Here are the most important parts of the proposal:
FOCUS ON THE CLEANING CHAMBER
Instead of requiring all Treasury transactions to be completed in full, the proposal takes a more targeted approach. It aims to move more cash and treasury repo transactions through clearing houses by changing the latter’s rules so that their members are required to clear not only their own transactions but also those of their clients. Typically, clearinghouse members are large brokers and other well-capitalized trading firms that are also major participants in the treasury market.
WHAT IS A CLEARING HOUSE?
Clearing houses are part of the market system that facilitate the exchange of cash and securities. Instead of thousands of bilateral transactions between traders and investors, clearing houses sit in the middle of the market as a buyer for every seller and a seller for every buyer.
Clearing houses clear market-wide risk and have strict collateral or “margin” requirements to secure transactions in case one of the counterparties fails. In addition, clearing houses typically have other strict risk management requirements to manage defaults, which also help reduce contagion and ensure market integrity.
HOW DO THE NEW RULES WORK?
The proposal would require clearinghouses in the Treasury market to have members to clear both sides of all of their repo transactions and some cash transactions.
This requirement is intended to cover trades entered into by hedge funds and primary trading firms that are not members of a clearing house. The new requirement would apply to participants that serve as interdealer dealers, government securities dealers, hedge funds and dealer-owned debit accounts.
The SEC’s proposal also aims to encourage members to clear more trades by changing the rules on how clearing house members treat the margin they collect from clients.
Importantly, members would no longer be able to clear their clients’ margin through their own proprietary trades, a common practice that reduces members’ margin obligations to the clearing house.
Instead, the proposal would allow the broker to pass the margin collected from customers to the clearing house.