US policymakers are debating whether and how to increase levels of clearing in Treasury securities and repos, as part of a series of measures intended to strengthen the resilience of these markets during periods of stress. Given the central role that US Treasuries play in the financial system, any policy change would reverberate widely and would affect different market segments and participants in different ways. To inform the discussion, ISDA has published the results of a new survey on Treasury clearing, which provides views on possible benefits and costs, necessary changes to clearing infrastructure and the impact on related markets, including derivatives.

Publication of the ISDA survey follows a recent Group-of-30 (G-30) progress report on steps to enhance the resilience and liquidity of the US Treasury markets under stress, which reiterated earlier recommendations for increased clearing. Specifically, it called for all Treasury securities trades executed on electronic interdealer trading platforms to be cleared, along with all Treasury repos (including those between dealers and clients). The G-30 paper also recommended that regulators and market participants study the case for central clearing of dealer-to-client cash Treasury trades. Separately, the US Securities and Exchange Commission is understood to be developing proposals intended to broaden the scope of central clearing for cash Treasury securities and repos.

The ISDA survey shows most respondents are largely supportive of clearing, but there’s a wide range of views on whether increased clearing in the US Treasury market is necessary and would materially improve market efficiencies, with opinions often split even within market segment and participant groups.

Generally speaking, respondents see several benefits from further clearing, from increased transparency in risk management practices to greater efficiency. Some highlighted a reduction in counterparty risk due to margin requirements and the netting of exposures, which could reduce the strain on dealer balance sheets – although this was felt to be more of an issue in the repo market. Despite these benefits, participants cautioned that more clearing would likely not have prevented the market volatility at the start of the coronavirus pandemic, when US Treasury markets came under severe stress.

Various potential costs were identified, including clearing fees, margin requirements and technology, legal and operational charges. Aside from these largely operational costs, increased clearing would also mean greater concentration of risk in central counterparties (CCPs). As a result, most participants warned against implementing a clearing mandate, arguing it could lead some entities to reduce activity or withdraw from the market altogether, an opinion that was expressed most strongly for client transactions in both cash Treasuries and repos. However, that view wasn’t universal – certain participants felt increased clearing was unlikely to occur unless a mandate was in place.

As an alternative to mandates (or potentially as a supplement to them), some participants suggested use of incentives to encourage clearing, including some modification of rules related to client margin and direct member and client access at CCPs. Modifications to the supplemental leverage ratio and an expansion of cross-margining were also suggested. Some respondents identified the Fixed Income Clearing Corporation’s (FICC) sponsorship model – which allows members to sponsor non-members to clear via the FICC – as already having contributed to an increase in clearing levels. Others highlighted certain reforms to the sponsorship model that could further encourage clearing, particularly for client repo transactions. Irrespective of their views on clearing mandates or the need for additional clearing, almost all respondents supported these measures as beneficial to the market in general.

The one indisputable fact from the survey is that the market is very far from a consensus, suggesting further research on the costs and benefits of increased clearing in the US Treasury market may be necessary. We entirely support the aims of US policymakers to strengthen the resilience of this market, but it’s obviously important we get this right given the critical role US Treasuries play in the financial system. We hope our survey serves as a useful starting point as policymakers and market participants continue the conversation.

A summary of responses to the survey is available here.