December 2024
Fixed Income Monthly Report
Chris Edmonds
U.S. Treasury clearing: building a safer, more efficient government bond market
As the world’s most liquid securities market, U.S. Treasuries play a key role in global financial stability. Long viewed as the quintessential risk-free asset, regulatory scrutiny of the sector has grown more intense over the past decade as the value of Treasuries outstanding has climbed to more than $28 trillion.
Adding to the attention paid to Treasuries is a series of stress events that roiled the market over the past few years, including the October 2014 Treasury “flash rally,” the September 2019 repo market dislocation, and the Federal Reserve’s intervention in the Treasury repo market during the pandemic-driven rush to cash in March 2020.
To strengthen the resiliency of this vital market, one year from now Treasury cash transactions will become subject to mandatory central clearing. Six months later, the clearing mandate will be extended to Treasury repo and reverse repo. ICE plans to be ready to meet both deadlines, offering clients a Treasury clearing service built on our tried-and-tested OTC derivatives clearing model.
ICE was a pivotal player in the implementation of mandatory clearing for OTC derivatives under the U.S. Dodd-Frank Act. We worked closely with regulators at the Commodity Futures Trading Commission and the Securities and Exchange Commission (SEC) to develop a practical clearing service to address weaknesses in the derivatives market exposed by the Global Financial Crisis.
In the years since the credit default swap (CDS) and interest rate swap clearing mandates took effect, neither market has experienced a major crisis, with both navigating the unprecedented market volatility of March 2020 without incident.
The demonstrated resiliency of the swap clearing model was a crucial factor in the SEC’s determination to use the same structure to underpin the upcoming Treasury clearing mandate. That’s why ICE Clear Credit (ICC) - our CDS clearing service with approximately 90% market share - will add U.S. Treasuries as clearable products in 2025, subject to regulatory approval.
Utilizing the same model developed for CDS, users can choose to either be a direct clearing member or elect to use an agency clearing model to clear their trades through an ICC clearing member.
Centrally clearing Treasuries will deliver a host of benefits to market participants:
- Less risk: The daily exchange of collateral between counterparties will enhance standardization, transparency and certainty in Treasury transactions, increasing resiliency and confidence in the market overall.
- Risk-based margin: With 70% of bilateral Treasury repo trades executing without any exchange of margin today, clearing at ICC will introduce efficiency, consistency and transparency around the process of dynamically margining risk, creating a foundation for a more predictable and resilient market - especially in times of stress.
- Fewer settlement fails: Over time, central clearing will allow the market to optimize and simplify operational processes around Treasury trade settlement.
- Broader universe of counterparties: With all trades cleared by ICE facing ICC, market participants can execute with a wider range of counterparties, while eliminating cumbersome bilateral vetting, documentation and ongoing counterparty credit risk monitoring obligations.
- More optionality in execution and clearing: The new model creates optionality for counterparties to select the optimal path to accomplish best execution, enabling them to execute and clear Treasury trades with the same dealer, or different dealers.
Over the next 12 months, ICE will convene a series of working groups with clients to listen to your input and work through the legal, workflow, settlement and risk management challenges. ICE plans to launch a Treasury clearing service by December 31, 2025, that is designed with your feedback in mind and responsive to your needs.
While there is much that needs to be accomplished over the coming year, the result will be a clearing solution for the market, built by the market, that will ultimately create a stronger, more efficient and more resilient trading landscape for U.S. Treasuries.
ICE Fixed Income Forum
The ICE Fixed Income Forum gathered financial experts and thought leaders to tackle the most pressing challenges and innovations in fixed income, including insights on pricing, climate impact, wealth management, and mortgage markets. Watch the sessions replays to learn more.
Tapping home equity: implications for capital markets
U.S. mortgage holders are sitting on record levels of home equity, casting a spotlight on their willingness to tap this wealth as expected rate cuts make equity utilization more affordable. If lenders see higher demand for loans and lines of credit, what are the implications for capital markets? ICE’s Vice President of Research and Analysis Andy Walden looks at the data.
Continuous, independent evaluated pricing
As the dominance of the principal-based trading model fades in favor of electronic trading, access to timely updates becomes critical. ICE is helping clients adjust to changing dynamics by providing Continuous Evaluated Pricing (ICE CEP™) that combines system and human analyses to generate a stream of fixed income evaluations that process and incorporate market data throughout the day.
Applying algorithms to navigate muni bond markets
For asset managers, the vast and opaque municipal bond market presents a pricing challenge - with 900,000 bonds across 50-60,000 issuers. Millennium Advisors Group CEO Laurent Paulhac sat down with ICE’s Chief Product Officer Varun Pawar to discuss how they apply algorithms at scale, reasons to be bullish on the outlook, and how Millennium sees the market evolving.
Fixed Income in Focus
As electronic trading gains momentum, the ability to access and manage real-time data and analytics can provide a crucial edge. In the latest Fixed Income in Focus, KX CEO Ashok Reddy shares his take on the transformative impact of data, AI, and cloud strategies shaping the future of fixed income markets.
Newsletter archive
Fixed Income
Manage risk, uncover opportunities, and make informed decisions in real-time with ICE’s end-to-end fixed income solutions. Reimagine your fixed income workflow from price transparency & discovery and efficient execution through to performance analysis.
This material contains information that is confidential and the proprietary property and/or a trade secret of Intercontinental Exchange, Inc. and/or its affiliates (the “ICE Group”), is not to be published, reproduced, copied, modified, disclosed or used in any way without the express written consent of the ICE Group. This document is provided for informational purposes only. The information contained herein is subject to change and does not constitute any form of warranty, representation, or undertaking. Nothing herein should in any way be deemed to alter the legal rights and obligations contained in agreements between the ICE Group and its respective clients relating to any of the products or services described herein. Nothing herein is intended to constitute legal, tax, accounting, or other professional advice.
The information contained herein is provided “as is” and the ICE Group makes no warranties whatsoever, either express or implied, as to merchantability, fitness for a particular purpose, or any other matter. The ICE Group makes no representation or warranty that any data or information (including but not limited to evaluated pricing) supplied to or by it are complete or free from errors, omissions, or defects. Without limiting the foregoing, in no event shall the ICE Group have any liability for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits) in connection with any use of and/or reliance on the content of this document even if advised of the possibility of such damages.
This document is not an offer of advisory services and is not meant to be a solicitation, or recommendation to buy, sell or hold securities. This document represents ICE Group’s observations of general market movements. Trades and/or quotes for individual securities may or may not move in the same direction or to the same degree as indicated in this document. Please note that the information may have become outdated since its publication.
Trading analytics available from ICE Data Pricing & Reference Data are a point in time output and as such dependent on and take into account the information available to ICE Data Pricing & Reference Data at the time of calculation. ICE Data Pricing & Reference Data does not have access to all relevant trade-related data or dealer quotes, and the utility of the output may diminish depending upon amount of available data underlying the analysis. The inputs utilized in each of the trading analytics services described herein depend on the methodologies employed by each such service and may not be the same as the inputs used in the other trading analytics services. There are many methodologies (including computer-based analytical modelling) available to calculate and determine information such as Trading Analytics described herein. ICE Data Pricing & Reference Data’s trading analytics may not generate results that correlate to actual outcomes, and/or actual behavior of the market, such as with regard to the purchase and sale of instruments. There may be errors or defects in ICE Data Pricing & Reference Data’s software, databases, or methodologies that may cause resultant data to be inappropriate for use for certain purposes or use cases, and/or within certain applications. Certain historical data may be subject to periodic updates over time due to recalibration processes, including, without limitation enhancement of ICE Data Pricing & Reference Data’s models and increased coverage of instruments. Although ICE Data Pricing & Reference Data may elect to update the data it uses from time to time, it has no obligation to do so.
Fixed income evaluations, continuous evaluated pricing, end-of-day evaluations, evaluated curves, model-based curves, market sentiment scores, and Fair Value Information Services related to securities are provided in the US through ICE Data Pricing & Reference Data, LLC and internationally through ICE Data Services entities in Europe and Asia Pacific. ICE Data Pricing & Reference Data, LLC is a registered investment adviser with the US Securities and Exchange Commission. Additional information about ICE Data Pricing & Reference Data, LLC is available on the SEC’s website at www.adviserinfo.sec.gov. A copy of ICE Data Pricing & Reference Data, LLC’s Form ADV is available upon request.
Trademarks of the ICE Group include: Intercontinental Exchange, ICE, ICE block design, NYSE, ICE Data Services, ICE Data, and New York Stock Exchange,. Information regarding additional trademarks and intellectual property rights of the ICE Group is located at www.ice.com/privacy-security-center. Other products, services, or company names mentioned herein are the property of, and may be the service mark or trademark of, their respective owners.