April 30, 2025
Submitted electronically via email
Ms. Agata Zhang
Secretariat
Treasury Market Practices Group

Re: SIFMA AMG Comments on TMPG Consultative White Paper and Proposed Best Practice Recommendations for U.S. Treasury Repo Risk Management

Dear Ms. Zhang:

The Asset Management Group of the Securities Industry and Financial Markets Association¹ (“SIFMA AMG”) appreciates the opportunity to provide comments on the Consultative White Paper and Proposed Best Practice Recommendations for U.S. Treasury Repo Risk Management recently published by the Treasury Markets Practices Group (“TMPG”).² We note that the Securities Industry and Financial Markets Association (“SIFMA”) intends to file a response to the TMPG’s Proposed Recommended Best Practices and SIFMA AMG is submitting these comments separately reflecting the views of the Asset Management Group. Given the critical role the Treasury repurchase agreement (repo) market plays in the functioning of the overall financial system, we understand the importance of sound risk management practices to mitigate counterparty and market risks. While we generally support the TMPG’s goal of promoting resiliency in the Treasury repo market, our members have raised concerns regarding the necessity and implications of the Proposed Recommended Best Practices, particularly in light of the Securities and Exchange Commission’s (“SEC”) Treasury Clearing Mandate and the Treasury Department’s Office of Financial Research (“OFR”) Repo Reporting Requirements.³ We appreciate the opportunity to provide feedback on the Consultative White Paper and Proposed Recommended Best Practices and welcome opportunities for continued discussion on these issues.

Discussion

I. The Proposed Recommended Best Practices are Not Necessary Considering the SEC’s Treasury Clearing Mandate and OFR’s Repo Reporting Requirements and are Counterproductive to Efforts to Implement such Regulations

As explained in the Introduction of the Proposed Recommended Best Practices, the proposed updates to the Treasury repo market risk management framework are based on a number of risks identified in the TMPG’s accompanying Consultative White Paper.⁴ The White Paper focuses extensively on concerns within the non-centrally cleared bilateral repo (“NCCBR”) market segment and states that a fuller understanding of risk management practices in this segment is warranted “given the current limited availability of data on the NCCBR market and the market’s large size”.⁵ The White Paper draws on previous research by the TMPG that highlighted the “bespoke and opaque risk management practices that are used in the NCCBR market due in part to the lack of central clearing of these transactions.”⁶ Given the importance of the repo market to the functioning of the financial system, concerns relating to the size of and visibility into the non-centrally cleared repo market are worthy of consideration. However, many of these concerns have already been considered and effectively addressed by regulators. While many of the concerns raised in the White Paper have already been addressed (or are in the process of being addressed through implementation of the regulations), attempting mid-implementation to make further changes to a market that is expected to materially shrink in the near future is both counterproductive to implementation and potentially disruptive to the U.S. Treasury market.

In 2024, the SEC amended the standards applicable to covered clearing agencies for U.S. Treasury securities, requiring direct participants of covered clearing agencies to submit for clearance and settlement all eligible secondary market transactions in U.S. Treasury securities, including repo and reverse repo agreements in which one of the counterparties is a direct participant of the covered clearing agency.⁷ As mandatory central clearing of repo agreements is implemented, the size of the non-centrally cleared market will decrease significantly. The White Paper acknowledges this shift, explaining that the SEC’s amendments “are likely to transform the structure of the Treasury market as they substantially expand the set of repo trades that are required to be centrally cleared. Therefore, these rule amendments will likely result in the sizable migration of non-centrally cleared repo into the cleared repo market.”⁵ Given this significant reduction in the size of the non-centrally cleared Treasury repo market, concerns identified in the White Paper stemming from the NCCBR market’s large size are effectively resolved by the SEC’s clearing mandate.

The White Paper goes on to note that NCCBR repos sometimes employ features that make these trades ineligible for central clearing, making it difficult to fully predict the volume of repo trading that will move to central clearing, stating: “As a result, the non-centrally cleared segment of this market will continue to warrant monitoring even after the SEC rule amendments go into effect.”⁶ We believe that it is premature to state that the non-centrally cleared segment will continue to warrant monitoring, especially given the mandate to clear. Expectations in the market would suggest the vast majority of Treasury repo will move to centralized clearing. In any case, this issue would seem to have already been addressed as well. To help monitor and identify potential risks arising in the Treasury repo market, in 2024, the Treasury Department’s Office of Financial Research adopted a Final Rule to establish ongoing data collection of NCCBR transactions.((See OFR Repo Reporting Requirements.)) The White Paper cites the OFR Rule and describes its anticipated impact, explaining that the data collection “will bring much needed insight into this segment to regulators and policymakers, including a better understanding of the magnitude of the bilateral and systemic risks inherent in this repo market”.⁸ For market participants, the White Paper explains that the publication of aggregate statistics “could help market participants more accurately measure the risks inherent in these trades and improve risk management associated with them going forward.”⁶

To meet the implementation timeline for the SEC’s Treasury Clearing Mandate, market participants have been working diligently to develop the market structures, legal documentation, and operation models to facilitate the transition to central clearing. Similarly, market participants have devoted significant efforts toward establishing processes and building systems to comply with the reporting requirements under the OFR Rule. Given these extensive ongoing efforts, we believe that it would be counterproductive for market participants to divert resources (and attention) to align with newly updated best practices, especially as the successful implementation of the Treasury Clearing Mandate and Repo Reporting Requirements will substantially address the concerns underpinning the Proposed Recommended Best Practices.

Implementing some or all of the recommendations would, at a minimum, require re-negotiation of settled MRAs and GMRAs (or any other repo related agreements) across the market along with operational, systems and collateral impacts. In addition to diverting resources, trying to change market practices (for an uncleared market that is expected to substantially be replaced with a cleared one in short order) in the midst of the same personnel focusing on both regulations’ implementation has the potential
lead to disruption of the orderly functioning of the market and, therefore, the funding of the U.S. government. We believe a better approach would be re-assessing the risks identified by the TMPG after SEC and OFR Rules have been successfully implemented and revising existing best practices only if significant concerns remain. In the event that the TMPG decides to move forward with updates to its Recommended Best Practices, we urge the TMPG to provide a substantial implementation period that appropriately takes into consideration the burdens of new and ongoing implementation efforts.

II. Further Clarification Regarding Haircut Recommendations Would be Beneficial

Aside from the question of the necessity of the Proposed Recommended Best Practices, we believe further clarification on the substance of the TMPG’s recommendations would be beneficial. Proposed Recommended Best Practice #1 states: “Consistent with appropriate risk management of counterparty exposures, all Treasury repurchase agreements (repo) should include prudent haircuts (or margin) on the value of the securities, in concert with other risk management techniques.”⁴ The Proposed Recommended Best Practice adds that the haircut “can be applied together with other risk management tools, such as position limits, netting agreements, and/or portfolio margining, when supported by a robust risk management framework and a complete set of legally enforceable written agreements.”⁶ Though this language providing that haircuts can be applied together with other risk management tools may be intended to offer flexibility for market participants implementing the Proposed Recommended Best Practices, further clarity on the relationship between haircuts and other risk management tools would be helpful.

For instance, it isn’t clear from the language of Proposed Recommended Best Practice #1 whether risk management tools such as position limits, netting agreements, and portfolio margining can serve as alternatives for haircuts or margin under the Recommended Best Practices. The Proposed FAQs on the Proposed Recommended Best Practices raise this question (“Can portfolio margining or netting agreements be used in place of haircuts on Treasury repo?”). The answer states that “haircuts can be used in concert with other risk management tools” (mirroring the language in the Proposed Recommended Best Practice #1) without providing further explanation on what “in concert with other risk management tools” entails and whether haircuts are always necessary to satisfy the Proposed Recommended Best Practices when other risk management tools are employed by market participants.⁹ Further clarification on this question would be helpful for market participants to better understand the TMPG’s recommendations.

In addition, while the TMPG Consultative White Paper focuses primarily on the NCCBR market segment (and to a lesser extent, indirect centrally-cleared Treasury repo trading), the Proposed Recommended Best Practices appear to apply to the entire Treasury repo market. Given this wide scope, further clarification on whether the proposed haircut practice applies to all transactions in the Treasury repo market, including the centrally cleared market, is critical. As noted in the White Paper, FICC (the only current central counterparty in the Treasury repo market) does not require a haircut on each repo transaction. Rather, FICC calculates margin based on each member’s portfolio of trades.¹⁰ If the TMPG does not intend to recommend haircuts for each individual Treasury repo transaction (including centrally cleared transactions), further clarification on this point is necessary.

III. The Proposed Recommended Best Practices Should Place Greater Emphasis on Other Risk Management Tools Beyond Haircuts

As discussed, Proposed Recommended Best Practice #1 states: “Consistent with appropriate risk management of counterparty exposures, all Treasury repurchase agreements (repo) should include prudent haircuts (or margin) on the value of the securities, in concert with other risk management techniques”.⁴ The Introduction of the Proposed Recommended Best Practices asserts that “widespread use of haircuts for Treasury repo would enhance financial system stability and support market function during periods of market stress.”⁶ We share the TMPG’s view that haircuts can be an effective tool for market participants to manage both counterparty and market risks. However, we caution against imposing one-size-fits-all recommendations that do not adequately consider the various risk management needs and practices of the diverse range of Treasury repo market participants.

As a general matter, we oppose minimum haircut requirements applying to all Treasury repo transactions, as such minimum haircuts could lead to higher transaction costs for market participants, contributing to lower trading volumes and market liquidity. Though existing regulatory requirements may require haircuts for some market participants in certain contexts,¹¹ we do not believe minimum haircuts are useful when applied to all Treasury repo transactions across the range of market participants. Though minimum haircuts may be intended to enhance financial stability, by reducing liquidity in markets, minimum haircuts could have the net effect of exacerbating financial stability risks as market participants are either forced to unwind positions or source additional collateral. The Proposed FAQs clarify that the TMPG “is not prescribing a minimum or specific haircut for Treasury repo transactions”.¹² While the Proposed Recommended Best Practices may not recommend a minimum or specific level of haircuts, the recommendation that all Treasury repo transactions include prudent haircuts necessitates haircuts being set at some level between parties adhering to the recommended best practices.

As discussed in the White Paper, a haircut can protect one, but not both, of the counterparties to the repo agreement from counterparty credit exposure.¹³ Indeed, while protecting the side receiving the benefit of a haircut, the haircut increases counterparty risk to the side paying it. This trade-off should be carefully considered by the parties best placed to consider whether a haircut is appropriate or not: the parties to the trade and not by TMPG. Instead of recommending prudent haircuts for all Treasury repo agreements, the Proposed Recommended Best Practices should place a greater emphasis on other risk management tools that provide net protection to all participants in a transaction and take into account the full portfolio of exposures between counterparties. For instance, portfolio margining techniques that calculate the overall net exposure between market participants and generate margin calls as necessary offer protection to both the cash-lending and securities-lending parties to a trade, whereas haircuts can only offer protection to one party. Though the Proposed Recommended Best Practices reference “other risk management techniques” that can be applied together with haircuts, the Proposed Recommended Best Practices should expressly provide that market participants can effectively manage risk through techniques such as master netting agreements and portfolio margining without requiring haircuts for each Treasury Repo agreement.

As we have previously discussed, encouraging substantial changes in market practices amid the transition to a largely centrally cleared Treasury market could create disruptions to the orderly functioning of the Treasury repo market. We re-iterate that a better approach would be to re-assess the risks identified by the TMPG after the SEC’s Treasury Clearing Mandate has been successfully implemented.

On behalf of SIFMA AMG, we appreciate the opportunity to respond to the TMPG’s Consultative White Paper and Proposed Recommended Best Practices for U.S. Treasury Repo Risk Management. Thank you for your consideration of our comments and recommendations. If you have any questions or require additional information, please do not hesitate to contact us by calling William Thum at (202) 962 7381 or Raymond Mosca at (202) 962-7342.

Sincerely,

William C. Thum
Managing Director and Assistant General Counsel, Asset Management Group
Securities Industry and Financial Markets Association
1099 New York Avenue, NW, 6th Floor
Washington, DC 20001

Raymond Mosca
Senior Associate, Asset Management Group
Securities Industry and Financial Markets Association
1099 New York Avenue, NW, 6th Floor
Washington, DC 20001

1. SIFMA AMG brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $45 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds. [↩]
2. Treasury Market Practices Group (TMPG) Consultative White Paper, Non-Centrally Cleared Bilateral Repo and Indirect Clearing in the U.S. Treasury Market: Focus on Margining Practices (Feb. 26, 2025) (“TMPG Consultative White Paper”); Treasury Market Practices Group (TMPG) Proposed Recommended Best Practices on Treasury Repo Risk Management (Feb. 26, 2025) (“TMPG Proposed Recommended Best Practices”). [↩]
3. SEC 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, 89 F.R. 2714 (Jan. 16 2024), https://www.govinfo.gov/content/pkg/FR-2024-01-16/pdf/2023-27860.pdf (“SEC Treasury Clearing Mandate”); Department of the Treasury Office of Financial Research Ongoing Data Collection of Non-Centrally Cleared Bilateral Transactions in the U.S. Repurchase Agreement Market, 89 F.R. 37091 (May 6 2024), https://www.govinfo.gov/content/pkg/FR-2024-05-06/pdf/2024-08999.pdf (“OFR Repo Reporting Requirements”). [↩]
4. TMPG Proposed Recommended Best Practices. [↩] [↩] [↩]
5. TMPG Consultative White Paper at 8. [↩] [↩]
6. Id. [↩] [↩] [↩] [↩] [↩]
7. See SEC Treasury Clearing Mandate. [↩]
8. TMPG Consultative White Paper at 14. [↩]
9. TMPG Proposed Frequently Asked Questions (FAQs): Treasury Repurchase Agreement Risk Management (Feb. 26 2025), TMPG-Treasury-Repurchase-Agreement-Risk-Management-Recommendation-FAQs.pdf. [↩]
10. TMPG Consultative White Paper at 11. [↩]
11. See SEC Rules 5b-3 and 2a-7, which effectively require money market fund Treasury repo agreements to be “collateralized
    fully”. [↩]
12. TMPG Proposed Frequently Asked Questions (FAQs). [↩]
13. TMPG Consultative White Paper at 9. [↩]