MFA Submits Comment Letter to the SEC in Response to Treasury Clearing Rule

On December 21, 2022, MFA submitted a comment letter to the U.S. Securities and Exchange Commission (SEC) in response to its Treasury clearing proposal. MFA welcomes the proposal but provides several recommendations to help better calibrate the proposal to avoid negative, unintended consequences on the U.S. Treasury market.

MFA highlights that expanding central clearing can help ensure greater market participation  despite the increased size of the market, particularly during periods of increased market stress and volatility. From the letter:

“Expanding central clearing could potentially partially address these issues by promoting participation by a larger and more diverse group of market participants, allowing market participants to deploy resources and capital more efficiently by netting offsetting transactions, and expanding access to market-wide protections provided by a clearing agency’s default management framework. While the U.S. Treasury market differs from the swaps market in important respects, we have seen similar benefits take root in the swaps market since the post-Dodd-Frank implementation of clearing requirements for certain types of swaps.”

MFA emphasizes that in order to achieve these benefits, it is imperative the SEC first prioritize and strengthen the measures to expand the availability of central clearing before mandating central clearing. From the letter:

“[T]he Commission should: adopt more robust and direct measures to ensure fair and open access; work with the Commodity Futures Trading Commission (“CFTC”), FICC, and relevant derivatives clearing organizations to permit cross-margining across the Treasury securities and related cleared derivatives markets; and enhance transparency around FICC’s margining and default management practices. These requirements should take effect some reasonable period of time before any central clearing mandates take effect.”

MFA notes that the proposal will be most beneficial for bilateral repo market transactions but the costs outweigh the gains for tripartite and cash transactions. From the letter:

“We expect the benefits of central clearing to be significant in the bilateral repo market. Expanding netting of repo transactions through more central clearing could increase market capacity by reducing the balance sheet and capital costs of repo transactions to liquidity providers. In addition, repo transactions involve more credit risk than cash market transactions, which can be mitigated through central clearing via a clearing agency’s margining and default management practices.”

“In our view, the costs of requiring central clearing of triparty repo transactions and cash market transactions are likely to outweigh any potential benefits. Relative to bilateral repos, triparty repo transactions already provide for additional risk mitigants and protections due to the role of the triparty agent and related regulatory oversight of the market. In addition, there is significantly less experience and track record with respect to central clearing of triparty repo transactions than there is for bilateral repo. Cash transactions, in turn, do not present the same extent of credit risk as repo transactions, which means that a principal benefit of central clearing—risk mitigation—is significantly less evident in these markets.”

MFA also stresses that singling out hedge funds for the cash-clearing mandate would create competitive disparities. From the letter:

“[T]he Proposed Rule would impose central clearing requirements on hedge funds and certain prime brokerage accounts, which seems likely to result in undesirable competitive disparities and opportunities for regulatory arbitrage vis-à-vis other institutional investors. The Proposed Rule also would impose central clearing requirements on certain transactions involving anonymous trading facilities, which could arbitrarily benefit certain platforms and discourage the development of all-to-all trading.”