“FICC needs to make significant changes to avoid disrupting Treasury markets – the foundation of the global financial system.” – Bryan Corbett, MFA President and CEO
Washington, DC – MFA urged the Securities and Exchange Commission (SEC) to improve access to Treasury clearing by making substantive changes to the proposed Fixed Income Clearing Corporation (FICC) Treasury clearing rules in a comment letter today. The FICC rulemaking is required by the SEC Treasury Clearing Rule finalized in December.
MFA supports FICC’s goal of improving the resiliency of the Treasury markets by giving market participants access to a flexible range of clearing structures and enhanced customer margin protection. However, the letter notes that the proposed rules fail to accomplish these objectives. It also raises concerns that the proposal’s lack of analyses will impair investor confidence and the ability of certain investors to continue trading Treasuries, which will decrease liquidity and increase volatility. To ensure indirect participants have access to Treasury clearing and create more resilient Treasury markets, MFA recommends that FICC:
- Adopt additional rules to streamline and clarify its indirect access models and ensure that each model is available in practice
- Conduct and publish a legal enforceability analysis covering the insolvency, resolution, or liquidation of FICC or a direct participant
- Provide additional information to market participants regarding the expansion of cross-margining opportunities
- Amend its rules to remove impediments to firms accessing other clearing agencies that may provide Treasury clearing services
“The proposed rules to provide non-FICC members access to Treasury clearing are largely cosmetic and fail to ensure all market participants have access to Treasury clearing,” said Bryan Corbett, MFA President and CEO. “FICC needs to make significant changes to avoid disrupting Treasury markets – the foundation of the global financial system.”
The MFA letter notes that the proposed rules do not improve access to clearing for “done-away” trades (trades conducted with a party other than a FICC member that are then cleared with a FICC member). Currently, there is no market for done-away trades. Mandating Treasury clearing without providing a market for done-away trades unnecessarily limits trading partners available to non-FICC members and harms Treasury liquidity. From the letter:
[I]t is critical for an indirect participant to be able to consolidate its clearing activities in a small number of direct participants to enhance the benefits of central clearing and minimize the costs, which requires a robust done-away clearing market… But there is no evidence to suggest that direct participants would actually accept done-away transactions. We are not aware of any meaningful done-away activity taking place at FICC today, under either the Sponsored Member model or the Agent Clearing Member model. It strains credulity to suggest that this is merely because FICC participants, all of which are sophisticated institutions, merely lack an adequate understanding of how FICC’s clearing models work. A more plausible explanation is that there are economic incentives for direct participants to bundle their execution and clearing services by favoring “done-with” transactions.
Read the full comment letter here.
About the global alternative asset management industry
The global alternative asset management industry, including hedge funds, credit funds, and crossover funds, has assets under management of $5.5 trillion (Q3 2023). The industry serves thousands of public and private pension funds, charitable endowments, foundations, sovereign governments, and other global institutional investors by providing portfolio diversification and risk-adjusted returns to help meet their funding obligations and return targets.
About MFA
Managed Funds Association (MFA), based in Washington, DC, New York, Brussels, and London, represents the global alternative asset management industry. MFA’s mission is to advance the ability of alternative asset managers to raise capital, invest, and generate returns for their beneficiaries. MFA advocates on behalf of its membership and convenes stakeholders to address global regulatory, operational, and business issues. MFA has more than 180 member fund managers, including traditional hedge funds, credit funds, and crossover funds, that collectively manage over $3.2 trillion across a diverse group of investment strategies. Member firms help pension plans, university endowments, charitable foundations, and other institutional investors to diversify their investments, manage risk, and generate attractive returns over time.
