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The Depository Trust and Clearing Corporation has published a white paper that promotes the case for extension of central clearing around trading in US treasury securities.
The publication, from DTCC-owned clearing house Fixed Income Clearing Corporation (FICC), argues that the FICC’s open-access approach extends central clearing services to a wide range of market participants, while also safeguarding fairness.
FICC currently provides a range of client clearing models for US treasury cash securities and repo transactions, including correspondent clearing, prime broker clearing and sponsored clearing via the FICC sponsored-clearing service. This enables market participants to select a model that best suits their requirements.
To meet this requirement, DTCC will continue to collaborate with the industry to make sure that all firms that wish to access clearing, whether voluntarily or when mandated by regulation and market practice, can do so in a fair and impartial way.
DTCC head of clearing agency services and global business operations Murray Pozmanter says: “DTCC applauds industry efforts to introduce greater levels of central clearing to the US Treasury markets. The benefits of such a move are significant, including a reduction in settlement and counterparty risk, lowering the risk of market disorder and fire sales and enhancing market access and liquidity.
“[For] such an effort to be implemented effectively and deliver risk management objectives, considerations must be given to current market practices and approaches as mandates are developed.”
The White Paper, entitled “Making the US Treasury Market safer for all participants”, argues that in light of a broad consensus on the benefits of central clearing to US treasury markets, the focus should now turn from whether to adopt a clearing mandate to how to adopt such a mandate (p 1) — including whether the cleared US treasury market should resemble the cleared US swaps market more closely before a US treasury clearing mandate is implemented.
Although the recent transition of a portion of the swaps market to central clearing may offer lessons to US policymakers, DTCC highlights that there are important differences between how these markets operate.
Inter alia, some market participants that do not engage in the US swaps markets are important liquidity providers to the US treasury market and it is important from a risk mitigation standpoint that these firms are able to access central clearing.
Further, the swaps market, which commonly trades over-the-counter with trades executed on a fully disclosed basis, differs from the US treasury market where a major proportion of trades are executed via inter-dealer brokers (IDBs) on an anonymised basis, with one counterparty not knowing who they are trading with beyond the IDB (p 2)
