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Revolutionizing U.S. Treasury Market: SEC's Landmark Decision on Clearing and Broker-Dealer Regulations



The Securities and Exchange Commission (SEC) is historically known for their Christmas Gifts over the years. One such gift was on December 13, 2023. On December 13, 2023, the U.S. Securities and Exchange Commission (SEC) finalized a significant rule (known as the "Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application of the Broker-Dealer Customer Protection Rule With Respect to U.S. Treasury Securities") with a majority vote of 4-1. This rule introduces two major changes: 


  • Enhanced Clearing Requirements for U.S. Treasury Securities (USTs): The rule mandates that specific clearing agencies, which handle transactions in U.S. Treasury securities (referred to  "Treasury CCPs"), will now require their members to clear additional repurchase agreements (repos) and transactions involving the buying and selling of USTs. This requirement aims to increase the robustness of the clearing process for these types of securities.

  • Modification of the Reserve Formula in the Customer Protection Rule for Broker-Dealers (Rule 15c3-3a): The new regulation amends the existing reserve formula used by broker-dealers under Rule 15c3-3a. The amendment allows broker-dealers to record a debit in the reserve formula for margins collected from customers. This margin, which is posted to a Treasury CCP, serves as security for the customers' obligations in repos, and in the purchasing and selling of USTs. This change is intended to enhance the financial safety measures surrounding transactions in U.S. Treasury securities.


 Overall, these changes by the SEC are part of an effort to increase the stability and transparency in the market for U.S. Treasury securities, particularly focusing on the clearing processes and the financial protections associated with broker-dealer operations.


Clearing Requirements for U.S. Treasury Securities (USTs) 

The final rules require U.S. Treasury securities Covered Clearing Agencies (CCAs) to establish, implement, maintain, and enforce written policies and procedures for clearing all eligible secondary market transactions entered into by a direct participant.

The products in scope for clearing, as defined by the Securities and Exchange Commission (SEC), include the following types of transactions in U.S. Treasury securities:


  • Repurchase or Reverse Repurchase Agreements Collateralized by U.S. Treasury Securities: These are financial transactions commonly known as repos or reverse repos. In a repurchase agreement, one party sells U.S. Treasury securities to another party with an agreement to repurchase the securities at a later date, typically the following day, at a predetermined price. In a reverse repurchase agreement, the transaction is the opposite, with the buyer agreeing to sell the securities back at a later date. These agreements are used for short-term borrowing and lending, often for overnight funding. For clearing purposes, at least one of the counterparties in these transactions must be a direct participant in the clearing process.

  • Cash Purchase or Sale Transactions in U.S. Treasury Securities: This category includes outright cash transactions involving the buying or selling of U.S. Treasury securities.


However, the SEC specifies certain exclusions within this category:


  1. Transactions with sovereign entities: These are transactions involving governments of other countries.

  2. Transactions with international financial institutions: These could involve global financial organizations like the International Monetary Fund or the World Bank.

  3. Transactions involving natural persons: This refers to transactions made by individuals.

  4. Inter-affiliate repo transactions: These are repurchase agreements conducted between affiliated companies, typically within the same corporate group.

  5. Transactions with state and local governments: These involve dealings with sub-national governmental entities within the United States.

  6. Transactions involving other clearing organizations: This refers to transactions where the counterparty is another organization involved in clearing financial transactions.


Additional requirements for Covered Clearing Agencies (CCAs):

The rule document outlines specific requirements regarding the segregation of customer margin and facilitating access in relation to U.S. Treasury securities cleared through Covered Clearing Agencies (CCAs). Here are the key details:


  • Segregation of Customer Assets: The rule requires that customer assets used to meet the customer position margin requirement for cleared U.S. Treasury securities positions must be segregated from the broker-dealer's proprietary assets. This segregation is aimed at ensuring that the assets used to meet the customer margin requirement are held in an account of the broker-dealer that is distinct from any other account and is designated for the exclusive benefit of the broker-dealer’s customers. The purpose of this requirement is to prevent using one customer's assets to meet the margin requirement of another customer.

  •  Separate Calculation and Holding of Margin: The rule stipulates that margin for a direct participant’s trades, such as those made by a dealer, will be calculated, collected, and held separately and independently from those of an indirect participant, like a customer. This separation allows for the netting of a direct participant’s trades with indirect participants against the direct participant’s position vis-à-vis other dealers. Holding margin amounts from a direct participant of a U.S Treasury securities CCA separately from those of an indirect participant is intended to reduce incentives for indirect participants to trade excessively, particularly in times of high volatility.

  • Policies and Procedures for Margin Calculation: The rule requires U.S. Treasury securities CCAs to establish, implement, maintain, and enforce written policies and procedures designed to calculate margin amounts for transactions submitted by a direct participant on behalf of others separately from the margin calculated for transactions submitted by the direct participant on their own behalf. Additionally, these policies must ensure that margin collateralizing customer positions is collected separately from margin collateralizing a direct participant’s proprietary positions. The rule also mandates that any margin held for customers or other indirect participants of a member must be held in an account separate from those of the direct participant.


Modification of the Reserve Formula in the Customer Protection Rule for Broker-Dealers (Rule 15c3-3a)

The amendment to Rule 15c3-3a, known as the Customer Protection Rule, involves several key changes as follows:


  • Debit Item in Customer Reserve Formula: The amendment allows for margin required and on deposit at a U.S. Treasury securities Covered Clearing Agency (CCA) to be included as a debit item in the customer reserve formula. This new debit item offsets credit items in the Rule 15c3-3a formula, thereby freeing up resources that could be used to meet the margin requirements of a U.S. Treasury securities CCA. This change enables a customer’s broker to use customer funds to meet margin requirements at the CCP generated by the customer’s trades, potentially lowering the cost of providing clearing services.

  • Inclusion of Various Securities as Collateral: The amendment expands the types of customer collateral that can be posted to the U.S. Treasury securities CCA. Previously, the broker-dealer was limited to posting customer cash or U.S. Treasury securities. The modification now includes any securities accepted as margin by the U.S. Treasury securities CCA, subject to certain conditions.

  • Creation of a New Debit Item: The amendment introduces a new Item 15 in the Rule 15c3-3a formula, representing the margin required and on deposit with a clearing agency registered under section 17A of the Exchange Act. This is a shift from the previous arrangement, where such a margin was identified under a different item number.

  • Impact on Carrying Broker-Dealers: The final rule amendment impacts only carrying broker-dealers, as they are required to maintain a customer or Proprietary Accounts of Broker-Dealers (PAB) reserve account and may collect customer margin.

  • Conditions for Including Debit: A new Note H to the reserve formula outlines the proposed conditions for including this debit. These conditions are similar to those in Note G, which pertains to margin required and on deposit at a securities futures clearing agency or Derivatives Clearing Organization (DCO).


Proposed Timeline for Compliance and Implementation

The compliance dates and implementation schedule for the amendments in the SEC rule are structured in a staged approach, as supported by the commenters. Specifically, the staged approach involves:


First Step: 

The initial requirements related to the segregation of house and customer margin, access to central clearing, and Rule 15c3-3 should become effective first.


  • Covered Clearing Agencies: Each covered clearing agency is required to file with the Commission any proposed rule changes regarding the separation of house and customer margin and changes to satisfy the condition for 15c3-3a debit no later than 60 days following the date of publication in the Federal Register.

  • Effective Dates for Rule Changes: The proposed rule changes must be effective by March 31, 2025


Second Step: 

The requirements related to clearing eligible secondary market transactions should become effective subsequently.


  • Covered Clearing Agencies: Each covered clearing agency is required to file with the Commission any proposed rule changes regarding the amendments required under Section 19(b) and/or advance notices required under Title VIII of the Dodd-Frank Act no later than 150 days following the date of publication in the Federal Register.

  • Effective Dates for Rule Changes: The proposed rule changes must be effective by December 31, 2025, for cash market transactions encompassed by section (ii) of the definition of an eligible secondary market transaction, and by June 30, 2026, for repo transactions encompassed by section (i) of the definition.

  • Compliance by Direct Participants: Direct participants of a U.S. Treasury Securities Covered Clearing Agency (CCA) are not required to comply with the requirement to clear eligible secondary market transactions until December 31, 2025, for cash transactions and June 30, 2026, for repo transactions.


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