On December 13, 2023, the U.S. Securities and Exchange Commission (the "Commission") adopted rules that will significantly alter the trading of U.S. Treasury securities and U.S. Treasury repurchase ("repo") transactions.1 Of particular note for asset managers and institutional investors, beginning on June 30, 2026, all U.S. Treasury repo transactions (with limited exceptions) will be required to be cleared through a covered clearing agency ("CCA"). Currently the Fixed Income Clearing Corporation ("FICC") is the only CCA that offers Treasury and Treasury repo clearing services. The Commission noted that the rules are designed to protect investors, reduce risk, and increase operational efficiency in the U.S. Treasury securities markets.

The final rules lead to this result by amending the standards applicable to CCAs for U.S. Treasury securities to require that such CCAs have written policies and procedures reasonably designed to require that every direct participant of the CCA submit for clearance and settlement all "eligible secondary market transactions" in U.S. Treasury securities to which it is a counterparty. Eligible secondary market transactions include repurchase and reverse repurchase transactions (including triparty repo transactions) collateralized by U.S. Treasury securities in which one of the counterparties is a direct participant in the CCA. Since the typical repurchase and reverse repurchase transaction counterparties of funds and institutional investors are direct participants of FICC, this means that eligible secondary market transactions by funds and institutional investors will be required to be cleared.

Eligible secondary market transactions also include cash purchase or sale transactions between a direct participant of the CCA and (i) any counterparty, if the direct participant is an interdealer broker (defined as a direct participant that "brings together multiple buyers and sellers using a trading facility (such as a limit order book) and is a counterparty to both the buyer and seller in two separate transactions") or (ii) a registered broker-dealer, government securities dealer or government securities broker. Significantly, the Commission did not adopt a clearing requirement for cash purchase or sale transactions involving a "hedge fund" or a "leveraged account," as had been proposed.2 Transactions involving certain types of counterparties – including sovereign entities, international financial institutions, natural persons, and state and local governments (but not state and local government pension plans) – are excluded from the mandate.

The Commission also addressed some concerns that the buy-side has raised in connection with U.S. Treasury securities clearing. For example, the Commission adopted amendments to Rule 15c3-3a under the Securities Exchange Act of 1934, as amended, to permit margin required and on deposit at a CCA providing central counterparty services for U.S. Treasury securities to be included by broker-dealers as a debit in the customer and PAB (i.e., proprietary accounts of broker-dealers) reserve formulas. This amendment, which was supported by both buy- and sell-side market participants, will have the practical effect of allowing broker-dealers to use margin collected from customers to satisfy margin requirements associated with such customers' transactions, rather than using proprietary funds to finance customer margin (the cost of which is passed on to customers of the broker-dealer). The Commission also adopted a requirement for CCAs to segregate margin for "house" positions of direct participants from margin posted with respect to transactions on behalf of indirect participants (customers) of the direct participant.

The Commission declined to adopt several other enhancements to the clearing model for repurchase transactions that had been requested by the buy-side. For example, the Commission declined to adopt a "legally segregated, operationally commingled" approach to margin, similar to the current margin structure for cleared swaps, which would have provided additional protection from losses to one customer of a direct participant if another customer of the direct participant were to default. Also, the Commission declined to adopt a rule that would require CCAs to adopt rules that would require direct participants to accept for clearing U.S. Treasury repurchase transactions that were originally executed between a customer and a different direct participant of the CCA (referred to as "done away transactions"), which could have increased competition in the U.S. Treasury repurchase agreement clearing market.

Compliance Dates. Compliance by the direct participants of a U.S. Treasury securities CCA with the requirement to clear cash transactions in U.S. Treasuries with certain types of counterparties will be required on December 31, 2025. Compliance with the requirement to clear U.S. Treasury repo transactions will be required on June 30, 2026.

The final rules will require FICC to update a number of its own rules before the clearing mandate can be implemented. These proposed rule changes will be filed with the Commission and subject to a consultative process under Section 19(b) of the Exchange Act. Those rule changes must be effective by March 31, 2025.

Note Regarding Registered Funds. Commenters raised a wide range of issues that may arise under the Investment Company Act of 1940, as amended (the "Investment Company Act"), in connection with central clearing of Treasury repo transactions.

For example, posting fund assets as margin to the FICC or a direct participant in the FICC that acts as the fund's "sponsoring member" could raise custody issues for registered funds. FICC rules currently do not require registered funds' margin to be posted with FICC; instead, a sponsoring member acting on behalf of a fund posts margin to the FICC on behalf of the fund and passes the cost along to the fund. The SEC provided no-action relief for a period of five years that will allow a registered fund's cash and/or securities to be placed and maintained in the custody of FICC for purposes of meeting FICC's margin deposit requirements, subject to certain conditions. The Commission noted that the five-year period is intended to allow FICC sufficient time to develop and file any proposed rule changes that may be relevant to facilitate a registered fund's ability to post margin to the FICC. The Commission adopted similar no-action relief with respect to placing and maintaining cash and securities with a sponsoring member in connection with facilitating the posting of margin to FICC on behalf of a registered fund.

Commenters also sought clarification regarding regulatory diversification requirements, including whether registered funds' cleared repo transactions will meet the definition of a "collateralized fully" repurchase agreement under Rule 5b-3 under the Investment Company Act. Funds are subject to diversification limits with respect to their investments in the securities of any one issuer. Investments in U.S. government securities are not subject to diversification limits. Under current SEC guidance, registered funds may treat a repo as an acquisition of the underlying collateral, such as a U.S. Treasury security, rather than an investment in securities issued by the counterparty, under the Investment Company Act if the transaction is "collateralized fully" (as defined in Rule 5b-3 and, with respect to money market funds, Rule 2a-7). A number of conditions must be met for a transaction to be deemed "collateralized fully," including requirements with respect to the amount and type of collateral that can be provided and a requirement that the collateral be maintained in an account of the fund with its custodian or a third party that qualifies as a custodian under the Investment Company Act. Commenters urged the Commission, through rulemaking or guidance, to confirm that FICC- cleared repo transactions will qualify as "collateralized fully" so registered funds can continue to rely on Rule 5b-3 (and similar rules that apply to money market funds under Rule 2a-7). In the adopting release, the Commission noted these questions but did not provide any guidance to market participants about whether cleared repo transactions will qualify as "collateralized fully" for purposes of Rule 5b-3 or Rule 2a-7.


1. Standards for Covered Clearing Agencies for U.S. Treasury Securities and Application of the Broker-Dealer Customer Protection Rule With Respect to U.S. Treasury Securities, SEC Release No. 34-99149 (Dec. 13, 2023), available at https://www.sec.gov/files/rules/final/2023/34-99149.pdf.

2. While the Commission ultimately did not apply the cash transaction clearing mandate to hedge funds or levered accounts, it has proposed (but not finalized) rules that have the potential to cause certain private funds, high-frequency traders and other proprietary traders to be required to register with the Commission as dealers and/or government securities dealers. Further Definition of "As a Part of a Regular Business" in the Definition of Dealer and Government Securities Dealer, 87 Fed. Reg. 23054 (Apr. 18, 2022), available at https://www.federalregister.gov/documents/2022/04/18/2022-06960/further-definition-of-as-a-part-of-a-regular-business-in-the-definition-of-dealer-and-government.

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