Concerns are mounting over the looming deadline before a greater portion of the US$28trn US Treasury market is forced through central clearing, industry experts warned at an event on Thursday in London held by the International Swaps and Derivatives Association.
The Securities and Exchange Commission is looking to increase the resilience of the world’s most important bond market by pushing more US Treasury trades through central clearing by the end of 2025 following a series of disruptive events.
All activity involving a direct participant of the Depository Trust and Clearing Corp's Fixed Income Clearing Corp, which operates the largest clearinghouse for Treasuries, will fall under the scope of the rules. That is expected to increase Treasury clearing volumes by more than US$4trn per day to about US$11trn, DTCC has said.
There has been a marked uptick this year in voluntary clearing of Treasuries, with volumes hitting a daily record of more than US$10trn in late September. But traders and lawyers still harbour concerns about the industry's readiness for the new rules, including the development of clearing models that can handle more activity from buyside firms.
“There’s really an open question of whether the timing is going to stick and whether there's really the ability for people to go through [this] whole process in the next 18 months,” said Lauren Semrad, partner at law firm Cleary Gottlieb, speaking at the ISDA event. “It’s going to be tough to get it done.”
Jared Noering, head of fixed-income trading at NatWest Markets, said that the Treasury clearing mandate is probably the biggest piece of work since the US Dodd-Frank Act in the wake of the 2008 financial crisis or the EU's MiFID rules.
"This is an enormous piece of work and it's going to capture all sorts of clients globally ... The timeline to getting this all done is going to be incredibly difficult," Noering said.
New models
Part of the concerns over the timeframe centre on the development of clearing models that will allow banks' clients to clear trades. “Sponsored service” models – an indirect form of clearing – is the most widely used method among clients today, handling roughly US$1trn in Treasury transactions daily, according to the Federal Reserve Bank of New York.
However, a growing number of buyside firms are looking to adopt "done-away" clearing models, which involve banks clearing Treasuries for their clients within their prime brokerage, agency clearing, or futures commission merchant business units.
Around 95% of respondents to a recent Coalition Greenwich survey said done-away clearing is “critically important”. However, only about 30% of sellside institutions are planning to offer such a service, according to DTCC.
DTCC said recently it is "advancing its efforts to support done-away clearing in the Treasury market". Rival exchange and clearer CME Group has also said it will provide done-away clearing services.
“Given our experience in clearing a variety of interest rate-related products, futures, options and swaps, we feel that we can bring the benefits of clearing to this cash market,” said Udesh Jha, managing director within CME’s clearing and post-trade division, also speaking at the ISDA event.
Regulatory uncertainty
It remains unclear when – or if – these done-away services will receive approval from the SEC. This, in turn, is frustrating the Treasury market’s ability to prepare properly for the mandatory clearing rules, according to Ted Leveroni, global head of margin services at BNY Mellon Markets.
“Until the rules are set, it’s difficult for those that would look to offer a done-away service to finalise their business models, make their investments, do their changes, and then present that to [the buyside firms] that would want a done-away service so that they can sign up and make it part of their plans when it comes to preparing for [mandatory] clearing,” Leveroni said at ISDA’s event.
Eric Litvack, ISDA chairman and group head of public affairs at Societe Generale, told the event that regulators' plans to force clearing of certain Treasury repo trades from mid-2026 also represents "a huge, transformative change that will come with significant operational challenges". They range from the development of legal documentation to the testing and implementation of client clearing models.
"Given the vital role that the US Treasury repo market plays in short-term global dollar financing, it's important to ensure that these issues are carefully considered and that sufficient time is given for implementation so that there isn't a negative effect on market liquidity or funding," Litvack said.