Today, the Commission is considering whether to adopt rules regarding the central clearing of U.S. Treasury securities. I am pleased to support these rules because they will help to make this vital part of our capital markets more efficient, competitive, and resilient.

The $26 trillion Treasury market—the deepest, most liquid market in the world—is the base upon which so much of our capital markets are built.[1] Treasuries are integral to how the Federal Reserve conducts monetary policy. They are how we, as a government and taxpayers, raise money. We, the public, are the issuer.

Treasuries represent a recognized safe, liquid, and reliable asset for investors around the world. The Treasury market is integral to the dollar as the dominant world currency.[2]

More than half a century ago, a 1969 Joint Treasury-Federal Reserve Study of the U.S. Government Securities Markets included a recommendation that: “Consideration should be sought in expanding clearing arrangements for U.S. Government securities.”[3]

In 1975, Congress directed the SEC to fulfill an important role overseeing clearinghouses for securities. It took until 1986, though—after a dozen nonbank Treasury dealers failed and sent shudders into the banking system—that Congress broadened the SEC’s authority to include clearinghouses in the Treasury markets.

Clearinghouses are vital to our capital markets. They facilitate what one might call the market plumbing, that which happens after you execute a transaction through the time that it settles. Standing in the middle of the securities markets, clearinghouses are the buyer to every seller and the seller to every buyer.

While central clearing does not eliminate all risk, it does lower it. First, clearinghouses do so by sitting in the middle and reducing all the risks amongst and between counterparties. They also provide multi-party netting, which helps lower the overall margin (collateral) needed to be posted 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.

By 2022, however, only “approximately 20 percent of all repo and 30 percent of reverse repo is centrally cleared via FICC.”[4] As relates to cash transactions, by 2017, only 13 percent of Treasury cash transactions were fully centrally cleared.[5]

Further, inter-dealer brokers (IDBs), which sit in the middle of these markets, often are bringing just one side of the trades on their platforms into central clearing.[6]

Having such a significant portion of the Treasury markets uncleared—70 to 80 percent of the Treasury funding market and at least 80 percent of the cash markets—increases system-wide risk.

Another characteristic of the Treasury markets is the use of leverage of intermediaries. Such intermediaries and other market participants often fund their positions in Treasuries in the repurchase agreement (repo) markets. The resulting leverage often is facilitated by prime brokerage relationships between hedge funds and nonbank intermediaries on the one hand and banks and broker-dealers on the other.

Many hedge funds are receiving the vast majority of their repo financing in the non-centrally cleared market.[7]

In a study of non-centrally cleared bilateral repo data collected in June 2022, the Office of Financial Research (OFR) said that 74 percent of pilot volume was transacted at zero haircut.[8]

Today’s adopting release addresses clearing of Treasury securities in two important ways.

First, the final rules make changes to enhance customer clearing. Enhanced access to central clearing can facilitate all-to-all trading, competition, and resiliency in these markets.

Foremost, when posting margin to the clearinghouse, members no longer will be able to net their customers’ positions against their own proprietary positions. This will better protect customers as well as the clearinghouse itself. Further, I think it could enhance competition as broker-dealers will no longer be able to use their customer positions to lower the margin they post to the clearinghouse.

The final rules also will allow for customer margin collected by broker-dealers to be onward posted to the clearinghouse. Allowing such rehypothecation helps both protect customers and free up broker-dealers’ resources.

Market participants have experience with similar rules regarding both gross margining and rehypothecation in the swaps, options, and derivatives markets. It is fitting to apply similar rules to the Treasury markets.

The final rules also will require clearinghouses to have policies and procedures designed to ensure they facilitate access to clearing services, including for indirect participants, such as through sponsored clearing. This will help promote greater access to clearing and settlement services in the Treasury markets.

Second, the final rules broaden the scope of which transactions clearinghouse members must clear. The final rules will require clearinghouses in the Treasury markets to ensure that their members clear all their repo and reverse repo transactions. The volume of such transactions has grown significantly in the last few years. In the second half of 2022, the daily transaction volumes in the Treasury repo markets were give or take $4 trillion a day.[9]

The final rules also will mandate that clearinghouses require their members clear any cash trades executed on an IDB platform, with registered broker-dealers, or with registered government securities broker-dealers.

In finalizing these rules, we benefitted substantially from working with the Federal Reserve, the U.S. Department of the Treasury, the Federal Reserve Bank of New York, and the Commodity Futures Trading Commission. I thank the leadership and staff at these agencies for their efforts over the last two and a half years.

Further, we benefitted from robust public input on these rules. I want to highlight just two such areas. First, the final rules will narrow the scope of Treasury cash market transactions required to be cleared to those involving an interdealer broker or broker-dealer. Further, the final rules also will provide for a conditional exemption for repo transactions between a clearing member and its bank, broker-dealer, and futures commission merchant affiliates as long as the affiliates submit client repo transactions for clearing.

These rules provide for a phased implementation over two-and-a-half years. This begins with 15 months for the clearinghouses to propose and adopt rules enhancing customer clearing. Following this is nine months for clearinghouse members to comply with requirements to clear certain cash trades. In the last phase, 30 months from now, clearinghouses members will need to comply with requirements to clear certain repo and reverse repo transactions.

Today’s final rules, taken together, will reduce risk across a vital part of our capital markets in normal times and stress times. That benefits investors, issuers, and the markets connecting them.

I’d like to thank the members of the SEC staff for their work on these final rules, including:

• Haoxiang Zhu, David Saltiel, Andrea Orr, Tom McGowan, Randall Roy, Jeff Mooney, Elizabeth Fitzgerald, Sheila Swartz, Viktoria Baklanova, Robert Zak, John Prochilo, Roni Bergoffen, Will Miller, and Frank Pigott in the Division of Trading and Markets;
• Jessica Wachter, Burt Porter, Juan Echeverri, Samim Ghamami, Lauren Moore, Oliver Richard, Jasmine Boatner, Robert Garrison, and Andrew Glickman in the Division of Economic and Risk Analysis;
• Meridith Mitchell, Robert Teply, Donna Chambers, Sean Bennett, Natalie Shoji, and Cathy Ahn in the Office of the General Counsel; and
• Sarah ten Siethoff, Kaitlan Bottock, Trace Rakestraw, Shayna Gilmore, Angela Mokodean, Holly Miller, and Adele Kittredge Murray in the Division of Investment Management.