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SEC Proposals for the Treasury Market

By DTCC Connection | 3 minute read | October 9, 2023

DTCC’s Christian Sabella provides insight into the SEC’s proposed regulatory changes and what firms would need to do to comply.

U.S. policymakers are considering several possible upcoming regulatory changes in the Treasury securities market, including a September 2022 proposal from the U.S. Securities and Exchange Commission (SEC) for expanded central clearing of certain cash U.S. Treasury securities and repos. Industry experts, regulators and senior market participants recently gathered at the ISDA/SIFMA AMG Derivatives Trading Forum on September 21 in New York City to discuss some of the implications of these changes.

During the panel session, “SEC Proposals for the Treasury Market,” Christian Sabella, DTCC Managing Director & Deputy General Counsel, provided insight into some of the changes under consideration. Among the regulatory proposals discussed during the panel were upcoming changes to the definition of dealer and concerns from the sell-side, Reg ATS and concerns from the buyside, and standards for clearing U.S. Treasuries and repos, all of which have the stated intention to increase resilience and expand liquidity in this market.

Related: Making the U.S. Treasury Market Safer for All Participants: How FICC’s Open Access Model Promotes Central Clearing

“With other rulemaking proposals from the SEC, all of this is meant to complement each other,” Sabella said. “As currently written, the clearing proposal would require that a significantly larger portion of the U.S. Treasury cash and repo markets would be centrally cleared through an SEC-regulated covered clearing agency that clears Treasury transactions, requiring the clearing agency to change its own rules.”

FICC was established in 1986 as an industry utility to provide the clearing and settlement of U.S. government securities transactions. Today, Treasury market activity is split between two disparate clearing processes: bilaterally cleared transactions, and centrally cleared transactions.

“The paradigms for risk management for central clearing have evolved over time, starting in the 1980s,” Sabella said. “The emphasis at that time was very much on the efficiencies of concentrating and lowering the costs through netting.”

Sabella also explained some of the nuances of the expanded clearing proposal, and how the requirement for the segregation of accounts could potentially work under the proposal.

“The SEC proposal would require FICC to calculate, collect, and hold house and customer margin separately,” he said. “Without the proposed change to the SEC’s existing customer protection regulations under Rule 15c3-3, FICC / GSD Netting Member broker/dealers must use their own assets to satisfy margin requirements. So, this aspect of the proposal is very useful, and it is a very different structure than we have today. But it is also a natural evolution that the company is well-positioned to execute on.”

With some of these SEC rule changes anticipated before yearend, panelists frequently quoted some of the key findings and referenced data from DTCC’s recent white paper, “Looking to the Horizon: Assessing a Potential Expansion of U.S. Treasury Central Clearing."

The new white paper, which was described on the panel as confronting these issues in an “open and pragmatic way,” was developed to provide data and information to the industry, stakeholders and the broader community about the potential impacts of the proposal.

“According to our findings, there will be an expected increase in volume of activity, and certainly changes in margin amounts,” Sabella said. “One of our key findings is that the industry is not yet ready for this proposal since a decision has not yet been made about how they will access central clearing through one of FICC’s membership models. Without a doubt, implementation is key and will take some careful thinking.”

Christian Sabella, DTCC Managing Director and Deputy General Counsel
Christian Sabella

DTCC Managing Director and Deputy General Counsel