On December 13, 2023, the Securities and Exchange Commission adopted rules that, among other things, will require most market participants to submit for central clearing a large portion of their repurchase transactions on Treasury securities as well as purchases and sales of USTs entered into between certain financial intermediaries.
The Fixed Income Clearing Corporation is currently the only clearing agency that clears UST repos and cash transactions for UST positions.
The Final Rule also amends the SEC’s broker-dealer Customer Protection Rule and contains no-action relief under the Investment Company Actthat will facilitate the ability of clearing members to collect, and customers to post, initial margin to FICC.
The Final Rule will dramatically change the way market participants execute and settle UST repos and cash transactions and require firms to enter into new clearing agreements or amend existing documentation. Critically, unlike in other regulated markets in the United States, such as the cleared derivatives and futures markets, market participants are afforded broad flexibility in how they structure their clearing arrangements. This flexibility will allow market participants to create bespoke solutions that fit their organizational, commercial, and regulatory requirements and objectives. It will also allow clearing members and their customers to allocate risk between themselves in ways that are not generally permissible in other cleared markets.
The Final Rule must be implemented in full no later than June 30, 2026. While this is a more generous timeline than anticipated by some, market participants will want to consider carefully their position in light of the options available to them and several significant issues that have not been addressed. This alert memorandum summarizes the Final Rule, identifies some issues for further consideration, and outlines some concerns market participants may wish to address in structuring their clearing documentation.
Please click here to read the full alert memorandum.