The Path to Clearing US Treasuries

Short-Term Deliverables to Achieve Long-Term Implementation

Recent and upcoming developments will have a significant impact on the U.S. Treasury markets, namely rules finalized in December by the U.S. Securities and Exchange Commission regarding its standards for covered clearing agencies and application of the broker-dealer customer protection rule with respect to U.S. Treasury securities.

In this episode of The SIFMA Podcast, SIFMA president and CEO Kenneth E. Bentsen, Jr. sits down with Robert Toomey and William Thum, who outline SIFMA and SIFMA AMG’s partnership to advance multiple workstreams and short-term deliverables that will set the stage for long-term implementation. These include standard documentation, enhancements to market structure, further needed regulatory reforms, and an operations timeline for all participants to adjust ahead of the 2026 go-live for U.S. Treasury clearing.


Edited for clarity

Ken Bentsen: I’m Ken Bentsen, President and CEO of SIFMA, and welcome to the SIFMA Podcast. Today, I’m joined by two of my colleagues, Bill Thum and Rob Toomey, to talk about the recent and upcoming developments that will have a big impact on the U.S. Treasury markets, namely rules finalized in December by the U.S. Securities and Exchange Commission regarding its standards for covered clearing agencies for U.S. Treasury securities and application of the broker-dealer customer protection rule with respect to the U.S. Treasury securities. Rob Toomey is Managing Director and Associate General Counsel and Head of our Capital Markets Group and Bill Thum is Managing Director and Associate General Counsel in our Asset Management Group. Bill and Rob, thank you for joining me today.

So Rob, maybe I’ll start with you. Before we dive into those details, and that was an elongated description of what is effectively a central clearing mandate for most Treasury securities and repos. But before we dive into those details, maybe we can take a step back and talk a bit about the U.S. Treasury markets more generally and maybe, Rob, you can explain in a little more detail one, what is involved in U.S. Treasury markets, and two, why is it not an exaggeration to say that the U.S. Treasury market is a bedrock or the bedrock of the global financial system? And then, Bill, maybe after that, you could give us your perspective from the buy side.

Robert Toomey: Thanks, Ken. I do not think it’s an exaggeration at all to say that the U.S. Treasury market is the bedrock of the global financial system. But when we think about it, we’ve got to think about it first from first principles and the U.S. government issues U.S. Treasury securities to fund its need for cash to fund the activities of the government. This is the most important function of the Treasury market, and it’s the most important function that requires a certain amount of resiliency and a certain amount of significant liquidity, which it does enjoy as a general matter. That leads to the other purposes that the Treasury market is used for and they draw on one, the fact that Treasury securities are and represent the full faith and credit of the U.S. government. And then secondly, as I mentioned, the market for U.S. Treasury securities as a result of the fact that it represents the full faith and credit of the U.S. government is deeply liquid and it allows firms to and investors to get in and out of Treasury securities quite easily to liquidate and move around large positions of risk throughout the system. And that leads to these other uses of the Treasury market.

Treasury market is one seen as a risk-free assets or near risk -free assets for investors who need to park money for short periods of time or for long periods of time. The Treasury security market has a curve from short term to long-term and you can match your investor horizons with that curve in a safe and easy way to manage your assets. The firms also use and the market also uses Treasury securities to hedge risks, to benchmark certain loans and interest rates throughout the economy that impact commercial loans, mortgages, and the like.

And then finally as well, the Federal Reserve uses the Treasury market through the repo market and I’ll say a little bit about that before I give it over to Bill, but it uses the Treasury market to implement monetary policy to impact the policy rates that are set by the Federal Reserve. And they do that by buying and selling Treasury securities or by engaging in repos. Now repo is a transaction and it’s primarily in Treasury securities that allows for market participants to raise short-term cash against Treasury securities, but it also allows market participants, and this contributes to the liquidity in the Treasury market, to access securities in a safe, easy, and inexpensive manner. Now I know, Bill, you have some thoughts, certainly from the buy side, on how they use the Treasury market.

William Thum: Hey Rob, that was a great summary. I think that what I would add to it really is that investments in U.S. treasuries underpin so many funds that are set up and activities of asset managers generally. But in addition to the investment, U.S. treasuries also serve as collateral for many of the transactions that the buy side enters into, particularly hedging transactions such as derivatives, treasuries are transferred to back up the obligations that are out under those transactions. And then you mentioned repos, and repos are a way for asset managers to take cash on hand and effectively transfer it over to the sell side in exchange for the treasuries that come in. So effectively providing a degree of liquidity to the sell side as they pursue their own activities in the market. So, treasuries underpin so much of what asset managers do and therefore it’s critical that as we approach the deadline for the clearing of both cash treasuries and repo treasuries that we have everything ready and there’s adequate liquidity in those markets.

Ken Bentsen: So great, discussions by both of you. Maybe let’s sort of drill down here to where we are today. I mean, how did we get to this mandate for central clearing of Treasury and Treasury repos? I mean, we saw that the market was certainly trending maybe more in the repo than the cash market. But how did we get to where we are today where now we have this very broad mandate?

Robert Toomey: Yeah, Ken, I’ll start. I think first we have to go back almost 10 years. Actually, it’s about 10 years ago where there was a what’s known as a flash rally within the Treasury market, a very quick movement in prices within 15 minutes. It was a round trip. It was unprecedented. And that led to a lot of granular studies around what had happened in that incident, but also what was happening in the Treasury market, both noting its tremendous growth over time as the U.S. government’s need for cash has increased significantly. And it’s changing profile. The Treasury market, since the last time it was significantly studied and that goes back to the 1990s, has moved into a much greater electronic phase, certainly like most other markets, capital markets in the world. But as well, some of the profiles of market participants have changed. There are more, whereas it used to be very much dominated by the primary dealers, there are more trading firms that are active and significant participants in the treasury market.

Fast forward as we move to the end of the decade in the early 2020s, there are several more instances of significant volatility in both the repo market and the Treasury market. And that led to a number of proposals to reform the market structurally in ways that would encourage both capacity, that’s the ability of intermediaries to use their balance sheets to support the market, as well as resiliency to reduce risk throughout the market. So that you’ll have, because again, what we were talking about before, as the bedrock for all of this activity within the financial system generally, as benchmarks, you need a certain stability. So you don’t want these super and significant volatile events to impact the use of treasuries. So to address those, a number of policy prescriptions have come out. One of the significant ones, is the Treasury clearing mandate, which came out in December and that was the result of a lot of discussions, a lot of studies that went into understanding what happened in these various volatile instances over the last 10 years.

Ken Bentsen: I know we at SIFMA and many of the other stakeholders certainly believe the goals of any reforms or changes to the Treasury market should be designed to enhance liquidity, resiliency, increase market-making capacity, particularly to meet the growing demand and supply of Treasuries. We can always debate which reform will accomplish these goals or how well it will accomplish these goals. But really going beyond that to where we are today, maybe, Bill, you can give us the cliffnote version of what the coming changes we’re going to see with this clearing mandate and who is impacted.

William Thum: Yeah, thanks a lot Ken and I think you know it’s important to note that from the buy-side’s perspective, in particular, we have embraced the transition of various markets to central clearing coming out of the Dodd-Frank reform so where we started in futures when now we do our clearing and exchange trading for swaps across a variety of currencies and durations and the buy side finds it just tremendously efficient and both mitigating significant risk that was present in the market before the clearing mandate. So the buy side has really embraced the idea of clearing. You know, as we think about the transition of the treasuring market to clearing, I think that from the buy side’s perspective, what we want to make sure is that before we hit a go-live date, that various work streams are in place and have demonstrated success so that liquidity is demonstrated in the clear space. Right now, we have relatively low liquidity, low percentage of the market, about 13% of the market centrally cleared now in repos. And the question I think that market participants look at is, You know, we’ve got 13% clearing now, we’ve got one major clearinghouse serving the business, we’ve really got only one access model that the market uses at present. And across all these different areas, there’s going to have to be tremendous change. The timeline for clearing is very aggressive. The SEC’s timeline is basically December 2025 for the clearing of cash securities by certain market participants and then June of 2026, basically two years from now, the entire repo market is going to have to transition to clearing from about 13% today to pretty much a hundred percent in two years. So the buy-side takes a very sober look at this. We want to get to the finish line, but we know it’s a lot of work that’s going to get there. And I think the buy-side’s really looking to SIFMA, first of all, to try and accelerate all the different work streams and then to engage as well with the SEC and other agencies to make sure that the timeline is manageable and we don’t come to a point where we haven’t yet met the finish line with the mandates in place.

Ken Bentsen: So those are significant changes, and as you pointed out, not very much time to do so. Maybe, Bill, talk a little bit more about the role that SIFMA is playing, particularly related to documentation, and then, Rob, maybe you can follow on on that.

William Thum: Yeah, I think, you know, SIFMA, it’s a really good point, Ken. SIFMA has really been the shepherd of the Treasury market for decades. And through not only paying attention to market reforms as they’ve developed over the years, but also in the repo market, investing in developing the market standard repo documents to make, the entering into of repos efficient as possible. So with the mandate, with the SEC passing its final rule, SIFMA really embraced this responsibility from the get-go and immediately started a host of work streams to accelerate the extent to which we have the control to accelerate all the different transitions that are going to need to happen in the next two years.

The most significant of those transitions is the development of market standard documentation. So right now we have working groups that involve both buy and sell-side members working together to try and come up with market standard terms for the existing market access model, which is we refer to it as the done with model or sponsored access with FICC. We also have a group that is devoting a lot of time to come up with a future market access model, which we refer to as done away,and that is more traditional. Perhaps we know it in the futures world and cleared swaps where you execute a trade with the street and it’s cleared by a clearing member. So many changes will have to happen to get to that point. But at this point, SIFMA plans to get through the documentation for done-with trading later this summer, hopefully by the end of July, and at that point, we hope to transition to developing the documentation for the done-with model as we work with the market participants to determine what changes will need to happen in market structure to facilitate the documentation development.

So that’s in terms of documentation. We have other work streams going on. We need to work from the buy side’s perspective. We need to work with the SEC on a host of market access issues particularly for registered funds, the ability to transfer payments and margin, which the SEC’s given temporary relief for, but if we’re going to embrace this as a wholesale transition to clearing, the SEC really needs to look at some of these issues more carefully so that asset managers can plan. We also have a host of operational issues, the plumbing in the market that needs to develop beyond the current 13% to 100% in the next two years. So, SIFMA will have significant work streams, planning models, and deadlines to meet to make sure that market participants are ready.

Robert Toomey: Yeah, thanks, Bill. And a couple of comments on each of those work streams that we see are SIFMA and SIFMA AMG working with the industry on documentation, I will say right after, immediately after the SEC passed its clearing main date back in December, I started to hear from members, what was the gating issue that you faced? What area requires, the greater change to get to some level of efficiency and we heard documentation was that gaining issue. Firms were negotiating for long periods of time. And you can imagine as more entities have to come into the clearing ecosystem, more negotiations are going to have to be made and that’s really why we’ve made a big commitment to get this documentation done and to get it done in a reasonably fast track. So that market participants can go off and start bringing in these new entities that have to come into the ecosystem to access the clearinghouse.

As you can imagine for what is a very complicated and complex rulemaking that the SEC engaged in and a very significant lift for the Treasury market, there are issues within that. Bill noted a couple for the buy side, certainly on the sell side there are other significant open questions, particularly around the treatment of an inter-affiliate exemption from the clearing mandate. This is an important use that firms with affiliated entities use to manage their collateral efficiently, to get it to places that it needs to be within the corporate group. And while the SEC gave an inter-affiliate exemption, they gave it in a way that it’s very hard to operationalize and implement. Also, we’re taking a careful look at how the clearing mandate will treat triparty repo. And then finally, I think talking about the operations and like Bill, you noted right, it’s the pipes, it’s the connectivity, it’s how firms get into the clearing houses wherever they are and I think we’re working with market participants, we’re gonna partner with market participants to look to develop really a timeline and what are the key goalposts you have to hit along the way to make this June 2026 for the repo side of things deadline.

William Thum: Hey, Rob, you know, the two other points that I’m reminded of that we’re looking at is if we are to move to a 100% cleared market for repos, certainly market standard documentation is going to bring the entities in. SIFMA is committed as well to obtain netting enforceability opinions in the relevant jurisdictions that are needed so that large-scale clearing can actually be put in place. So that’s tied in very closely to the development of market standard documentation. And for all of you that are involved in the project to develop these documents, it’s not just about coming up with preferred terms for one side or the other. It really is coming up with standard terms that can then be evaluated from an enforceability perspective as we get the legal opinions. We also are evaluating new documentation approaches. So, you know, are we planning on publishing a hard copy document that folks will negotiate or we’re looking at new approaches as well that may unlock the efficiencies that modern communications methods provide. So we are really trying to fire on all cylinders across all these different work streams to meet the need of two years from now to have 100% of the market cleared.

Ken Bentsen: So that’s a lot of detail and information of what we expect to happen over the next 24 months. Maybe as we get to the end here, both of you can tell our listeners what they should expect over the next three to six months as we work through these efforts.

Robert Toomey: Yeah, I’ll just start off the key milestones to look for first are the publication of our done-with standard documentation bill noted at the end of July, done-away will be a little bit after that and also working with the industry to develop an operations timeline, which we expect to put together within the next three months. I think those are the key sort of very short term deliverables that’ll allow for the longer term implementation.

William Thum: We’ll be reaching out to the market and market participants to confirm exactly where we are in this process so folks know. Every shop, of course, is developing its own strategy to meet the clearing deadline and it’ll be important that as SIFMA makes efforts to meet that deadline, that market participants are fully informed. We also plan to be reaching out on a regular basis to the SEC and the other agencies to make sure that they know where we are in that process and the timeline. And it’s particularly important that we communicate that on a regular basis, especially if there is a need at the end to look for extensions or perhaps a phased rollout. But we’re rolling up our sleeves now and we’ll be communicating progress on a regular basis.

Ken Bentsen: So that’s a lot of information in a short period of time and a lot of work in a very short period of time. I’m sure we’ll have future podcasts and other publications on this for the membership and the broader public. I want to thank both Rob and Bill for joining us today and to learn more about SIFMA’s work around Treasury clearing and more broadly, visit, and thank you again to our listeners for joining us today.

Kenneth E. Bentsen, Jr. is President and CEO of SIFMA. From 1995 to 2003, he served as a Member of the United States House of Representatives from Texas. Prior to his service in Congress, Mr. Bentsen was an investment banker specializing in municipal and housing finance. 

Robert Toomey is Head of Capital Markets/Managing Director and Associate General Counsel at SIFMA.

William Thum is Managing Director and Associate General Counsel, Asset Management Group at SIFMA.