The text discusses three major challenges and uncertainties related to the SEC’s clearing rule, focusing on clearing processes in the Treasury market.
Key Areas of Concern:
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Inter-affiliate Transactions:
- The SEC allows exempting certain transactions between a Covered Clearing Agency member and their affiliates for liquidity and collateral management.
- However, if an affiliate engages in outward-facing transactions, those must be centrally cleared to prevent avoidance of clearing rules.
- The industry seeks more flexibility for non-centrally cleared activity among affiliates to manage resources more effectively.
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Global Nature of the Clearing Rule:
- The SEC’s mandate applies globally, requiring central clearing of eligible transactions regardless of jurisdiction.
- There are calls for flexibility in cross-border transactions, given complexities in dealing with non-U.S. counterparties, but any adjustments must ensure fairness and avoid evasion.
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Done-away Clearing Model:
- Unlike in the U.S. Treasury market, where execution and clearing happen together, derivatives often separate these processes.
- A done-away model could allow firms that excel at trade execution to partner with those that are better equipped for clearing, thus enhancing access to central clearing.
- BNY plans to develop its own clearing agent services to facilitate this model as it gains traction.
Innovations in Clearing Models:
- The introduction of new Central Counterparties (CCPs) like CME and ICE alongside the existing Fixed Income Clearing Corporation (FICC) indicates a transformation in clearing models, sparking interest among market participants.
Conclusion:
As regulatory deadlines approach, the evolution of these aspects will be critical for the market’s efficiency and compliance.
