By Davide Barbuscia
NEW YORK (Reuters) – Two U.S. Treasury market utilities are set to roll out new rules by the end of this year that will determine the amount of leverage hedge funds and other investors can deploy in trades, a step that could counterbalance rising transaction costs stemming from upcoming clearing requirements.
The Depository Trust and Clearing Corporation (DTCC), a market infrastructure company, and futures exchange operator CME Group last year launched an enhanced cross-margining arrangement for clearing members that trade and clear both U.S. Treasury securities and CME Group interest rate futures.
They plan to expand it to clearing members’ clients by December, subject to regulatory approval, they said in a joint statement on Monday.
It would become available as Treasury market participants prepare for new rules introduced by the Securities and Exchange Commission in 2023 aimed at reducing systemic risk in the $28.5 trillion Treasuries market by forcing more trades through clearing houses.
“Aligning enhanced cross-margining for end-user customers with the regulatory timeline for expanded U.S. Treasury Clearing requirements encourages greater utilization of central clearing, therefore reducing systemic risk,” the companies said.
Clearing houses act as an intermediary between buyers and sellers, but they require traders to deposit collateral, called margin, to cover potential losses on their positions. With this arrangement the required collateral will be calculated across positions in both cash and futures, rather than determined on each market independent of the other.
Under the proposal, the Fixed Income Clearing Corporation (FICC), a subsidiary of DTCC, will earmark cross-margin accounts, allowing all qualifying positions in the accounts to offset against eligible CME Group interest rate futures. CME Group will allow market participants to allocate futures to end-user cross-margin accounts throughout the day, making them available for offset within the cross-margin framework.
“Customers that have material offsets in the exposure between their futures and their cash and repo positions … can take advantage of that same type of portfolio margining and capital efficiency” available to clearing members of CME Group and the Government Securities Division of FICC, Laura Klimpel, head of Fixed Income and Financing Solutions at DTCC, said in an interview.
The new central clearing rules are supposed to be implemented in phases by June 2026, but several Wall Street trade associations have recently asked the SEC to extend key deadlines by one year.
(Reporting by Davide Barbuscia; Editing by Paul Simao)
