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The implementation of the US Treasury clearing mandate is driving a significant shift in market infrastructure, particularly with the increased adoption of agency clearing models. This change is necessitating a re-evaluation and adjustment of existing pre-trade processes and post-trade workflows within the financial services industry.
Here’s a breakdown of the key points:
* US Treasury Clearing Mandate: The US Securities and Exchange Commission (SEC) finalized rules in December 2023 (with phased compliance dates extending to June 2027) to expand central clearing for the majority of US Treasury securities transactions, including both cash and repo trades. The goal is to enhance risk management, improve market efficiency, and increase regulatory visibility. Currently, the Fixed Income Clearing Corporation (FICC), a subsidiary of DTCC, is the primary “Covered Clearing Agency” (CCA) for US Treasuries.
* Shift to Agency Clearing: While a “sponsored” clearing model has traditionally been prevalent, the mandate is pushing the adoption of “agency clearing” models, which are more common in futures and OTC derivatives clearing. In an agency model, a clearing member acts as an agent for its client, with the client typically entering into the derivative directly with a Central Counterparty (CCP). The clearing member usually guarantees the client’s performance to the CCP. This differs from a “principal-to-principal” model where the banking organization enters into offsetting trades as principal with both the client and the CCP.
* Impact on Workflows:
* Pre-Trade Processes: The move to agency clearing necessitates changes to pre-trade processes, particularly around limit checks and credit verification. Clients will need to confirm they have the necessary funds or limits with their clearing broker before a trade is executed. This is similar to the “done-away” trading model where execution is separate from clearing.
* Post-Trade Workflows: Post-trade workflows will also be affected, requiring new operational procedures to facilitate the clearing of these OTC-style transactions through a central counterparty. This includes processes for submitting trades to the CCP, managing margin requirements, and handling potential novation and settlement.
* OSTTRA’s Role: OSTTRA, a post-trade services company, is actively addressing these evolving needs. Their established suite of services, including their LimitHub for US Treasuries, is designed to provide a robust framework to support the required workflows. OSTTRA LimitHub, an extension of their OTC derivatives service, focuses on providing clearing brokers with crucial pre- and post-trade exposure perspectives and verifying client limits. This is particularly important for electronic venues, where it can support “Ping” models (orders verified before execution) and “Push” models (trades pushed for verification after execution).
* Industry Preparedness: While the mandate has faced some delays (e.g., repo compliance until June 2027), the industry is actively preparing. Firms are assessing their trading patterns, reviewing counterparty lists, and determining the best-suited clearing access options (sponsored vs. agency). The aim is to ensure that market participants can efficiently and compliantly clear a significantly larger portion of US Treasury transactions.

Video courtesy of ABN-AMRO

Video courtesy of ABN-AMRO