Central clearing in the US Treasury market
The FIA Principal Traders Group today released a white paper regarding central clearing in the US Treasury market. FIA PTG believes increased central clearing would deliver a number of benefits to market participants in the US Treasury market, including alleviating specific balance sheet constraints observed during the volatility of March 2020, as well as reducing operational risk, facilitating the entry of new liquidity providers, and increasing overall market transparency.
In order to increase central clearing, the white paper details the importance of a viable client clearing model. Experience in other asset classes demonstrates that the vast majority of market participants access CCPs through a client clearing model. Currently the option available in the US Treasury market is the "sponsored clearing" model offered by the Fixed Income Clearing Corporation. While there has been some use of this model for Treasury repo transactions, it has not been used in practice to clear cash Treasury transactions. As a result, a majority of these transactions are not cleared. To explain why, the paper discusses key limitations of the sponsored clearing model and recommends several enhancements to encourage greater use of clearing.
"The members of FIA PTG are very familiar with the benefits of central clearing in other markets such as futures and options, and we are pleased to see that key stakeholders in the US Treasury market are exploring the potential to expand the use of central clearing in this market as well," said Rob Creamer, FIA PTG Chairman. "We hope that our paper will provide important insights on practical considerations and useful recommendations for ensuring a viable model for market-wide participation."
The white paper is organized into three parts. The first section details the benefits of central clearing in terms of transparency, liquidity and resiliency. The second section discusses the limitations of the current client clearing model for US Treasury securities and recommends several changes designed to expand access to a wider range of market participants. The third section discusses several points for stakeholders to consider before mandating the use of central clearing.
"Our experience in other asset classes has shown that a viable agency clearing model can increase market resiliency, liquidity and transparency," said Creamer. "We firmly believe that our recommendations will lead to greater adoption of central clearing and contribute to the modernization of the US Treasury market."
The full white paper can be found here.