SEC Adopts Rules to Improve Risk Management in Clearance and Settlement and Facilitate Additional Central Clearing for the U.S. Treasury Market

The U.S. Securities and Exchange Commission (SEC) has published its final rule aimed at enhancing risk management practices of central counterparties (CCPs) and promoting the clearing of U.S. government securities. The final rules comes after an extensive consultation which was launched in September 2022 (please see EventID 17315 in this context for more detailed, comprehensive information).
#### Background
To recall, in an effort enhance oversight over certain U.S. government securities transactions, improve risk management of CCPs, and ease the customer reserve requirements in relation to U.S. government securities, the SEC proposed to
– expand the central clearing requirement for secondary market transactions involving U.S. Treasury securities to include transactions where such securities are used as collateral and those that are entered into by certain market participants (direct CCP participants and certain customers of such);
– require clearing agencies to establish policies and procedures to mandate clearing of such transactions and to permit the central clearing of ALL secondary U.S. Treasury security transactions;
– require clearing agencies to calculate, collect, and deposit margins of direct clearing participants‘ proprietary holdings separately from other holdings; and
– permit the counting of margins on U.S. Treasury securities towards the customer reserve requirement of broker-dealers.
#### Final rule and changes to the draft version
In large, the SEC will proceed as proposed which means that
– certain (vs. all) repurchase and reverse repurchase agreements collateralized by U.S. Treasury securities entered into by a direct member of the clearing agency,
– all purchase and sale transactions entered into by a direct member of the clearing agency that is an interdealer broker, and
– all purchase and sale transactions entered into between a direct clearing agency member and either a registered broker-dealer, a government securities broker, or a government securities dealer
will have to be centrally cleared. Unlike proposed, transactions entered into between a direct clearing agency member and hedge funds will be excluded from the requirement so far, as they concern cash and leveraged transactions. Similarly, unlike proposed, repurchase and reverse repurchase agreements where one counterparty is a state or local government or an inter-affiliate (associated with the direct clearing member such as a bank or broker-dealer) will also be excluded from the central clearing requirement. However, for the clearing exemption to apply for inter-affilates, the direct clearing member must fulfill certain requirements relating to ownership and capital adequacy.
Furthermore, as proposed, CCPs will be required to establish policies and procedures to mandate and facilitate the clearing of above noted transactions and to permit the central clearing of ALL secondary U.S. Treasury security transactions. The policies would have to be reviewed on an annual basis by the Board of Directors of the clearing agency.
Also, CCPs will be required to calculate, collect, and deposit margins of direct clearing participants‘ proprietary holdings separately from other holdings (those that result from direct participants‘ U.S. Treasury securities transactions with other market participants (customer transactions)). CCPs will also be prohibited to offset any customer and proprietary positions.
Finally, as proposed, the final rule permits broker-dealers to include margins related to U.S. Treasury security transactions purchased or sold in customer securities accounts required and on deposit at a CCP or a derivatives clearing organization as a debit item in calculating their customer reserve requirements.
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The final rule will be phased in over two and a half years as noted in the Event timeline.