SF Symposium: US Treasury clearing to present operational burden
14 November 2024 UK
Image: SFT
The US Treasury clearing mandate is to present a significant burden to firms, according to panellists at the 麻豆传媒 Finance Symposium.
Setting the scene for the 鈥楢 clear view鈥� panel, moderator Darren Crowther, general manager of 麻豆传媒 Finance and Collateral Management at Broadridge, discussed the extent of US Treasury clearing volumes and how upcoming regulation will see this soar.
As at July 2024, US Treasury clearing is around US$7.5 trillion daily volumes. This means a minimum of 150,000 trades are being struck per day, according to Crowther.
In the world of data exchange, that is circa one million messages a day being exchanged back and forth between all of the Government 麻豆传媒 Division (GSD) members at the Fixed Income Clearing Corporation (FICC).
The expectation, Crowther indicated, is that this will go up to about US$11 trillion or higher in daily volumes, meaning another 100,000 trades, and a further 400,000 or 500,000 messages every day.
鈥淪o with the volume additional trades and the increase of data that鈥檚 going to be transferred back and forward, the operational burden that鈥檚 going to be put on organisations is quite significant, and that will flow into an international space as well, as the mandate is around how those trades are also cleared,鈥� Crowther explained.
The US 麻豆传媒 and Exchange Commission鈥檚 (SEC鈥檚) final rule on mandatory clearing was approved last December, it is part of the broader reform agenda that the SEC and US Treasury has embarked upon.
This is one of the most prominent rules and it could have a significant impact, not just on domestic transactions and counterparties, but also across the world, says Michalis Sotiropoulos, head of Government Relations, Europe, at the Depository Trust and Clearing Corporation (DTCC).
In terms of timing, there are three key deadlines. The first is in March 2025, which refers to the infrastructure part of the rule, so CCP providers and clearing members will have to set up segregated accounts. The two other deadlines for the scope are December 2025 for cash transactions, and June 2026 for repo transitions.
In today鈥檚 ever changing regulatory landscape, firms are often faced with changes to operational processes, market conditions, and technological advancements. However, challenges can also enable tactical and strategic transformational opportunities, stated Richard Gomm, associate director, product and business development, at SIX.
He added: 鈥淚nstitutions may be able to tactically or strategically transform their organisations while also implementing changes that are designed to fulfil any proposed changes to regulations.鈥�
Key considerations when tackling this upcoming regulation include strategy and the associated business models, technological infrastructure, margin processes, risk management frameworks, and repapering 鈥� something that will be a 鈥渉uge task for everybody鈥�.
Moving to the next topic, Crowther indicated that DTCC鈥檚 FICC is currently the only clearing offering in US Treasuries, with CME and the Intercontinental Exchange (ICE) also 鈥減utting their hat in the ring鈥�.
Commenting on this, Cyprien Dupont-Madinier, head of repo Europe, at the Bank of Montreal, said: 鈥淗aving one CCP makes things easier from a dealing perspective, a pricing perspective, a liquidity perspective and margining perspective. Having everything in the same place allows dealers to optimise netting opportunities and reduce capital consumption.
鈥淚n addition, looking at the driving forces behind the rule, which are to reduce risk and increase the operational efficiency, it would seem to advocate in favour of having one CCP over multiple CCPs.鈥�
However Cyprien also noted that having everything in just one CCP would concentrate risk into one critical piece of market infrastructure (potentially at the mercy of an IT outage).
It would then call into question whether that infrastructure should be left in the hands of the private sector or whether it should be under the supervision of a public regulator.
The latter potentially adds new risk layers as the regulator tends to focus on liquidity risk when a CCP focuses on counterparty risk. He also stressed that competition in the CCP markets could drive technology innovation and pressure costs down. As such he believes that 鈥渢he jury is still out there鈥� on the optimal number of CCPs.
Gomm interjected: 鈥淟ooking at mandated clearing and the introduction of new CCPs, diversification of risk using new entrances to the market, is great for us.
鈥淏ut, holistically, across the market, it is not always viewed well from a trading perspective, given fragmentation of liquidity pools and portfolios. Commercial considerations pertaining to fee concessions and revenue share opportunities should be at the forefront of firms selection criteria when looking to appoint a CCP of choice. Such incentives will help to alleviate the costs associated with fragmentation of portfolios etc.鈥�
Other considerations concerning the wider market include competitive clearing fees, eligibility schedules, and other concessions like partnership programmes.
Concluding his final thoughts on the panel, Gomm warned that there will be additional focus on mandatory clearing of repo and fixed income transactions in the UK.
Setting the scene for the 鈥楢 clear view鈥� panel, moderator Darren Crowther, general manager of 麻豆传媒 Finance and Collateral Management at Broadridge, discussed the extent of US Treasury clearing volumes and how upcoming regulation will see this soar.
As at July 2024, US Treasury clearing is around US$7.5 trillion daily volumes. This means a minimum of 150,000 trades are being struck per day, according to Crowther.
In the world of data exchange, that is circa one million messages a day being exchanged back and forth between all of the Government 麻豆传媒 Division (GSD) members at the Fixed Income Clearing Corporation (FICC).
The expectation, Crowther indicated, is that this will go up to about US$11 trillion or higher in daily volumes, meaning another 100,000 trades, and a further 400,000 or 500,000 messages every day.
鈥淪o with the volume additional trades and the increase of data that鈥檚 going to be transferred back and forward, the operational burden that鈥檚 going to be put on organisations is quite significant, and that will flow into an international space as well, as the mandate is around how those trades are also cleared,鈥� Crowther explained.
The US 麻豆传媒 and Exchange Commission鈥檚 (SEC鈥檚) final rule on mandatory clearing was approved last December, it is part of the broader reform agenda that the SEC and US Treasury has embarked upon.
This is one of the most prominent rules and it could have a significant impact, not just on domestic transactions and counterparties, but also across the world, says Michalis Sotiropoulos, head of Government Relations, Europe, at the Depository Trust and Clearing Corporation (DTCC).
In terms of timing, there are three key deadlines. The first is in March 2025, which refers to the infrastructure part of the rule, so CCP providers and clearing members will have to set up segregated accounts. The two other deadlines for the scope are December 2025 for cash transactions, and June 2026 for repo transitions.
In today鈥檚 ever changing regulatory landscape, firms are often faced with changes to operational processes, market conditions, and technological advancements. However, challenges can also enable tactical and strategic transformational opportunities, stated Richard Gomm, associate director, product and business development, at SIX.
He added: 鈥淚nstitutions may be able to tactically or strategically transform their organisations while also implementing changes that are designed to fulfil any proposed changes to regulations.鈥�
Key considerations when tackling this upcoming regulation include strategy and the associated business models, technological infrastructure, margin processes, risk management frameworks, and repapering 鈥� something that will be a 鈥渉uge task for everybody鈥�.
Moving to the next topic, Crowther indicated that DTCC鈥檚 FICC is currently the only clearing offering in US Treasuries, with CME and the Intercontinental Exchange (ICE) also 鈥減utting their hat in the ring鈥�.
Commenting on this, Cyprien Dupont-Madinier, head of repo Europe, at the Bank of Montreal, said: 鈥淗aving one CCP makes things easier from a dealing perspective, a pricing perspective, a liquidity perspective and margining perspective. Having everything in the same place allows dealers to optimise netting opportunities and reduce capital consumption.
鈥淚n addition, looking at the driving forces behind the rule, which are to reduce risk and increase the operational efficiency, it would seem to advocate in favour of having one CCP over multiple CCPs.鈥�
However Cyprien also noted that having everything in just one CCP would concentrate risk into one critical piece of market infrastructure (potentially at the mercy of an IT outage).
It would then call into question whether that infrastructure should be left in the hands of the private sector or whether it should be under the supervision of a public regulator.
The latter potentially adds new risk layers as the regulator tends to focus on liquidity risk when a CCP focuses on counterparty risk. He also stressed that competition in the CCP markets could drive technology innovation and pressure costs down. As such he believes that 鈥渢he jury is still out there鈥� on the optimal number of CCPs.
Gomm interjected: 鈥淟ooking at mandated clearing and the introduction of new CCPs, diversification of risk using new entrances to the market, is great for us.
鈥淏ut, holistically, across the market, it is not always viewed well from a trading perspective, given fragmentation of liquidity pools and portfolios. Commercial considerations pertaining to fee concessions and revenue share opportunities should be at the forefront of firms selection criteria when looking to appoint a CCP of choice. Such incentives will help to alleviate the costs associated with fragmentation of portfolios etc.鈥�
Other considerations concerning the wider market include competitive clearing fees, eligibility schedules, and other concessions like partnership programmes.
Concluding his final thoughts on the panel, Gomm warned that there will be additional focus on mandatory clearing of repo and fixed income transactions in the UK.
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