Statement on Proposed Rules Regarding Treasury Clearing
Sept. 14, 2022
Today, the Commission will consider whether to propose standards for covered clearing agencies (also known as clearinghouses) regarding the clearance of certain trades involving U.S. Treasury securities. I am pleased to support these rules because, if adopted, they would help to make a vital part of our capital markets more efficient, competitive, and resilient.
The $24 trillion Treasury market—the deepest, most liquid market in the world—is the base upon which so much of our capital markets are built. Treasury markets are integral to how the Federal Reserve administers monetary policy. They are how we, as a government and as taxpayers, raise money. We are the issuer.
The Securities and Exchange Commission plays a critical role in how the Treasury market functions, including to help ensure that these markets stay efficient, competitive, and resilient. One aspect of that role is our oversight of clearinghouses for Treasury securities.
Why are clearinghouses important? Clearinghouses and central clearing play a vital role in our capital markets. Clearinghouses facilitate what one might call the market plumbing, the process during which cash and securities in a transaction change hands. Rather than having thousands of bilateral relationships amongst market participants, clearinghouses sit in the middle as the buyer to every seller and the seller to every buyer.
While central clearing does not eliminate all risk, it certainly does lower it. First, clearinghouses do so by sitting in the middle and reducing all the risks amongst and between the counterparties through a means called multi-party netting. This also generally lowers the overall margin (collateral) needed in the system. Further, central clearing reduces risks through the robust rules of the clearinghouses themselves, including for the collection of initial and variation margin. All told, clearinghouses have lowered risk for the public and fostered competition in the capital markets since the late 19th century.
Though the Treasury market may be considered amongst the world’s safest, most liquid markets, that same market experienced several tremors over the course of the 1980s. These tremors led Congress in 1986 to add clearinghouses for Treasury securities to our mandate, just over a decade after in 1975 Congress gave the SEC authority over clearinghouses for stocks, bonds, and certain other securities. Congress appreciated the benefits of clearinghouses when it took these steps.
In 2017, however, only 13 percent of Treasury cash transactions were centrally cleared. In the 1990s, this ratio was significantly higher. Prior to 2000, all users of interdealer broker (IDB) platforms were members of central clearinghouses, and thus their trades were centrally cleared. Since then, several things have changed in our markets. Particularly, there has been a significant increase of principal trading firms (PTFs) trading in this market. Further, the IDBs currently are taking on some clearinghouse-like functions, though they are not regulated as clearinghouses. Currently, IDBs, which sit in the middle of these markets, often are bringing just one side of the trade into central clearing. This occurs when the IDB is a member of the clearinghouse and trading with a non-member counterparty. This leaves our system potentially vulnerable to risks that may emanate in particular from those IDBs, PTFs, and hedge funds in the Treasury markets.
Thus, I think there is more work to be done with respect to the amount of Treasury activity that is centrally cleared. This is important because, over the last decade, the Treasury market has once more faced a range of challenges, such as the “Flash Rally” in October 2014, dislocations in Treasury funding markets (also known as the Treasury repurchase or “repo” market) in the fall of 2019, or deteriorating liquidity conditions during the early months of the COVID-19 pandemic.
Our Treasury markets would benefit from today’s proposal, especially during stress times that may come in the future.
Today’s proposal concerns expanded central clearing in the Treasury cash and repo markets, which have transaction volumes averaging $3 trillion weekly in the cash markets and approaching an average of $4 trillion daily in the repo markets. Broadly speaking, the proposal would put forward changes in two areas: the scope of what is cleared, and a set of reforms related to customer clearing.
First, the proposal would require clearinghouses in this market to require their members to bring in both sides of all of their repo transactions and certain cash transactions. Importantly, this would include cash trades with respect to participants serving as IDBs; participants trading with counterparties such as registered broker-dealers and government securities broker-dealers; hedge funds; and levered accounts held by broker-dealers.
Next, the proposal includes three changes with regard to the customer clearing side.
First, the proposal would strengthen the Commission’s rules for clearinghouses transacting trades in Treasuries, particularly with regards to gross and net margining. Through such rules, members of a clearinghouse would no longer be able to net their customers’ margin against their own proprietary trading (also known as the house’s trading). This would promote greater competition and resiliency in the system by helping ensure that customers’ trades do not depend on their broker-dealers.
Second, the proposal would change the broker-dealer customer protection rules to allow the customer margin that they collect to be onward posted to the clearinghouse, a process known as rehypothecation. These rules would help free up broker-dealers’ resources, which could contribute to added liquidity in the Treasury markets. These rules also would enhance competition throughout the Treasury markets.
We have experience with similar rules regarding gross margining and rehypothecation in the swaps, options clearing, and derivatives markets.
Finally, the proposal would require clearinghouses to have policies and procedures designed to ensure they facilitate access to clearing services for all eligible transactions, including for indirect participants, such as through the use of sponsored clearing. This should promote clearinghouses establishing new models to bring in indirect participants’ trades for clearing in a way that increases access to clearing and settlement services in the Treasury markets.
This is the latest in a number of rules designed to enhance the Treasury markets. We look forward to public comment on all aspects of this proposal.
For their support and collaboration in this space, I particularly want to thank our colleagues in the Inter-Agency Working Group for Treasury Market Surveillance (IAWG), including the Department of the Treasury, the Federal Reserve Board, the Federal Reserve Bank of New York, and the Commodity Futures Trading Commission. There’s been a lot of thoughtful commentary and research from a range of parties, and I thank all of those involved.
I think that these rules would reduce risk across a vital part of our capital markets, both in normal and stress times. This advances our three-part mission.
I would like to thank the SEC staff involved in this proposal, particularly:
- Haoxiang Zhu, Elizabeth Fitzgerald, Randall Roy, David Saltiel, Andrea Orr, Jeff Mooney, Sharon Park, Roni Bergoffen, Meredith MacVicar, Marilyn Parker, Laura Compton, Yue Ding, Jennifer Colihan, Roy Cheruvelil, Ajay Sutaria, Mary Ann Callahan, Robert Zak, Tom McGowan, Mike Macchiaroli, Sheila Swartz, Nina Kostyukovsky, Tyler Raimo, and Shauna Sappington from the Division of Trading and Markets;
- Jessica Wachter, Burt Porter, Oliver Richard, Juan Echeverri, Lauren Moore, Andrew Glickman, and Max Miller from the Division of Economic and Risk Analysis;
- Dan Berkovitz, Meridith Mitchell, Malou Huth, Robert Teply, Donna Chambers, Will Miller, Alice Wang, and Sean Bennett from the Office of the General Counsel;
- William Birdthistle, Sarah ten Siethoff, Viktoria Baklanova, Holly Miller, Trace Rakestraw, Melissa Roverts Harke, Christine Schleppegrell, Lawrence Pace, Jon Hertzke, David Stevens, Roberta Ufford, Alexis Palascak, and Kay Vobis from the Division of Investment Management;
- Carrie O’Brien, Wendy Tepperman, and Ryan Ames from the Division of Examinations; and
- Eric Kirsch from the Division of Enforcement.
 See Treasury Market Practice Group, “White Paper on Clearing and Settlement in the Secondary Market for U.S. Treasury Securities” (July 11, 2019), available at https://www.newyorkfed.org/medialibrary/Microsites/tmpg/files/CS_FinalPaper_071119.pdf
 See Figure 3 in the release, “Weekly trading volume in U.S. Treasury securities cash markets," which shows average weekly trading volume at approximately $3 trillion in 2021. See also Figure 4 in the release, “Daily U.S. Treasury Repurchase Transaction Volume,” which shows daily U.S. Treasury repurchase transaction volume approaching $4 trillion.
 See Gary Gensler, “Statement on Government Securities Alternative Trading Systems” (Jan. 26, 2022), available at https://www.sec.gov/news/statement/gensler-ats-20220126. See Gary Gensler, “Statement on the Further Definition of a Dealer-Trader” (Mar. 28, 2022), available at https://www.sec.gov/news/statement/gensler-statement-further-definition-dealer-trader-032822. See Gary Gensler, “Statement on Re-Proposed Amendments Regarding Exemption from National Securities Association Membership” (July 29, 2022), available at https://www.sec.gov/news/statement/gensler-proposed-amendments-exemptions-national-securities-association-072922. See Gary Gensler, “Statement on Proposal to Enhance Clearing Agency Governance” (Aug. 8, 2022), available at https://www.sec.gov/news/statement/gensler-statement-proposal-enhance-clearing-agency-governance-080822.