Wall Street Prepares for Implementation of Centralized Treasury Clearing

By Davide Barbuscia

Wall Street is facing a deadline of 2026 for the implementation of a new rule requiring centralized Treasury clearing, as the Securities Industry and Financial Markets Association contemplates requesting regulators for more time to comply with the regulation. The Securities and Exchange Commission recently adopted new rules designed to reduce systemic risk in the $27 trillion Treasury market, the largest bond market globally, by mandating that more trades go through clearing houses. These rules, which will provide the SEC with greater oversight of the market, are set to be phased in by June 2026.

However, key details regarding how mandatory central clearing will function have yet to be determined, leading market participants to express concerns that the remaining two years may not be sufficient for a smooth transition. William Thum, managing director for the asset management group at SIFMA, acknowledged that the trade association had initially estimated a six-year timeline for the change. He indicated that it is likely they will need to request additional time from the SEC.

One of the challenges in expanding central clearing lies in the necessity of modifying the process for clearing trades in the repo market, where banks and funds exchange short-term loans secured by Treasuries. Currently, these trades are cleared either through the Fixed Income Clearing Corporation or directly between the parties involved. The new rule aims to route these bilateral transactions through central clearing.

Market participants have raised concerns about changes proposed by FICC to enable expanded clearing for Treasuries, as they believe these changes do not adequately address the issue of “done-away” trades, which are not executed with a sponsoring member. The lack of a market for such trades could limit trading partners available to non-FICC members and impact Treasury liquidity, according to the Managed Funds Association.

During the recent Treasury forum in New York, several industry experts echoed these concerns, emphasizing the importance of developing new trading models to support central clearing. SIFMA’s Thum reiterated the association’s commitment to collaborating with the SEC and providing updates on the transition process, highlighting the need for more than two years to successfully implement central clearing.

In conclusion, the timeline for centralized Treasury clearing poses challenges for Wall Street, with market participants urging regulators for additional time and emphasizing the importance of addressing key operational issues to ensure a smooth transition.

(Reporting by Davide Barbuscia; Editing by Cynthia Osterman)