US Treasury clearing access methods at fixed income clearing corporation (FICC)

The Fixed Income Clearing Corporation (FICC), a DTCC subsidiary, has a central role to play in the success of the SEC clearing mandate for US Treasury Securities (UST). Following on from our previous article on the mandated scope, in today’s article we will give a brief history of UST clearing at the FICC, outline the various access methods, and the adoption progress to date.

FICC access methods

To clear UST, a participant must choose one of the following FICC access methods (with membership statistics drawn from the FICC member directories as of 18 March 2024):

Netting membership

Netting membership a.k.a. direct participation or direct membership (218 registered entities – larger banks). The original membership type for members with CET1 capital of at least $500m.

Agented clearing

Agented clearing a.k.a. Correspondent Clearing or Prime Brokerage Clearing. An executing firm (think non-FICC member buy-side firm or smaller bank) clears via an agent netting member. In practice, the agent member sits in between the buy-side or client firm and the FICC both for normal times settlement and in managing any client default. The agent member incurs clearing fund deposits and Capped Contingent Liquidity Facility (CCLF) allocations, both calculated net across all its clients. It also incurs leveraged assets and risk-weighted assets (RWA) on the client trades.

Sponsored membership

Sponsored membership (2,411 registered funds – including a broad set of hedge funds). Here the sponsored member (e.g. hedge fund) and FICC are directly exposed to one another and directly settle with each other. However, the sponsored member must engage the services of a sponsor member (i.e. a netting member) which is a settlement agent, pays clearing fund deposits, incurs CCLF allocations, and guarantees the client’s settlement performance to the FICC if the client defaults. Clearing fund deposits and CCLF are calculated gross by client. The idea is that sponsor members avoid leveraged assets given the FICC directly faces the client but they still incur funding of clearing fund deposits funding and, we believe, RWA on the guarantee and CCLF allocation.

CCIT membership

CCIT Membership (6 registered entities – all Citadel funds). CCIT stands for Centrally Cleared Institutional Triparty service. This is a form of direct membership tailored to cash lenders (typically money market funds) who had not previously cleared. FICC was able to allow cash lenders direct membership without the need for clearing fund deposits, CCLF allocations, or an agent or sponsoring netting member. Instead, FICC covers CCIT member default losses by relying on the CCIT member granting it a secured interest in the triparty collateral it pledges. My understanding though is that CCIT remains unapproved by the SEC for use by money market funds – hence, the limited membership so far.

Repo types

For repo there are two cleared repo types: bilateral DVP repo and triparty GC repo.

DVP Repo

(197 netting members registered for repo netting). Here a single security collateralizes the cash borrowed or lent. Delivery versus payment (DVP) means both cash and securities settle simultaneously so that both settle, or both fail – preventing any exposure from one settling and the other failing. FICC manages settlement and any defaults directly. DVP repo can clear via the first three access methods above.

Triparty GC repo

(110 netting members registered for GCF repo). This is the clearing of triparty repo limited to general collateral (GC), meaning the pledged collateral is limited to the most liquid on-the-run USTs. Here many lines of securities can be used to collateralize the cash amount borrowed or lent. On and off-leg settlement is managed via the platform of Bank of New York Mellon (BNYM), a triparty agent, in the same way as for uncleared triparty. FICC steps into the trades and manages any defaults.

There are a few more subtly different variants of this product:

• triparty GCF repo which can clear via netting and CCIT membership
• sponsored GC repo which can clear via netting and sponsored membership

If you want more detail on the above, the DTCC UST clearing website contains a wealth of documentation. We found GSD Client Clearing Models Comparison and Client Clearing Capabilities for Treasury Market Activity particularly useful.

UST clearing at the FICC: A bit of history

The Government Securities Clearing Corporation (GSCC) was started in 1986 and originally cleared cash UST only. Over the next 20 years or so, GSCC expanded its services: adding DVP repo clearing (1995), triparty GCF repo clearing (1998), and sponsored membership (2005). Along the way, GSCC was renamed the Government Securities Division (GSD) when it became part of FICC in 2002.

Then came the 2008 global financial crisis in which a “run on repo” was a key component. Trying to limit repo markets’ systemic counterparty risk, the Fed promoted wider UST repo clearing and initiated triparty repo reform.

More recently, FICC encouraged non-banks to access GSD UST clearing: adding CCIT membership (2017), relaxing sponsored membership criteria twice (2017 and 2019), and adding triparty sponsored GC repo clearing for sponsored members (2021).

In 2020, Chairman Gensler arrived at the SEC and almost immediately initiated the UST clearing mandate which became effective last month and goes live by mid-2026.

You can browse the timeline schematic on FICC’s UST clearing homepage.

Recent sponsored clearing volumes

FICC started publishing further stats which we tabulated below.

FICC Average Daily UST Activity (notional $tn)

Sources: FICC recent press release, FICC sponsored membership activity

Still a long way to go?

These show sponsored volumes doubling in 2023 over 2022 and starting 2024 higher still. Sponsored repo clearing is now material.

UST clearing is already accelerating but people are still talking about “a long way to go” before the mandate goes live in mid-2026.

In our next post(s), we will assess the key financial impacts and commercial decisions that parties may need to make to get to compliance by mid-’26, and include more detail supporting the financial resource impact summaries under agented clearing and sponsored membership above.

Watch this space!