Treasury Clearing Within ICC
On December 13, 2023, the Securities and Exchange Commission (SEC) adopted a final rule under the Securities Exchange Act of 1934 to enhance risk management practices for central counterparties in the U.S. Treasury market and facilitate additional clearing of U.S. Treasury security transactions.
The rule changes require firms to clear eligible secondary market transactions related to U.S. Treasury securities, including both cash transactions and repurchase / reverse repurchase agreement transactions, and capturing a broad range of market participants with a few exceptions.
In general, the rules require direct participants of a U.S. Treasury Covered Clearing Agency (CCA) to submit for clearing and settlement all such eligible secondary market U.S. Treasury transactions.
The rules outline a phased implementation of the clearing mandate as described below (subject to some exemptions):
December 31, 2026 - Cash Transactions1
UST purchases and sale (cash transactions) between a CCA direct participant and:
- any counterparty, if the direct participant is acting as an interdealer broker
- a registered securities broker-dealer, government securities dealers or a government securities broker
June 30, 2027 - Repo Transactions
1 On February 25, 2025, the SEC extended the original clearing mandate deadlines by 12 months from their original dates of December 31, 2025 for cash transactions and June 30, 2026 for repo transactions.
Clearing Expertise
ICC operates the largest Credit Derivative Swap (CDS) clearing service, globally. The ICC clearing approach facilitates real-time clearing, elimination of bilateral counterparty risk, customer segregation and customer porting, and operates a robust and capital efficient risk management framework. ICC, as a fixed income central counterparty, is uniquely positioned to extend its clearing services to U.S. Treasury securities. ICC believes the U.S. Treasury market demands the same standards of clearing and plans to provide U.S. Treasury clearing services by the SEC mandated deadlines that will arguably benefit the market through increased competition and innovation.
Regulatory Status
ICC is an SEC registered Covered Clearing Agency (CCA) and a CFTC regulated Derivatives Clearing Organization (DCO) with 15+ years of experience complying with applicable clearinghouse regulatory requirements.
SIFMU & QCCP Status
ICC is designated by the Financial Stability Oversight Council (FSOC) as a Systemically Important Financial Market Utility (SIFMU). ICC is a qualified central counterparty (QCCP) under U.S. bank capital rules. This status is essential for obtaining support by the market for capital and risk management reasons. Without QCCP status, clearing firms that are banks or bank affiliates, would face substantially higher capital charges than when transacting with a QCCP clearing agency.
Central Bank Access
ICC has access to the Federal Reserve System. Such access provides robust financial risk mitigation to the market.
Foreign Recognition
ICC is recognized or holds exemptions for key non-US jurisdictions, which are essential for global market participants.
Distinct Services
The UST clearing service will be distinct from the current CDS clearing service, with separate rule book, membership, financial and liquidity resources and Risk Committee.
Firms choosing to clear their trades at ICC have two options; either as a direct ICC Participant or as a Non-Participant Party clearing through one or more ICC Participants that are client-carrying brokers (clearing brokers) under the ICC Rules.
ICC Participants may choose to clear their own proprietary trades, in which case the resulting cleared positions are recorded and risk managed as House-Related Positions.
Non-Participant Parties can clear their trades through ICC Participants who offer client services. Cleared positions resulting from Non-Participant Party trades are recorded and risk managed as Client-Related Positions.
Client-Related Position record keeping, financial payments/obligations are maintained and risk managed separately from any House-Related Positions. For the avoidance of doubt, ICC Participants may clear House-Related Positions and/or Client-Related Positions.
Participant portfolios associated with House-Related and Client-Related Positions are risk analyzed by means of the ICC developed Initial Margin (IM) methodology, based on Value-at-Risk (VaR) estimation framework with Margin Period of Risk (MPOR) of 2 days. Additional liquidity and concentration requirements are assessed. House-Related and Client-related positions are subject to the same risk management approach. House-specific concentration requirements and liquidity requirements are assessed.
ICC uses a portfolio-based risk framework with forward looking Monte Carlo (MC) simulated scenarios to estimate IM requirements, consistent with the currently used CDS risk management approach.
ICC establishes a separate Participant-only contributed Guaranty Fund, sized to provide financial resources based on Cover-2 regulatory standards. The required contribution to the Guaranty Fund by a Participant is risk-based using stress test analyses under extreme but plausible market conditions, with a minimum of $20 million.
The initial ICC contribution to the Guaranty Fund, as Skin-In-The-Game (SITG), is $100 million.
Done-With and Done-Away Support
A firm choosing to offer combined execution and clearance to its clients can become an ICC Participant and submit “Done-With” trades for clearing. The trade submission indicates that the Participant is an executing party, and results in a House Position being automatically recorded for the Participant’s leg. The trade submission also implies that the Participant is acting as the clearing broker for the trade. The submitted Non-Participant Party leg is automatically recorded as a Client-Related Position in a customer (legal entity specific) segregated portfolio.
ICC Participants that offer stand-alone clearing services to their clients submit “Done-Away” trades to the clearinghouse. The trade submission indicates the Participant is acting as the clearing broker for the Non-Participant Party, resulting in the Non-Participant Party leg is automatically recorded as a Client-Related Position in a customer (legal entity specific) segregated portfolio. The opposite leg, however, will be automatically recorded as a House position at a different ICC Participant.
Participants can elect to deliver “Done-With” and “Done-Away” clearing services in two distinct memberships, i.e. as a Paired Position Participant for “Done-With” only treatment, and Unpaired Position Participant for “Done-Away” only treatment, or in one single membership as a General Participant, where both “Done-With” and “Done-Away” treatments are supported.
Client Initial Margin Regimes
The ICC client IM regime is based on individual Client portfolios, also referred to as gross Client IM approach.
ICC will provide certain flexibility to a Client and its clearing broker to agree upon the amount of IM resources contributed by each party. A Client can contribute 100%, 70% or 0% of its gross Client IM requirement. This provides more commercial flexibility for both parties to mutually agree on service cost and pricing, while maintaining the consistency of the ICC risk management approach and meeting the 15c3-3 eligibility criteria.
In each of the considered Client IM regimes, "Client-Funded", "Participant-Funded" and "Hybrid", the clearinghouse establishes and receives the same level of IM resources for each Client portfolio, and thus provides the same level of protection. In case of a Participant default, ICC maintains a uniform ability to port Client positions, execute a unified and robust default management waterfall approach, and minimize the utilization of Guaranty Fund resources, regardless of the considered Client IM regime.
Client Protections
The ICC default management framework is designed to provide Client protection and portability in default scenarios. ICC supports Client porting today for CDS clearing and is extending the functionality for U.S. Treasury clearing. Porting is supported in both pre-default and post-default scenarios. In a pre-default scenario, Clients can initiate a transfer via the ICE Link user interface or API, and transfer positions to one or more clearing broker(s). In a post-default scenario, ICC has a customer porting process where Participants can review and accept Client portfolios.
"Client-Funded" IM is used only to cover losses related to the portfolio of the funding Client. In case the Client losses are greater than the "Client-Funded" IM, the "Participant-Funded" IM associated with the given Client portfolio will be utilized.
ICC holds "Client-Funded" collateral in a legally segregated account, separate from House-related collateral and "Participant-Funded" IM.
ICC will collect Variation Payments at start-of-day to guarantee settlement and financial performance. Variation Payments are based on portfolio re-valuation at prior end-of-day price levels. Client-Related and House-Related daily Variation Payments are operationally and legally separated.
Physical Settlement
Non-Participant Parties may, in coordination with the Participant through which they clear, elect for indirect or direct U.S. Treasury security settlement with ICC.
In case of direct settlement, the Client settles its net deliver or receive obligation for each financial instrument directly with ICC. The Participant is not obligated to settle the transactions cleared by the Client, and thus is eligible for off-balance sheet treatment.
In the case of indirect settlement, each Non-Participant Party relies on its clearing broker to facilitate security settlement. The clearing broker settles with ICC for the net Client-related delivery obligation across all Clients with indirect settlement and the net House-related delivery obligations. The two settlement flows are completely separate, maintaining full segregation of Client-Related funds and securities from the House-Related funds and securities. The clearing broker settles directly with ICC on a net basis across all its Client-Related indirect-settlement portfolios.
In the Unpaired-Positions Participant structure, in case of a Client default, ICC will take on the obligation to settle directly on behalf of the Client without direct involvement by the Participant. However, the Participant may instead choose to directly manage the settlement obligations of its defaulting Client(s).
Webinar
U.S. Treasury Clearing
How to prepare for the transformation
In this virtual discussion jointly hosted by ICE and Risk.net, thought leaders in fixed income analyze the various U.S. Treasury clearing models under development at different central counterparties, the interplay between margin efficiency and diversification across clearing houses, and the lessons the Treasury market can learn from the Dodd-Frank derivatives clearing mandates.