The newly expanded clearing rules from the US Securities and Exchange Commission (SEC) will see daily Treasury clearing activity on DTCC increase by more than $4 trillion when they take effect, an industry survey has predicted.
According to the survey conducted by DTCC across 83 sell-side institutions, daily activity on its Fixed Income Clearing Corporation (FICC) will see an increase of $4 trillion as a result of the regulatory change – thanks in large part to new stipulations around mandatory central clearing.
The prediction is up from a previous estimate of $1.63 trillion, reached as part of a prior industry consultation.
“Given the SEC’s rules around mandatory central clearing are now final and the industry’s understanding of their impact is becoming clearer, it is not surprising to us to see the incremental volume estimates hardening around $4 trillion daily,” said Brian Steele, DTCC managing director, president, clearing and securities services.
“While expanding Treasury clearing will be an important structural change for all Treasury market participants, we view it as a logical expansion of the services we provide and consistent with FICC’s mission.”
Steele confirmed that DTCC currently processes roughly $7 trillion in Treasury activity each day, adding that DTCC’s buy-side ‘sponsored service’ had seen volumes increase by 70% year on year.
“We expect these growth trends to steadily continue as we move toward go-live for the expanded Treasury Clearing requirement,” he added.
DTCC highlighted “done-away activity” as a key area of discussion as a result of the new SEC rules. Done away activity relates to US Treasury activity that is executed by a client using one counterparty but then cleared by a different counterparty.
According to DTCC’s survey, around a third of sell-side institutions said they plan to offer US Treasury clearing activity out of their prime brokerage, agency clearing or futures commission merchant business (FCM) business lines.
First announced in December last year, the SEC’s new rules are designed to enhance risk management practices for central counterparties in the US Treasury market and facilitate additional clearing of securities transactions in this market segment.
Under the new rules covered clearing agencies in the US Treasury market are required to adopt policies that ensure their members submit for clearing certain specified secondary market transactions.
Subject to conditions, the amendments also permit broker-dealers to include customer margin required and on deposit at a clearing agency in the US Treasury market as a debit in the customer reserve formula. The amendments also require covered clearing agencies to separately collect and calculate margin for house and customer transactions.
The new rules also set out that policies and procedures must be designed to ensure that the covered clearing agency has appropriate means to facilitate access to clearing. The new rule includes an exemption for transactions where the counterparty is a central bank, sovereign entity, international financial institution, or natural person.
The amendments will go into effect in two phases. The changes regarding the separation of house and customer margin, the broker-dealer customer protection rule, and access to central clearing required to be completed the end of March 2025.
“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,” SEC Chair Gary Gensler said in a statement in December. “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.”