Key Takeaways on New Regulations Impacting the US Treasury Market

By: William Kolkey

US financial regulators have recently adopted several new rules aimed at promoting liquidity and reducing systemic risk in US treasury markets. The SEC’s clearing mandate will subject an estimated $4 trillion of daily volume in US treasury transactions to mandatory clearing. A data collection rule from the Office of Financial Research (OFR) will extend repo reporting requirements to uncleared bilateral transactions. Finally, amendments to dealer registration rules will require principal trading firms and hedge funds acting as de facto market makers to register as securities dealers.

For market participants, the challenge goes beyond designing new systems and processes for facilitating compliance. The timeframe for implementing the new rules is relatively condensed, with the first compliance date – for reporting uncleared bilateral repos – going into effect as early as this December.

Key takeaways for complying with each of the new requirements are provided below.

OFR Data Collection
The OFR data collection requirement applies to US financial companies that have exceeded a $10 billion materiality threshold in uncleared bilateral repo transactions over a given calendar quarter. For registered securities dealers and brokers, termed Category 1 entities, the materiality threshold covers all outstanding commitments to borrow cash and extend guarantees. For other US financial companies with over $1 billion in assets, termed Category 2 entities, the threshold covers outstanding commitments to borrow cash and extend guarantees, including for funds where the entity serves as an advisor, where the counterparty is not a Category 1 entity.

The rule can be summarized as two distinct obligations. All Category 1 and 2 entities must determine whether they have exceeded the materiality threshold to become a covered reporter. For entities active in the US treasury market, that means implementing systems for aggregating cash borrowing and guarantees with respect to covered repo transactions.

Category 1 and 2 entities who exceed the materiality threshold then must report all covered repo transactions to which they participate. Trade reports are required to be submitted on a daily basis using the OFR’s Data Collection Utility system. Noteworthy is that the scope of reportable transactions is broader than that of the transactions counted against the materiality threshold, encompassing any transaction where the covered reporter is a direct or indirect participant. There are 32 reportable data fields, though the OFR has hinted that more might be added in the future.

The initial compliance dates for Category 1 and 2 covered reporters are December 2, 2024 and April 1, 2025, respectively.

Treasury Clearing
The SEC clearing mandate requires direct participants of Treasury CCPs to clear cash and repo transactions involving US treasuries. There is currently only one registered Treasury CCP, the Fixed Income Clearing Corporation (FICC).

The challenge for compliance is twofold. First, there is the infrastructure for evaluating whether a given cash or repo transaction is subject to mandatory clearing. There are various exceptions to the clearing rule, including for transactions with an affiliate that clears all other US treasury transactions “to which the affiliate is a party”. (ISDA has asked regulators to clarify that this does not mean the affiliate has to clear external trades otherwise not subject to clearing.)

Second, market participants will be responsible for onboarding counterparties for clearing at a Treasury CCP. This will entail entering into new clearing agreements with counterparties and implementing controls to comply with revised collateral and margin segregation requirements, which can vary based on the counterparty and clearing model.

The mandate to clear US treasury cash transactions goes into effect December 31, 2025; the mandate to clear repo transactions, June 30, 2026. It should be noted that the latter requirement, by substantially reducing the size of the uncleared bilateral repo market, will also reduce the population of covered reporters for OFR data collection. Covered reporters that fall below the materiality threshold for four consecutive quarters are no longer obligated to report.

Dealer Registration
Pursuant to recent amendments that define the term “as a part of a regular business”, the SEC will require de facto market markers in securities and government securities to register as dealers. The practical effect of the rule is to apply registration requirements to principal trading firms (PTFs) and hedge funds that rely on high-frequency trading strategies. The compliance date is April 29, 2025, with the SEC estimating that up to 22 PTFs and 12 hedge funds active in the treasury securities market will be required to register as dealers.

Dealer registration means complying with TRACE and CAT reporting requirements, as well as SEC and FINRA supervisory and risk management requirements. Registered dealers are also considered Category 1 entities under the OFR data collection rule. The OFR estimates, however, that only a small number (if any) PTFs would exceed the materiality threshold, as currently defined. For PTFs that might approach the threshold, software will be necessary for aggregating covered transactions.

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Market participants had wanted a minimum of five years to implement changes to their infrastructure for trading US treasuries. They are getting half that time. If there is any silver lining, it is that US treasury reporting and clearing requirements are not unlike reporting and clearing requirements that have applied to OTC derivatives transactions since the 2010s. There is an opportunity here to leverage a similar control architecture, which should reduce costs associated with implementation. Whatever the approach, market participants will want to act quickly, in order to ensure adequate time to identify and remedy any gaps in their data models and to test new systems and workflows.

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