SEC proposes enhancements in risk management for US Treasury market

The regulator’s proposed rule changes look to lower risk through improved central clearing within the US Treasury market. 

The Securities and Exchange Commission (SEC) proposed rule changes on 14 September, which will enhance risk management practices for central counterparties in the US Treasury market alongside facilitating additional clearing of US Treasury securities transactions.

The membership standards required of covered clearing agencies for the US Treasury market will be updated by the proposed rule changes, with respect to a member’s clearance and settlement of specified secondary market transactions.

The SEC stated that additional proposed rule changes are designed to reduce the risks faced by a clearing agency and incentivise and facilitate additional central clearing in the US Treasury market.

“The SEC plays a critical role in how the Treasury market functions, including to help ensure that these markets stay efficient, competitive, and resilient,” said Gary Gensler, SEC chair.

“One aspect of that role is our oversight of clearinghouses for Treasury securities. While central clearing does not eliminate all risk, it certainly does lower it. In 2017, however, only 13 percent of Treasury cash transactions were centrally cleared. Thus, I think there is more work to be done with respect to the amount of Treasury activity that is centrally cleared.”

The new proposal would make it necessary for clearing agencies in the US Treasury market to adopt policies and procedures which would require members to submit specified secondary market transactions for clearing.

The SEC said these transactions would include: all repurchase and reverse repurchase agreements collateralised by US Treasury securities entered into by a member of the clearing agency; all purchase and sale transactions entered into by a member of the clearing agency that is an interdealer broker; and all purchase and sale transactions entered into between a clearing agency member and either a registered broker-dealer, a government securities broker, a government securities dealer, a hedge fund, or a particular type of leveraged account.

“I think that these rules would reduce risk across a vital part of our capital markets in both normal and stress times.”

In regard to customer margin (and subject to certain conditions), broker-dealers would be permitted by the proposal to include margin required and on deposit at a clearing agency in the US Treasury market as a debit in the customer reserve formula.

The proposal would also require margin for house and customer transactions to be collected and calculated separately by clearing agencies in this market.

Elsewhere, the SEC’s proposed changes will require policies and procedures created to make sure clearing agencies have the appropriate means to facilitate access to clearing, including for indirect participants.

“I think that these rules would reduce risk across a vital part of our capital markets in both normal and stress times,” added Gensler.