U.S. Treasury Clearing: Key Questions and Answers as Implementation Deadlines Approach

The U.S. Securities and Exchange Commission (SEC) published a final rule in January 2024 establishing standards for central clearing of U.S. Treasury securities (the Treasury Clearing Rule).¹ (For additional information, please read our March 2024 Advisory.) The implications of the Treasury Clearing Rule for the U.S. Treasury market will be substantial; a projected $4 trillion in U.S. Treasury market transactions will require central clearing on a daily basis upon implementation of the mandate.² Compliance with the Treasury Clearing Rule will be required based upon a phased implementation schedule — with the first of several compliance dates arriving on March 31, 2025. And, unlike some other regulatory changes pursued by the last administration, it does not appear likely that the Trump administration will rescind the Treasury Clearing Rule as a whole at this point — although some elements, such as fast-approaching implementation dates, may be modified.

This Advisory highlights the key questions facing market participants, such as U.S. and non-U.S. banks, broker-dealers, investment advisers, private funds, and others who transact in the Treasury market and Fixed Income Clearing Corporation (FICC), a subsidiary of The Depository Trust & Clearing Corporation — which at present is the only registered covered clearing agency (CCA) for purposes of the Treasury Clearing Rule — as compliance dates approach.

What are the objectives of the Treasury Clearing Rule?

As outlined in the preamble to the Treasury Clearing Rule, the U.S. Treasury market plays a “critical and unique role in the U.S. and global economy.”³ U.S. Treasury securities serve as a “significant investment instrument and hedging vehicle,” as well as “a risk-free benchmark for other financial instruments, and an important mechanism for the Federal Reserve’s implementation of monetary policy.”⁴ The preamble also addresses an observed decrease in centrally cleared U.S. Treasury securities transactions in recent years, and touts the benefits that can be derived from the use of central counterparties (each a CCP) for the clearing and settlement of such transactions.⁵

In adopting the Treasury Clearing Rule, the SEC is seeking to (1) reduce counterparty credit risk in the secondary market for U.S. Treasury securities while mitigating CCAs’ exposure to “contagion risk,” (2) increase the likelihood of orderly defaults through the interposing of CCPs and mandatory default management processes, (3) promote prompt and accurate clearing and settlement of U.S. Treasury securities transactions, (4) improve market structure and resiliency (for example, by lowering aggregate counterparty risk as noted above and creating opportunities for competition among various bank and independent dealers), and (5) increase the transparency of settlement risk to regulatory authorities and market participants.⁶

What are the key requirements of the Treasury Clearing Rule?

The Treasury Clearing Rule amends SEC Rule 17ad-22,⁷ which establishes certain standards for CCAs, to require direct participants of CCAs (for example, banks, broker-dealers, trust companies, and other similar entities that are members of the Government Securities Division of FICC)⁸ to submit for clearing any “eligible secondary market transaction” (each an ESMT). (The details of this definition are discussed below). Direct participants are those entities with direct access to CCP services through a CCA, whereas indirect participants are entities that rely upon direct participants for access to such services. Under the Treasury Clearing Rule, indirect participants that transact with direct participants may have their transactions in U.S. Treasury securities become subject to central clearing.

When providing CCP services for U.S. Treasury securities transactions under the Treasury Clearing Rule, CCAs must identify and monitor participants’ submission of transactions and ensure that the CCA has “appropriate means” to facilitate access to clearance and settlement services of all ESMTs.⁹ CCAs are also required to establish “objective, risk-based, and publicly disclosed criteria for participation,” which, among other things, require participants to have “sufficient financial resources and robust operational capacity to meet obligations arising from participation” and ensure ongoing compliance monitoring.¹⁰ Further, in respect of the provision of CCP services for U.S. Treasury securities transactions, CCAs must collect and hold margin accounts from direct participants for their proprietary positions in U.S. Treasury securities that are separate and independent from margin accounts collected and held for indirect participants.¹¹

These requirements must be codified into CCAs’ internal rules, as discussed further below, and CCAs’ members must comply with such rule requirements as they take effect.

Which transactions will require central clearing?

There are two broad categories of ESMTs that must be submitted for clearing at the appropriate time based upon the implementation timeline discussed below.

1. Repo transactions: Repurchase or reverse repurchase (each a “repo”) transactions collateralized by U.S. Treasury securities in which a counterparty is a direct participant.

2. Cash-market transactions: A purchase or sale between a direct participant and (A) any counterparty, if the direct participant brings together multiple buyers using a trading facility and is a counterparty to both a buyer and seller in two separate transactions, or (B) a registered broker-dealer, government securities broker, or government securities dealer, with certain exceptions (collectively, “cash market” transactions).

The ESMT definition excludes repo transactions collateralized by U.S. Treasury securities involving certain enumerated counterparties, including central banks, sovereign entities, international financial institutions, derivatives clearing organizations, and state and local government entities, and also establishes specialized clearing and settlement processes for such transactions involving affiliated counterparties.¹²

When is compliance required?

The Treasury Clearing Rule took effect on March 18, 2024; however, compliance with the requirements of the rule will be required in accordance with the following phased implementation timeline:

• March 31, 2025: CCAs must implement required practices (e.g., relating to separation of margin, participant access to clearance and settlement services, and customer asset protection).
• December 31, 2025: Direct participants must comply with the clearing requirement in respect of cash market ESMTs.
• June 30, 2026: Direct participants must comply with the clearing requirement in respect of repo ESMTs.

Due to a long list of legal and regulatory, market-based, and operational considerations, industry associations representing the securities, banking, asset management, and derivatives industries have requested a 12-month extension of the implementation timeline.¹³

Which entities are CCAs for purposes of the Treasury Clearing Rule?

At present, FICC is the only CCA that provides CCP services for U.S. Treasury securities transactions. The Intercontinental Exchange, Inc. (ICE), which is an SEC-registered clearing agency, announced in June 2024 that it intends to launch a CCP service for U.S. Treasury securities transactions through its existing clearinghouse entity, ICE Clear Credit. CME Group also has announced plans to provide CCP services for U.S. Treasury securities trades. As of the date of this Advisory, neither ICE nor CME Group has registered as a CCA entity for purposes of the Treasury Clearing Rule.

What steps has FICC taken to prepare for implementation of the Treasury Clearing Rule?

As required by the Treasury Clearing Rule, FICC proposed modifications to its rulebook in March and June of 2024.¹⁴ Pending the SEC’s approval, these modifications will be implemented by March 31, 2025. In addition to requiring “netting members” of FICC, or direct participants for purposes of the Treasury Clearing Rule, to submit ESMTs for clearing, the proposed modifications, among other things, update membership eligibility and qualification requirements to further facilitate access to U.S. Treasury securities clearing and settlement services, revise account structures and procedural requirements relating to the designation of accounts for margin purposes, impose upon netting members recordkeeping and compliance monitoring and notification requirements, and require netting members to submit annual certifications of compliance with trade submission requirements.

What must market participants consider as they prepare to comply with the Treasury Clearing Rule?

Compliance with the Treasury Clearing Rule will require market participants to develop and implement operational processes and controls to conform to FICC’s modified rules. For instance, market participants must consider, among other things:¹⁵

• For market participants that are not direct participants of FICC, whether their transactions in Treasury securities are subject to clearing requirements
• Proper account structure (i.e., segregation of proprietary and customer accounts in accordance with FICC obligations and rule requirements)
• Extent and nature of inter-affiliate transaction activity and status of affiliate counterparties (e.g., whether a market participant’s affiliates are direct participants with FICC and the related implications for the market participant)
• Appropriate margining practices and corresponding processes for collecting and handling margin funds and complying with margin calls
• Whether customer onboarding processes require modification, including to account for the information and data required to determine if customer transactions qualify as ESMTs
• Updates to relevant legal documentation (e.g., clearing agreements, margin/collateral management agreements, netting agreements, general terms and conditions, website terms and conditions, and disclosures, etc.)
• Whether risk management controls should be enhanced in consideration of potential changes to liquidity management and other risks
• Modified operational workflows and corresponding support needs (e.g., information technology, operations, legal, and compliance, etc.)

What questions have market participants raised regarding compliance with the Treasury Clearing Rule?

The Treasury Clearing Rule, and FICC’s proposed rulebook modifications in response to the rule’s requirements, have generated a wide array of questions from market participants regarding the scope and technical requirements (of both the rule itself and FICC’s corresponding rulebook modifications), as well as concerns regarding legal, operational, and technological issues that must be addressed in order to ensure compliance.

For instance, market participants have raised questions and concerns regarding the following:¹⁶

• The possible entrance of additional CCAs and the potential for varying or conflicting access models and procedural requirements
• The potential for “double margining” requirements for SEC-registered investment companies that, pursuant to separate SEC rules, already fully collateralize repo transactions¹⁷
• The scope of the Treasury Clearing Rule as applied to inter-affiliate transactions (specifically, with regard to the application of the rule to transactions entered into for treasury, liquidity, or collateral management purposes)
• The appropriate accounting treatment for centrally cleared U.S. Treasury securities transactions under the risk-based capital regulations
• The potential need to amend and re-execute customer agreements under modified FICC rules
• The ability of market participants to implement system, operational, legal, and compliance processes to ensure compliance with the Treasury Clearing Rule by the designated compliance dates
• The extent to which a foreign bank, rather than its U.S. branch or agency, is required to become a netting member of FICC in order to engage in U.S. Treasury securities transactions in accordance with the Treasury Clearing Rule
• The potential need to create or expand models to support “done-away” clearing (i.e., where a trade is executed and cleared by different participants)

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If you would like more information about how the Treasury Clearing Rule and related developments may impact your business, please contact any of the authors of this Advisory or your usual Arnold & Porter contact. The firm’s Financial Services team would be pleased to assist with any questions that you may have.

© Arnold & Porter Kaye Scholer LLP 2025 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.