Europe should brace for U.S. Treasury clearing rules, says industry body

By Huw Jones

LONDON (Reuters) – Europe has nowhere to hide from U.S. plans to mandate clearing of U.S. Treasuries transactions that will need to be carefully introduced over time, a global derivatives industry body said on Tuesday.

Wall Street is waiting for the U.S. Securities and Exchange Commission to finalise its rules for clearing much of trading in the $25 trillion Treasuries market, one of the world’s deepest and most liquid markets, to bolster stability and resilience.

A clearing house is backed by a default fund, ensuring that a transaction is completed even if one side of a transaction goes bust.

Regulators began mandating the use of clearing more widely in derivatives markets after the global financial crisis in 2008 to improve stability and transparency.

Regulatory reviews were prompted by stresses in Treasuries and other parts of the market when economies went into lockdown in March 2020, forcing central bank intervention.

“It’s not just a U.S. domestic problem – we’re effectively changing the plumbing for the world’s most significant financial assets, and that feeds into dollar funding globally,” Eric Litvack, chair of the International Swaps and Derivatives Association (ISDA), told reporters.

“It’s something that you need to look at carefully and at this stage I think we still have more questions than answers as to how the actual process of clearing Treasury cash and Treasury repo will play out,” Litvack said.

ISDA chief executive Scott O’Malia said it was critical that certain parts of the market don’t lose access to Treasuries, or pull away due to the new regulatory requirements.

Much will hinge on the details in the final rules that determine who will be within scope, O’Malia said.

“I don’t want to do a ‘sky is falling’ here, but we do want to make sure the timetable suits the implementation challenge,” O’Malia said.

Financial markets in the United States already face pressure on compliance resources from pending changes to bank capital rules, and a shift to settling U.S. share trades within one working day next year.

O’Malia said only a small portion of repos are cleared currently, meaning many players need hooking up to clearing houses, and suggested this would be best phased in over time, in the same way that margining for uncleared derivatives was over several years.

(Reporting by Huw Jones; Editing by Chizu Nomiyama)