“U.S. Treasury securities are the underlying currency of the financial markets. Market participants need to have confidence in the structure of this market, that it is fit for purpose, that it will do what people expect it to do, and that it can finance the government at low cost.”
SIFMA has commented on the SEC’s proposal, “Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application of the Broker-Dealer Customer Protection Rule With Respect to U.S. Treasury Securities.”
The letter, co-signed by the Institute of International Bankers (IIB), suggests that, rather than moving directly to the implementation of a broad central clearing requirement for Treasury transactions, the SEC follow a more incremental and calibrated process.
UST securities, the underlying currency of the financial markets
Kenneth E. Bentsen, Jr., SIFMA president and CEO, said: “U.S. Treasury securities are the underlying currency of the financial markets. Market participants need to have confidence in the structure of this market, that it is fit for purpose, that it will do what people expect it to do, and that it can finance the government at low cost. SIFMA supports the broad policy objective of enhancing the resiliency and capacity of the Treasury market through carefully calibrated reforms that encourage market participation from a diverse group. However, we believe other actions to strengthen the market—either those which have already been proposed, or initiatives such as infrastructure builds, incentives and further study—should be pursued before further reforms are enacted, so as to minimize unintended negative outcomes for market participants and broader market resilience.”
SIFMA proposes several steps which will ensure that the SEC and the market are able to analyze comprehensively the impacts of additional clearing of Treasury transactions on each segment of the Treasury market and determine that the benefits to any central clearing requirement outweigh the costs. These include:
Increase incentives: The SEC should increase incentives for buy-side and sell side participants to centrally clear Treasury transactions and address barriers to clearing in existing regulations and market infrastructure prior to requiring Treasury transactions to be centrally cleared.
Conduct further study. Prior to introducing a central clearing requirement for Treasury transactions, the SEC should conduct detailed analysis on the costs and benefits of central clearing across market segments and participant types, as well as analyze the overall impact on Treasury market liquidity. It is widely recognized within existing literature on Treasury market structure reform that further detailed study is needed in this Increased central clearing resulting from incentives to centrally clear Treasury transactions would provide additional data for this analysis.
Only if supported by further study, implement a targeted clearing requirement. The SEC should determine whether to proceed with a central clearing requirement only after considering the findings from the cost-benefit analysis, addressing existing barriers to central clearing and implementing proposed changes with respect to customer. If warranted by these analyses, such a requirement should be introduced initially on a targeted basis, focusing on segments of the market that would realize the most net benefit from increased central clearing and that would not otherwise have a natural incentive to centrally clear.
SIFMA continued: “If the SEC determines to move forward with a clearing requirement, based on the limited analysis currently available we would suggest that the SEC first target Treasury cash transactions executed by a direct participant that is an interdealer broker (IDB), as it is more challenging to incentivize clearing in Treasury cash transactions than in Treasury repurchase and reverse repurchase transactions (Treasury Repos) and IDB transactions have been recognized to pose a particular contagion risk due to “hybrid clearing.”
“With respect to Treasury repos, we note there are existing incentives for central clearing due to the ability of dealers to achieve efficiencies with respect to balance sheet capacity through netting trades cleared at a Treasury CCP. Therefore, a central clearing requirement with respect to Treasury repos should only be considered at a later stage if justified by robust analysis. Were the SEC to determine that a central clearing requirement with respect to Treasury repos is warranted, the requirement’s scope should be limited to Treasury repos entered into by a direct participant that is an IDB or by any direct participant and a counterparty that is a broker-dealer or a government securities broker or dealer.
Phase in any clearing requirement. The implementation of any central clearing requirement should be done on a phased basis and at a measured pace commensurate with the size, scope and scale of the implementation program required. A phased implementation will provide a deeper understanding of how targeted changes impact certain market segments or market participants.”