ISDA: āNot a lot of timeā to prepare for US Treasury reforms
09 August 2024 US
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The International Swaps and Derivatives Association (ISDA) revealed that there is an āenormous laundry list of tasksā that need to be worked through when it comes to the US Ā鶹“«Ć½ and Exchange Commissionās (SEC) Treasury reforms.
These tasks, which include the development of documentation and the recalibration of certain capital rules, will require time and a collective effort from the entire industry, says Scott OāMalia, ISDA CEO.
The SEC finalised its regulations on US Treasury reforms in December 2023, which includes a requirement to clear certain Treasury cash transactions from 31 December 2025 and Treasury repos from 30 June 2026.
āThereās an awful lot to do and not a lot of time to do it,ā says OāMalia.
In his published opinion on the subject, OāMalia indicates that market participants will need to assess existing and future clearing models to determine which best suits their needs.
In addition, legal documentation will need to be developed, negotiated and executed, and regulatory-compliant structures for the segregation of client margin will need to be put in place and tested.
He adds: āAll of this work comes against a backdrop of concern about the need to maintain and enhance market liquidity, particularly during periods of stress.ā
Solving legal and operational issues will be critical, says OāMalia, who also highlights the significance of calibrating the US prudential framework to make it risk appropriate and able to support market liquidity.
For example, OāMalia indicates a lack of recognition in the revised US capital framework for cross-margining programmes, such as the one offered by the Fixed Income Clearing Corporation (FICC) and CME Group for transactions based on US Treasury securities and interest rate futures.
These services allow firms to obtain initial margin efficiencies from offsetting trades in a portfolio of transactions, but OāMalia believes there are no commensurate benefits from a capital perspective under the standardised approach for counterparty credit risk.
He states: āAs more Treasury securities and repos are cleared as a result of the SECās rule, a lack of recognition for cross-margining will constrain bank balance sheets and limit their ability to offer client clearing.ā
ISDA has worked alongside SIFMA to propose a number of calibration changes to the Basel III Endgame proposals and the surcharge for global systemically important banks (G-SIBS), to ensure the rules do not disproportionately hamper the ability of banks to act as intermediaries.
Furthermore, the association has sent a letter to US prudential regulators drawing attention to non-risk-based supplementary leverage ratio (SLR) and how, in ISDAās view, it may impede banksā capacity to participate in US Treasury markets and facilitate access to cleared markets, especially during periods of stress.
In his conclusion, OāMalia says: āAll of these issues need to be resolved before weāre in a position to implement Treasury clearing safely and efficiently.
āThe question is whether they can be completed in the time available, and this is something weāll be discussing with members in the coming months.ā
These tasks, which include the development of documentation and the recalibration of certain capital rules, will require time and a collective effort from the entire industry, says Scott OāMalia, ISDA CEO.
The SEC finalised its regulations on US Treasury reforms in December 2023, which includes a requirement to clear certain Treasury cash transactions from 31 December 2025 and Treasury repos from 30 June 2026.
āThereās an awful lot to do and not a lot of time to do it,ā says OāMalia.
In his published opinion on the subject, OāMalia indicates that market participants will need to assess existing and future clearing models to determine which best suits their needs.
In addition, legal documentation will need to be developed, negotiated and executed, and regulatory-compliant structures for the segregation of client margin will need to be put in place and tested.
He adds: āAll of this work comes against a backdrop of concern about the need to maintain and enhance market liquidity, particularly during periods of stress.ā
Solving legal and operational issues will be critical, says OāMalia, who also highlights the significance of calibrating the US prudential framework to make it risk appropriate and able to support market liquidity.
For example, OāMalia indicates a lack of recognition in the revised US capital framework for cross-margining programmes, such as the one offered by the Fixed Income Clearing Corporation (FICC) and CME Group for transactions based on US Treasury securities and interest rate futures.
These services allow firms to obtain initial margin efficiencies from offsetting trades in a portfolio of transactions, but OāMalia believes there are no commensurate benefits from a capital perspective under the standardised approach for counterparty credit risk.
He states: āAs more Treasury securities and repos are cleared as a result of the SECās rule, a lack of recognition for cross-margining will constrain bank balance sheets and limit their ability to offer client clearing.ā
ISDA has worked alongside SIFMA to propose a number of calibration changes to the Basel III Endgame proposals and the surcharge for global systemically important banks (G-SIBS), to ensure the rules do not disproportionately hamper the ability of banks to act as intermediaries.
Furthermore, the association has sent a letter to US prudential regulators drawing attention to non-risk-based supplementary leverage ratio (SLR) and how, in ISDAās view, it may impede banksā capacity to participate in US Treasury markets and facilitate access to cleared markets, especially during periods of stress.
In his conclusion, OāMalia says: āAll of these issues need to be resolved before weāre in a position to implement Treasury clearing safely and efficiently.
āThe question is whether they can be completed in the time available, and this is something weāll be discussing with members in the coming months.ā
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