Central Clearing Required for U.S Treasury Market

In December 2023, the SEC adopted a new rule to mandate central clearing for certain US Treasury transactions. This new rule, which applies to most counterparties, includes certain secondary and repo trades. Specifically, central clearing of applicable Treasury trades begins by December 31, 2025, whereas Treasury repo transactions must be centrally cleared by June 30, 2026, for all participants except central banks and government entities.

A central clearing model helps to increase transparency, lower counterparty risks, and enhances market stability. Nearly all US equity trades, for example, are already cleared centrally by the Depository Trust Company (DTC). The Securities and Exchange Commission (SEC) remains focused on market structure reform that lowers risks and improves resiliency.

The Fixed Income Clearing Corporation, abbreviated as FICC, is currently the only clearing house for Treasuries. It is a subsidiary of DTCC and rated AAA. The SEC has been telegraphing that a rule requiring central clearing of Treasuries would be forthcoming. While the news was not a surprise, the length of the implementation timeframe was longer than expected, reflecting the amount of work that needs to be done, especially to migrate billions of dollars in bi-lateral repo agreements to be centrally cleared.

Northern Trust is a member of FICC and can sponsor asset owners, investment managers, and hedge funds to participate in centrally cleared Treasury markets.[1] The expected daily volume of centrally cleared repo is expected to increase by $1.63 trillion.[2] The increased volume will enhance the value of accessing the FICC repo market, benefitting both cash investors who appreciate the safety of the largest cleared repo market with AAA rating and holders of Treasuries who are looking to borrow cash.

About FICC:

FICC (Fixed Income Clearing Corporation) Sponsored Repo allows institutional investors to participate in the repo market through a sponsoring member who acts as an intermediary. This allows institutional investors to access a deep pool of liquidity, such as U.S. cash or U.S. treasuries, on a daily basis and participate in secure repo transactions without the need for direct membership in the clearing corporation, thereby reducing counterparty risk and increasing operational efficiency.

[1] Northern Trust’s FICC repo program currently sponsors entities (i.e., corporate entities, funds, insurance companies) domiciled in the U.S., Cayman Islands, and Ireland on behalf of institutional clients classified as Qualified Institutional Buyers (QIBs) as defined by SEC Rule 144A. Investment Managers to the sponsored entity can also be located in the UK and Hong Kong subject to meeting other eligibility requirements.

[2] Rates & Repo: Expanded Treasury Centralized Clearing | DTCC

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