Accounting fix needed for done-away Treasury clearing – DTCC

Splitting UST execution and clearing “not viable” for clearing brokers under current regime

Accounting-fix-for-USTs]

Unbundling of US Treasury execution and clearing is “not viable” under current accounting rules, a senior executive at the Depository Trust & Clearing Corporation (DTCC) has warned, as higher capital treatment would make the service uneconomic for banks to offer.

Banks which submit clients’ US Treasuries and repos for clearing typically do so for ‘done with’ trades, which they have also executed. US regulators are pushing for clients to choose who they clear with after execution, in so-called done-away trading. Accounting rules do not currently permit clearing banks to record the trade off balance sheet, as they would for derivatives, potentially subjecting them to higher capital requirements for the leverage ratio.

If clearing brokers “can’t take capital relief for being able to recognise the activity as… off [balance] sheet, they’re not going to be able to do it,” said Laura Klimpel, head of fixed income at the DTCC – the parent company of incumbent US Treasury clearing house the Fixed Income Clearing Corporation.

She added the accounting regime was the “key decision” in determining whether done-away clearing would be “economically viable or not” for clearing brokers to offer.

While the accounting treatment of done-away style activity in the derivatives space has been vetted for several years… this is a new exercise for the accountants
Laura Klimpel, Depository Trust & Clearing Corporation

Klimpel was speaking at the 2024 US Treasury Market Conference in New York on September 26.

Klimpel described the accounting obstacle as a “sleeper issue”, one that has “bubbled up in the last couple of months”.

Some participants have already called on FICC to address the matter. In an April 18 comment letter to the US Securities and Exchange Commission (SEC), the Futures Industry Association (FIA) described the accounting issue as “critical” and urged FICC to obtain “accounting confirmation that a US GAAP reporting entity acting as an agent clearing member would not be required to record the transactions it clears for its executing firm customers on its balance sheet”.

It added the association “would be pleased to work with FICC” to address accounting treatment for each service. 

FICC has proposed rule changes that will allow it to offer an agency clearing service that sees dealers ring-fence client margin in a separate account. 

Speaking on the panel, Klimpel called for more consistency between the accounting regimes that apply to US Treasury clearing brokers and those that apply to futures commission merchants in the US derivatives market, where done-away trading is the norm and margin can be held off balance sheet.

“While the accounting treatment of done-away style activity in the derivatives space has been vetted for several years… this is a new exercise for the accountants,” Klimpel said.

“They need to look at this model as it relates to the Treasury clearing market specifically. Even though we have modelled our rule book very closely on the FCM space, it is still a new accounting analysis.”

Speaking at the same event, SEC chairman Gary Gensler re-emphasised that the importance of done-away clearing was to promote access and competition in the UST market.

“There should be provision of clearing services such that it doesn’t matter with whom one does a trade,” said Gensler.

Speaking on the same panel as Klimpel, Suzanne Sprague, CME’s global head of clearing and post-trade services, said the Chicago exchange is working with the SEC on a model that that could help solve the accounting conundrum to encourage done-away business.

“The details are still being sorted out for the application process with the SEC, but it is our intention to be able to offer a client access model that would be balance-sheet friendly and support both done-with and done-away activity,” said Sprague.

Paul Hamill, who is advising Ice on the expansion of its credit default swap clearing platform, Ice Clear Credit, to include USTs and repo, described the current solution from incumbent FICC as “deeply unpopular”.

“There is a deficit of trust that that solution will be ready and scalable in the timeline we are talking about,” he said on the same panel as Klimpel.

New rules require firms to begin clearing certain UST transactions from the end of 2025 and repo from mid-2026.

Hamill said Ice’s UST clearing effort would be closely based on the derivatives clearing infrastructure created in the wake of the 2008 financial crisis.

“The way that Ice is approaching this is to look at the problems that in relatively recent history we solved for swaps,” he said. “Customers should have the ability to choose a top price for the product and then shop around for a price for the clearing services,” he added.

In defence of FICC, Klimpel pointed to record volume figures of $9.2 trillion in daily activity on September 3, adding that on September 25 the firm’s sponsored service handled a record $1.5 trillion of transactions, giving members $662 billion of balance sheet savings.

“We look forward to market participants having a choice, and we think it will be us,” she said.

“Whether a competitor, or more than one, ultimately emerges… we’re going to be laser focused on our mission, and we’re going to continue to innovate as we have done for many years in rolling out new products that create value for our clients, whether that’s through capital efficiencies, margining efficiencies such as cross margining [or] through new service innovations, we’re going to continue to stay the course”. 

Editing by Helen Bartholomew

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