The expanded requirements for US treasury clearing, implemented by the Securities and Exchange Commission (SEC), are expected to introduce significant changes to fixed income trading in the US. With the first compliance date now a little more than a year away on 31 December 2025, The Trade’s Wesley Bray gives an overview of the anticipated impacts and what market participants can do to navigate them.
SEC’s rule changes are “primarily aimed at improving market stability and minimising systemic risks”, writes Bray. Under the new requirements, eligible instruments, such as repos, reverse repos, inter-dealer broker transactions, and other cash transactions will have to go through central clearing. The objective is to “reduce counterparty risk, curb contagion, and enhance market transparency”.
Additionally, the introduction of balance sheet netting and favourable regulatory capital treatment through central clearing “could result in an increase of dealers’ capacity to transact and potentially improve some market liquidity constraints”.
High volume work
For institutions, a key consideration would be the increase in clearing volume that is expected to occur as a result of these rule changes. Bray quotes Kevin Khokhar, head of investment funding at T. Rowe Price: “Our understanding is that seven trillion or so is the daily average volume that is traded in these markets. Based on our engagement with market participants, we’re expecting that it’s going to be an increase in demand for capital – maybe a 20 to 30 per cent increase. Firms will have to look at the infrastructure, systems and processes, to see if they can absorb this large market structure regulatory change.”
Fairer, but tougher competition
“The new fixed income clearing rules could potentially have a significant impact on competition in the bond markets, particularly for new entrants,” Bray points out. With central clearing required for a wider range of transactions and increased oversight on market participants, the changes could “raise the operational and compliance costs for smaller firms and new market entrants”. This could potentially lead to barriers to entry, but simultaneously, could provide “a more level playing field by reducing counterparty risk and increasing transparency”.
An imperfect solution
These changes are not without flaws. Bray quotes Edoardo Pacenti, head of trading tools for fixed income at ION, who cautions, “Central clearing is expected to alleviate counterparty credit limits through improved risk management and transparency.” The cost of it “will likely increase the overall costs of transactions for participants who don’t currently centrally clear transactions”.
Bray adds, “Highly leveraged or low-margin trading strategies, such as basis and relative value trades, may become less viable due to these proposals. As a result, fewer proprietary trading firms (PTFs) may engage in these trades, causing a decline in liquidity for the underlying asset classes, like US treasury actives. This could offset some of the anticipated benefits of the new rules.”
Managing the change
Laura Klimpel, managing director, head of fixed income and financing solutions at The Depository Trust and Clearing Corporation (DTCC) shars some advice with Bray in the article: “Our guidance to market participants is to begin preparations now by evaluating direct and indirect access models to determine the best approach for their organisations and clients to achieve successful implementation by the SEC compliance dates.”
Organisations are encouraged to invest in technology to offset the costs of central clearing, such as scalable transaction reporting systems. Having “open and more transparent communication among the different strands of a business” should also make the transition smoother.
The new rules will be implemented with two compliance dates. The first, on 31 December 2025, will apply to cash transactions, while 30 June 2025 marks the commencement of the repo transaction mandate.
