JPM on Treasury Central Clearing
J.P. Morgan Securities wrote earlier this month on "Fixing the roof while the sun is shining," which was subtitled, "Treasury central clearing takes shape via the SEC." They explain, "Last week, the SEC unanimously voted to propose a rule to increase central clearing of US Treasury cash and repo transactions and improve risk management at central counterpart(ies), namely the Fixed Income Clearing Corporation (FICC), which clear these products. Notably, the proposed regulation stops short of imposing a clearing mandate for all Treasury trades, but instead would require clearinghouses to demand their members to clear eligible secondary market transactions in US Treasury cash and repo markets. If finalized, the rule could impact a significant portion of the $24tn Treasury market (an outside study noted that only 13% of trades in US Treasuries were centrally cleared in 2017) as well as the $3.8tn Treasury repo market, of which only 30% are currently centrally cleared." The piece continues, "According to the SEC, this should 'help increase the safety and efficiency of securities trading and reduce costs,' 'mitigate the potential for a single market participant's failure to destabilize other market participants or the financial system,' and 'address concerns by substituting the clearinghouse's liquidity and creditworthiness for each counterparty.' There is a 60-day comment period." JPM explains, "In any case, the proposed rule will have implications for the money markets given substantial exposures to T-bills, short-dated Treasury coupons, Treasury FRNs, and Treasury repo. Indeed, government MMFs -- one of the largest investors in the money markets -- currently hold over $1.5tn of Treasury exposures ($1.3tn in the form of unsecured Treasury exposure and $0.25tn in the form of secured Treasury exposure). Meanwhile, recent research indicates that $63bn of MMFs' Treasury repo holdings were centrally cleared as of 2Q22, mostly through the FICC's Sponsored Program. While the proposed rule would exclude the $2tn of balances currently sitting at the Fed RRP, to the extent that cash gets reallocated back into the Treasury cash and/or repo markets, this would further increase the impact this rule could have on government MMFs and the rest of the money markets." They add, "Fortunately, the availability of sponsored cleared repo should help mitigate some of the operational impact. Currently, both registered investment companies (e.g. money funds) and qualified institutional buyers (e.g., hedge funds) can be sponsored onto the FICC sponsored repo platform by direct participants of FICC.... Since its launch in 2017, sponsored cleared repo has expanded to include Delivery-versus-Payment (DVP) and general collateral tri-party transactions in overnight and term maturities. Accordingly, to comply with the clearing mandate, a money market participant would migrate their uncleared, bilateral or tri-party repo transactions to sponsored cleared repo. That said, while many money market participants are already on the sponsored repo platform, not all are, particularly given some counterparty limitations at the FICC. To get them on the platform takes time. Furthermore, current rating agency guidelines limit how much repo exposure a MMF could have to any one counterparty. An industry shift towards sponsored repo will likely necessitate a change to those guidelines, though again, this takes time."
