Treasury Clearing’s Operational and Cost Implications Come Into Focus

Intercontinental Exchange – an operator of clearing platforms alongside a global array of equity, energy and commodity markets and data, fixed-income and mortgage technology businesses – is moving in on a new opportunity.

ICE’s June announcement of its intention to offer U.S. Treasury securities clearing was an early salvo toward a remaking of market structure and competitive alignments as Treasury trading adapts to a Securities and Exchange Commission clearing mandate over the next two years.

Depository Trust & Clearing Corp.’s Fixed Income Clearing Corp., the sole incumbent clearer serving the $27 trillion market, handling about 25% of the trades, has been ramping up its own preparations while ICE and others gather in the wings. CME Group and the London Stock Exchange Group’s LCH have publicly acknowledged interest.

Independent brokerages may explore ways to set up clearing operations to serve their customers. Futures commission merchant R.J. O’Brien & Associates is considering joining one or more clearinghouses for that purpose.

A DTCC-FICC “pulse check” in July indicated improved marketplace understanding of and preparedness for expanded Treasuries clearing since last year. A projected $4 trillion boost in daily clearing activity would bring the total to above $11.5 trillion. (FICC’s Government Securities Division hit a new $8.8 trillion “milestone” on July 31.)

ICE said it will be leveraging the capabilities of ICE Clear Credit, which grew from inception in 2009 into the leading global clearinghouse for credit derivatives. ICE Clear Credit president Stan Ivanov said it “is strategically positioned to offer Treasury clearing services that will promote competition and help facilitate the SEC’s policy objective of bringing increased transparency and standardized risk management to the Treasury securities market.

“The rich experience we’ve developed creating and operating ICE Clear Credit and the work we’ve done to ensure its compliance with all U.S. and foreign regulatory regimes has created a fertile environment for adding Treasury clearing to our suite of credit clearing services.”

Projected post-Treasury clearing mandate activity levels based on FICC “pulse check” survey results.

“A Heavy Lift”

DTCC’s FICC “has made the most progress to date, having filed several rules with the SEC to build the framework for its clearing model, with more rules to come in the fall,” Futures Industry Association president and CEO Walter Lukken said at a July 25 House Agriculture Committee hearing on reauthorization of the Commodity Futures Trading Commission.

“FIA finds this competition healthy because it will sharpen the discussions with the end users in mind,” Lukken continued. “We believe we have the expertise and experience to offer in how ‘done-away’ client clearing models will work, given their similarity to the agency give-up clearing model of the futures markets.”

The FIA chief warned, however, of “challenges ahead” that will require the CFTC and SEC “to work together to ensure that the Treasury clearing mandate does not conflict with CFTC regulations . . . Implementing this mandate before June 2026 will be a heavy lift, especially considering the importance of the Treasury and repo markets to the funding of the government and financial markets. Regulators will need to be flexible and aligned with industry to ensure realistic timetables.”

In a 14-page comment letter to the SEC on August 7, the FIA requested several changes to the clearing proposal including on Rule 5, which, it said, “does not permit netting members to clear Treasury securities through any other clearing agency. The proposal expressly contradicts the requirements in Section 17A of the Securities Exchange Act of 1934 as amended [governing establishment of a clearance and settlement system] and will become unworkable for netting members that become members of other clearing agencies as they may arise.”

Retention of Rule 5 “would not allow for competition among clearing agencies. It would instead stand to stifle competition by requiring all U.S. Treasury securities to be cleared by a single clearing agency. FIA recommends that the commission review the proposal in light of its mandate to promote fair competition among clearing agencies.”

Cross-Margining “Holy Grail”

A multiplicity of clearinghouses, presuming they obtain regulatory approvals, will generate demand for cross-margining of products within and, pending necessary agreements, between clearinghouses.

“For a variety of reasons, clients may want to go to multiple clearinghouses, resulting in a fractured portfolio that ideally you want to cross-margin,” said Tom Ciulla, managing director of the Capital Markets Solutions practice at Treliant. “Cross-margining is the holy grail.”

Walter Lukken of the FIA

“Not an easy task,” FIA’s Lukken wrote in an April article. With Treasury futures regulated by the CFTC, the cash market by the SEC, and OTC interest rate swaps (IRS) primarily regulated and cleared in London, “implementing a common approach to portfolio margining will require the regulators to find a way to work together to reconcile their different regimes.”

Lukken pointed out that liquidity is concentrated in “three locations with three different institutions and three different margining models”: FICC (U.S. cash Treasuries), CME (U.S. futures) and LCH (dollar-denominated IRS). “Capturing all three of these markets under one margining model will be challenging, so partnerships and alliances are needed.”

He noted that CME and FICC have an edge with a cross-margining arrangement that was enhanced in January.

In an August 8 derivatiViews blog, International Swaps and Derivatives Association CEO Scott O’Malia identified “the lack of recognition in the revised U.S. capital framework for cross-margining programs” as an issue of concern for both ISDA and FIA.

“These services allow firms to obtain initial-margin efficiencies from offsetting trades in a portfolio of transactions, but there are no commensurate benefits from a capital perspective under the standardized approach for counterparty credit risk,” O’Malia explained. That “lack of recognition for cross-margining will constrain bank balance sheets and limit their ability to offer client clearing,” he added.

New Futures Challenger

CME’s clearing of cash Treasuries would be the futures powerhouse’s first SEC-regulated business, Lukken observed, also pointing to FMX, a new exchange venture organized by BGC Group chairman and CEO Howard Lutnick that is taking direct aim at CME. Lukken said BGC “trades cash Treasuries on its Fenics platform and is now preparing to list Treasury futures and other interest rate futures on FMX,” which is backed by major banks and market makers, is expected to launch in September and will clear some products with LCH.

The margining implications: If FMX captures “a share of the interest rate futures market, LCH could offer portfolio margining of swaps and futures,” Lukken said. “And if LCH decides to enter the cash Treasury clearing business, it would have all three legs of the stool with cash, futures and swaps under one roof.”

“I absolutely expect the LCH to do a cross-margining agreement with the FICC,” Lutnick said at a conference sponsored by Piper Sandler & Co. on June 5. “If there’s a negotiation between LCH and FICC, I will be in the mix and try to make that happen.”

Operational Considerations

An immediate concern for clearinghouse members and their customers will be how central clearing of Treasuries impacts their operational flows and how to deal with disruptions, said Helen Nicol, head of product at software-as-a-service provider CloudMargin.

“They’ll have to make sure they have robust infrastructure to ensure that they have the right controls in place and provide transparency to end clients who will be asking about how margin is calculated and settled, and where it is at any given point,” Nicol said, adding that firms’ systems must be prepared for a significant increase in trading volume.

Deloitte Risk & Financial Advisory principal George Black noted that Treasury clearing stretches from the back end of market infrastructure at the clearinghouses through operations, risk and finance, the trading desk and the market itself.

“It’s a bigger impact than T+1,” Black said, referring to the recently implemented shortening of the equities settlement cycle from two days to one day after the trade date.

Liquidity and Other Costs

Most Treasury repos trade outside of central clearing with multiple counterparties, often dozens. After June 30, 2026, they will have to be cleared either directly with a clearinghouse member, or, in the case of a done-away trade, through a third-party firm. Black said the operational complexity of setting up those clearing relationships may prompt firms to consolidate their repo counterparties.

In the FICC pulse check survey, 28% of respondents expected to facilitate Treasury clearing activity through a business area that offers done-away execution.

George Black of Deloitte

Growth of cleared Treasury trade volumes will saddle clearinghouse members with new and ongoing liquidity, balance-sheet and headcount costs, Black said. Either clients, counterparties or the trading firm itself will have to cover those costs, and whether through wider spreads, fees or another approach remains “a question the industry is trying to get its head around,” Black added.

“We all just celebrated reducing DTCC clearing deposits by approximately $4 billion because of T+1, but collateral requirements at the FICC for Treasury clearing will increase by several times that amount,” the Deloitte consultant said. “That will require significantly more liquidity committed to the FICC than today.”

A key issue in discussions with current and potential clients, Black said, is done-away trades cleared by a third party, and whether those clearers should charge for the service or use it in negotiations for other client business. Existing clearing brokers best understand these costs and revenues, and those currently viewing clearing as a secondary business may seek to build it out.

Another challenge for many will be determining what Treasury clearing means for their business models, Black went on. Firms will have to canvas each trading desk to identify clients who trade Treasury securities and gauge how that could change after the clearing deadline for cash Treasuries at the end of 2025. (That is six months before the deadline for Treasury repos and reverse repos.)

“That’s where you need to get the business involved – it’s not just a back-end decision,” Black said. “This process will help you understand what businesses you need to build and capabilities you need to add.”