In about 18 months, the first US Treasury securities will be mandated for clearing under new Securities and Exchange Commission (SEC) rules. As demonstrated by the efforts to introduce clearing in the derivatives markets a decade ago and, more recently, the implementation of margin requirements for non-cleared derivatives, a structural change of this scale will take time and careful thought. But we also can’t consider this requirement in isolation – we should think hard about the impact of various rules in combination to ensure policymakers achieve the outcome they want: a resilient, efficient Treasury market.

The SEC’s Treasury reforms – which include a requirement to clear certain cash Treasury securities from December 31 next year and repo transactions from June 30, 2026 – are part of a program of work to improve market resilience following a series of stress events, including the dash for cash in March 2020. Proponents say broader clearing of US Treasury securities will help reduce settlement risk, enhance liquidity and increase balance sheet capacity.

However, certain aspects of the US prudential framework are inconsistent with those objectives. For example, the current US Basel III ‘endgame’ proposal and changes to the surcharge for global systemically important banks (G-SIBs) would constrain balance sheets and could force banks to scale back or withdraw from certain intermediation activities. Nowhere is this more evident than central clearing. According to an impact study by ISDA and SIFMA, the proposals would increase capital for clearing businesses at US G-SIBs by more than 80%.

Implementing central clearing as a risk mitigant has been a key regulatory objective since the financial crisis, and we think it’s worked very well in the swaps market. So, it’s completely unclear to us why US prudential regulators suddenly think this activity is so risky that it warrants a near doubling of capital. A tax of this size will inevitably affect the ability of US banks to offer client clearing services, reducing capacity and increasing costs.

The US Basel III proposal will also make it more expensive to raise funding for meeting margin requirements on cleared transactions. That’s due to the introduction of minimum haircut floors for securities financing transactions (SFTs), putting the US at odds with other major jurisdictions like the EU and UK, which have opted not to enforce this requirement.

This is compounded by the US supplementary leverage ratio (SLR), which serves as a non-risk-sensitive binding constraint on banks and can impede their ability to act as intermediaries, including their capacity to clear for clients. That’s particularly the case in times of stress. At the height of the global pandemic in April 2020, this was a serious enough concern to prompt the Federal Reserve to temporarily exclude US Treasury securities from the SLR calculation.

We think regulators should closely consider the impact of various rules in combination to achieve consistent policy goals. In this context, ISDA and SIFMA have proposed several calibration changes to the US Basel III and G-SIB proposals to better reflect actual levels of risk. These include changes to certain aspects of the rules for credit valuation adjustment and modifications to the complexity and interconnectedness categories of the G-SIB surcharge to reduce the impact on client clearing. We also proposed changes to certain aspects of the rules for SFTs, including removal of the minimum haircut floor.

Separately, we’ve called for a permanent exclusion of US Treasury securities from total leverage exposure, which would free capacity for banks to participate in US Treasury markets and facilitate access to cleared markets, especially during periods of stress. A permanent exclusion would better promote the stability and resilience of the US Treasury market and give banks more certainty to expand balance sheet capacity than a regime introduced during market stresses that will later be reversed.

We strongly believe the capital rules should be consistent, risk-sensitive and appropriate. Disproportionate increases in capital could force banks to retreat from certain trading and intermediary businesses, creating capacity constraints and raising financing and hedging costs for end users.

The US Treasury market reforms represent a major transition for a market that is critical to the functioning of the global financial system. That means market participants and regulators need to work together to ensure this change is managed appropriately and the regulatory framework is calibrated and aligned to avoid potential impacts on liquidity and market capacity.