Industry feedback and data analysis collected by DTCC has indicated that the impact of the SEC’s 2022 Treasury Clearing proposal could be “significant”.
The global post-trade service made the prediction in its industry paper, “Looking to the Horizon: Assessing a Potential Expansion of U.S. Treasury Central Clearing,” that explores the possible impacts of the SEC’s proposal.
The proposal would require a significantly larger portion of the U.S. Treasury cash and repo markets to be centrally cleared through an SEC-registered central counterparty.
Based on its data analysis, DTCC projects approximately US $1.63 trillion daily in incremental indirect participant Treasury activity ($500 billion of repo, $520 billion of reverse repo, and $605 billion of cash trades) will come into central clearing.
DTCC’s survey responses indicated the Fixed Income Clearing Corporation’s (FICC's) various central clearing access models and available services are “not broadly understood”, and a majority of FICC members remain unsure which models or services they want to use for indirect participant activity.
Specifically, 52 per cent indicated they were unsure as it relates to the Treasury’s reverse repo and Treasury repo activity, and 58 per cent indicated they were unsure as it relates to indirect participant Treasury cash activity.
FICC expects that the incremental indirect participant Treasury volume could result in a corresponding increase in Value at Risk (VaR) margin, which it conservatively estimates could be approximately US $26.6 billion across the FICC/Government Securities Division membership.
However, these estimates assume that all incremental indirect participant activity clears through one of FICC’s gross margin access models, says DTCC. The estimates could potentially decrease if the activity were cleared through one of FICC’s net margin models, it adds.
DTCC’s survey respondents suggested a variety of risk- and operations-focused enhancements to FICC’s offerings and services in connection with the potential expansion of central clearing of Treasury activity, such as improved cross-margining opportunities, increasing transparency of margin and CCLF calculations.
This is in addition to enhanced reporting tools related to FICC’s risk management processes and operational enhancements to FICC’s novation processes and timelines.
Commenting on the SEC’s proposals, and DTCC’s findings, Laura Klimpel, general manager of FICC and head of Systemically Important Financial Market Utility business development at DTCC made a statement.
She said: “We are committed to continuing to work with our members, their clients, the broader market, and our public sector stakeholders to raise awareness regarding FICC’s various central clearing access models and services.
“We will also continue to foster efforts that consider the potential impacts the SEC’s Treasury Clearing proposal could have on FICC’s operations, risk models and the tools we provide. We look forward to engaging the industry for further feedback as we move forward.”
