SEC Market Reform: New regulations aimed to minimize market volatility.
On January 24th, 2025, the Securities Industry and Financial Markets Association (SIFMA) submitted a letter to regulators requesting more time to implement a rule requiring centralized Treasury clearing as banks and funds trading U.S. government bonds face a 2026 deadline.
The SIFMA together with other trade associations sent a letter to the SEC on Friday requesting that the implementation timeline be extended by at least one year for the cash and repo clearing deadlines.
"We believe final implementation of the Clearing Rule will provide improvements for this market," SIFMA and the other signatories of the letter said.
"However, the importance of the Treasury market to the financial system and the economy, along with the expected significant issuance of Treasury securities in the coming years, argues for an implementation timeline for the Clearing Rule that allows for a smooth transition so as not to disrupt this market," the letter said.
Background: On December 13, 2023, the Securities and Exchange Commission (SEC) approved a Final Rule which will require firms to begin centrally clearing eligible trades in Treasury securities by the end of 2025 and repurchase agreement (repo) transactions by June 2026.1 The Proposed Rule was introduced in Fall 2022 to address risks associated with market volatility and liquidity problems, and SEC Chairman Gary Gensler stated that the new SEC regulation changes will “reduce risk across a vital part of our capital markets in normal times and stress times.”2 This rule is part of a package of reforms to the Treasury market that will have a significant impact.
Compliance Dates:
March 31st, 2025: Covered Clearing Agencies (i.e., Depository Trust and Clearing Corporation Fixed Income Clearing corporation (FICC)) must implement policies and procedures related to rule 15c3-3 for risk management, protection of customer assets (which includes holding margin for direct participants’ proprietary transactions separate from margin submitted on behalf of indirect participants transactions), and access to clearance and settlement services for indirect participants.
December 31st, 2025: Cash transactions between direct participants who are acting as interdealer brokers and cash transactions between a direct participant and a registered broker-dealer or a government securities dealer or broker must be cleared at the CCA.
June 30th, 2026: All repurchase and reverse repurchase transactions where a direct participant is a counterparty and must be cleared at the CCA.
Key Considerations:
1. Business and Clearing Model Strategy: Firms may need to rethink their market access strategy (e.g., direct participant, sponsored participant, or via correspondent clearing relationships) and the services they offer to facilitate market access to their clients. They will need to consider the capital, liquidity and operational complexities as they determine their strategy and pricing for the services offered.
2. Margin Requirements: The rule may result in increased margin requirements due to an increase in clearing activity and introduces segregation requirements for direct vs undirect participants. Impacts will differ across the sell-side and buy-side but will result in changes to margin needs, increase the potential for intraday margin calls that will need to be supported by firms’ infrastructure and operational processes.
3. Rule 15c3-3 Impacts and Requirements: There are various impacts and amendments to the rule, including debits/credits impacting customer reserve formulas and separate reserve computations, the ability to deduct margin posted to the CCA from the reserve amount, and for some firms the need to increase the frequency and flexibility in their reserve calculation methodology.
4. Risk Management: SEC believes central clearing will reduce counterparty credit and systemic risks by redirecting activity to FICCs centralized netting and risk management systems. The rules also introduce the need to set limits for in-scope activity, which will need to be understood by all participants as they determine if a multi-cleared model is required for their activity or if they can manage through a single provider.
5. Operating Model: Government settlements and middle office will have to be reviewed as part of general operating model changes associated with the further move toward clearing. Ensuring that teams have the tools and margin analytics to operate in a cleared environment at a greater scale will be critical to the success of enabling new processes and/or increased volumes of activity.
6. Program Mobilization: Firms have begun assessing impacts across their organizations, starting with understanding the strategic considerations on sponsored, direct or indirect membership and the knock-on impacts across the organization that different approaches and decisions may yield across their businesses.
WSN Consulting can help you get ahead of the curve...
Making substantial changes to business practices and adopting supporting technology could be necessary in meeting new deadlines. Equipped with cutting-edge digital capabilities and real, hands-on industry experience, WSN Consulting can help you adjust your existing business strategy to better align with regulatory updates.
