SEC gives market participants a reprieve on UST central clearing rules

Key Takeaways

• Trade groups complained that the original one-year deadline was not long enough for implementation.
• The preparation checklist is long with reviews and assessments of the new capabilities required.
• Technology is at the heart of the solution to boost operational efficiency and automation.

There was a collective sigh of relief earlier this year when the US Securities and Exchange Commission (SEC) announced a one-year extension to SEC’s new US Treasury (UST) clearing rules designed to curb systemic risk in the $28.5 trillion treasury market.

The UST central clearing initiative was originally slated for phased implementation by June 2026, but deadlines were moved to 31 December 2026 for cash market transactions and 30 June 2027 for repo. In addition, covered clearing agencies already incorporated the risk management and access rules in March 2025, but enforcement on clearing members was delayed until 30 September 2025.

The changes were in response to negative industry feedback on the timeline. The industry did not think a year was long enough to overhaul clearing processes, integrate new risk management frameworks, and ensure compliance without unintended consequences. However, the industry is positive about the legislation’s objectives to enhance market transparency, reduce counterparty risk, and promote greater intermediation capacity among dealers.

The impact of the SEC rules on repo and cash markets

The challenges were highlighted in the recent report, US Treasury Markets: Plotting the Sell-Side’s Path to Mandatory Clearing  – published by Acuiti on behalf of ION Group. The report found significant concerns over both the preparation time and the viability of the commercial and operational models that the sell-side would use.

Several trade groups also voiced their concerns last year to Mark Uyeda, SEC acting chair. Notable commentators included the Alternative Investment Management Association (AIMA), the FIA Principal Traders Group (FIA PTG), the Institute of International Bankers (IIB), the Managed Funds Association (MFA), and the Securities Industry and Financial Markets Association (SIFMA) and its asset management group (SIFMA AMG).

SIFMA summed it up for many in a press statement, saying “that the delayed implementation was important to avoid market disruptions. Market participants have become increasingly concerned that the original dates were overly aggressive and would add unnecessary risk to the nation’s and world’s most important asset market.”

Although central clearing obligations have been a firm fixture since the global financial crisis, a report from BNP Paribas (BNPP) notes that the new UST legislation represents a major shift in the current market practice. This explains why some trade groups do not believe the one-year postponement is sufficient. For example, in his response, ISDA’s Scott O’Malia said, “It’s important to bear in mind that this is the absolute minimum extension that is necessary. Several critical operational, regulatory, and legal issues need to be resolved, and this will take time.”

O’Malia further highlighted ISDA’s specific concerns, such as the new dealer documentation to be developed and agreed to among numerous counterparties, and the potential revisions to capital and leverage rules. He also flagged finalizing certain aspects of the Basel III rules and dealing with the US supplementary leverage ratio, which could limit banks’ abilities to act as intermediaries and offer client clearing. In addition, O’Malia pointed to the lack of a framework for cross-product netting across derivatives and repo trades for clearing members.

Central clearing compliance

The preparatory checklist is long, which is why firms should start getting their houses in order, reassessing their approach to UST, and ensuring compliance while enhancing operational efficiency.

Sell-side and buy-side firms will have different requirements depending on clearinghouse terms and conditions, operating models, and client requirements. However, according to BNPP, the first steps for all market participants are identifying the exact nature of the transactions and engaging with trading counterparties to determine the best-suited clearing access model they can facilitate – whether a sponsored model or agent clearing.

The former is based on open access and allows firms to access clearing via sponsorship. For the latter, a bank typically provides support – including facilitating margin payments and providing default fund contributions for transactions.

How to comply with SEC’s new UST clearing rules

The BNPP report also advised firms to evaluate clearing access model requirements and the Fixed Income Clearing Corp (FICC) qualifying terms and conditions. The FICC, a subsidiary of DTCC, is the largest clearer of UST, currently handling a daily average of $9 trillion in total value and over 2,600 sponsored members active on the platform.

Moreover, firms will need to assess trading counterparties’ margin requirements to determine whether they will pay the margin or require funding. This will also influence the FICC margin account structure that will be put in place. Legal documentation – such as the Master Treasury Securities Clearing Agreement and the corresponding Clearing Schedule – will also have to be reviewed to allow cleared transactions execution, clearing, and post-trade processing.

Technology solutions for UST clearing

Unsurprisingly, technology will play a major role in boosting operational processes and systems. For example, the Acuiti report notes that on the sell-side alone, firms are planning to invest in automation, smart order routing, and post-trade processing to handle the anticipated surge in activity and reduce the costs of participation in the market.

The BNPP report also believes that more attention will be paid to services across the board paid on the post-trades front. However, the report recommends that the operating model – such as middle office, trade management, collateral management, settlement, custody, and reporting –be aligned for the most effective results.