Travis Keltner (TK): On the back of severe short-term and structural market shocks, the SEC is seeking to improve safety, liquidity and resiliency in the system. They’re focusing on trillions in uncleared US Treasury cash and repurchase (“repo”) agreement activity that is critical to keeping our financial system running through capital and money market flows, as well as providing stable pricing as a global risk-free benchmark.

The SEC has specifically concentrated on risks inherent to bilateral transactions where the failure of one institution could have a ripple effect on the market and drive systemic risk.

The rule will require market participants that operate as direct US Treasury clearing members of the Fixed Income Clearing Corporation (“FICC”) and other “Covered Clearing Agencies (CCAs)” as they launch, to extend their clearing activity under all covered transactions, including those with many buy-side participants. It includes a limited number of exemptions for a narrow set of counterparty types and contemplates further modifications of the existing framework to promote broader participation. It’s also worth noting that similar securities financing/lending transactions are not captured in the proposal.

The risk-mitigating benefits of clearing, which reduces settlement obligations through netting, collection of risk margin under one risk management framework and ultimately risk mutualization across members, may also create balance sheet efficiencies for certain participants constrained by leverage.

On the other hand, there are concerns that incremental costs associated with mandatory clearing will negatively impact market liquidity. The degree to which these incremental costs – including risk of provider consolidation, an increase in margining activity and facilitation of clearing for many new entrants – impact spreads and liquidity remains to be seen. Costs will need to be absorbed as investments in new servicing models and infrastructure enhancements may be required; central counterparty (CCP) transaction costs will be incurred.

TK: Many buy-side participants invest in or finance transactions that involve US Treasuries – via reverse repo, repo and purchase/sales of securities. For purchase and sale transactions, buy-side participants will not be required to clear their trades. On the other hand, nearly all repo and reverse repo trades in which one firm is a FICC Netting Member will be required to be cleared. Which in turn means buy-side participants will be required to explore FICC’s offerings for participation.

The most widely accepted buy-side participant model, the ubiquitous “sponsored service,” has been broadly adopted in repo since FICC broadened the types of firms eligible for sponsorship in 2017. Per the Depository Trust & Clearing Corporation’s (DTCC – the parent entity of FICC) publicly available data, the sponsored service cleared more than US$2 trillion over the 2024 year-end, with consistent volumes following that at around the US$1.8 trillion mark in total repo activity.

Under the well-established sponsored model, buy-side firms access clearing through a sponsoring direct member that clears trades on behalf of its clients. This indirect access model typically services on a “done with” basis, meaning the transaction is executed and cleared by a direct member facing its client as a counterparty.

FICC is also expanding its suite of available access models in alignment with the mandate. The Agent Clearing Service is more aligned to futures clearing, whereby the clearing member facilitates clearing of its clients’ trades on an agency basis. The updated model is driving clearing members to enhance servicing to allow for “done away” trading, where the trade execution is done with a direct member separately and then submitted to a different direct member for clearing. This ultimately allows for centralization of clearing through one member, while retaining multiple trading counterparties.

TK: The runway to compliance will be phased, but it will come quickly, even with the SEC’s 12-month extension for market participants. The SEC is looking to FICC to redefine the rulebook to support new clearing requirements by September 30, 2025 – but with FICC maintaining the original target date of March 31, 2025 for a majority of its required changes. The extensions made earlier in 2025 by the SEC have given market participants more time to digest some of the significant changes to FICC’s services that impact access models, treatment of failed novations, margin models and the host of technology and infrastructure changes the market will be required to adopt to support these changes. By December 31, 2026, all US Treasury purchases and sales by direct participants acting as interdealer brokers as well as transactions among direct participants, broker-dealer and government securities dealer must be cleared.

Most important to the buy-side, clearing of all reverse repo and repo transactions with a direct participant will be required by June of 2027. Thus, nearly every US Treasury agreement traded with a buy-side’s dealer relationship today – whether bilateral or tri-party – will be required to fall under a FICC clearing umbrella.

All institutions that trade and settle US Treasuries should review the SEC’s proposal and begin planning immediately to be ready to meet clearing requirements for their activities. In a post-mandate environment, even firms that aren’t planning on becoming FICC members may see their counterparty options dry up if they don’t have an outlet to clear their trades – given that any eligible UST cash/repo trades where at least one counterparty is a FICC member will need to be cleared. We will likely see several bottlenecks as market participants digest the new requirements and the impact on their businesses.

While these services generally introduce a perceived cost, we’ve observed numerous buy-side benefits to sponsored clearing from our experience in running a sponsored repo program with more than 160 clients. Namely, liquidity, scale, spot date servicing and competitive pricing to traditional repo make cleared repo attractive. The number of sponsors participating in FICC’s service has grown significantly, and providers’ offerings have evolved to reduce complication and cost of contracting, onboarding, trading and trade servicing.

For US Treasury repo and reverse repo transactions, a buy-side firm should consider reaching out to current sponsors and dealers, or engage with members who are prepared to handle the size and scale of new servicing. The DTCC also has public resources and updates available at U.S. Treasury Clearing. Anecdotally, State Street has seen a number of prospects and clients interested in migrating to sponsored activity already, and we look forward to providing value through these services globally.

It’s worth noting that:

• Overnight and term US Treasury repo activity is supported in the sponsored service (as well as agency mortgages outside of the mandate), in both traditional bilateral delivery-versus-payment and tri-party constructs
• FICC has approved over 40 jurisdictions for sponsorship and continues to add more jurisdictions to the mix

TK: One of the largest changes in the final ruling pertained to hedge fund activity. In the proposal, a subset of buy-side firms (such as hedge funds) were in focus regarding US Treasury purchase and sale transactions; however, hedge funds were excluded in the final rule. For repo and reverse repo transactions, all buy-side participants are in scope with the exception of state/local governments, central banks, sovereign entities and international financial organizations s (like multilateral development banks). Thus, the rule is inclusive of, but not limited to, traditional or non-traditional asset managers, asset owners and corporates. In simple terms, if you trade US Treasuries via reverse repo or repo globally today with a FICC member (i.e., a typical repo dealer), clearing is required, considering the limited exemptions.

Trading between two buy-side participants – i.e., “peer-to-peer” including guaranteed transactions – does not fall under the clearing mandate. The buy-side should consider the portfolio and operational benefits to these diversified outlets in their planning for central clearing. These transactions are sure to gain steam as many counterparties look to complement their cleared repo transactions.

TK: At this point, only US Treasuries are in focus under the mandate, particularly because they make up the largest traded security market in the world. Its resiliency is paramount to the performance of the US Treasury and Federal Reserve mandates. I wouldn’t be surprised that the precedents set here are carried into other G7 markets or beyond in the coming years.

The US currently leads other global markets in terms of appetite for and adoption of cleared repo. The mandate could reinforce perceived benefits of cleared repo and potentially drive adoption of cleared solutions offered by global CCPs, even in the absence of a regulatory mandate. Thematically, we have seen that global CCPs have refined their cleared buy-side focused solutions and are in the process of bringing these solutions to the marketplace or tweaking their current models.

TK: I can only envision market adjustments. This is a multi-trillion-dollar market that will consistently grow. We could certainly see swings in participants and pricing, but not the market diminishing. This could mean new market participation, and it’s worth noting that sponsored clearers have arguably added liquidity into the system by allowing a broader range of market participants to service the flow of US Treasury trading. Speaking from experience, custody banks have become new participants and market accelerators of repo clearing and markets, providing additional liquidity that otherwise, pre-2017 (when FICC expanded its sponsored service), may have not found a home.

Participants tend to lose sight of how clearing has serviced the broader Treasury market to date. However, we may have to take a step back before taking a few steps forward as the market adjusts to the final rule. This rule could also be intertwined in the evolution of market of fiscal and monetary policy as the US Treasury’s financing needs and budget deficits swell. The path in a fully cleared world will likely require some future adjustments, as a new chapter in financing markets takes center stage.