US Treasury Clearing Operational Readiness

The upcoming changes in the U.S. Treasury (UST) market, driven by the Securities and Exchange Commission's (SEC) final rule in December 2023 requiring central clearing of UST transactions, present both challenges and opportunities for market participants. This guide serves as a quick reference to key steps for operational readiness, focusing on 1) papering "Done With" documentation; 2) reviewing counterparties; 3) refining operating models and margin management process; and 4) considering AI and ML to streamline processes.

Compliance deadlines:

1. Getting Ready for the "Done With" Documentation

Last September, SIFMA published the 2024 SIFMA Master Treasury Securities Clearing Agreement, Schedule to the Agreement, and Module I-IV to the Agreement. SIFMA is also considering publishing an annex that applies to the existing Master Repurchase Agreements (MRAs) and Global Master Repurchase Agreements (GMRAs). The "Done With" documentation is a critical component of the UST Clearing process, outlining the criteria to be met for a transaction to be considered in compliance.

Start Early: FICC estimates that over 7,000 new participants need access to clearing, and exiting clearing members also need repapering. Historically, signing an MRA could take 6-12 months. Working backward, we don’t really have a lot of time to meet the first deadline of December 2025.
Update Policies and Procedures: Revise internal policies and procedures to incorporate the new "Done With" criteria. In addition, closely monitor documentation and operational requirements for the “Done Away” trades.
Train Staff: Conduct education and training sessions to familiarize staff with the updated documentation and processes.

2. Reviewing Counterparties

At the end of 2025, all cash transactions done between broker dealers, interdealer brokers, government securities brokers dealers (except for central banks and sovereign entities) must be cleared. By June of 2026, all transactions done with a FICC member must be cleared; even the counterparty is a non-clearing member, including global counterparty.

Identify Counterparties: Understanding your trading counterparties and how they impact your clearing requirements.
Costs and Profitability Analysis: Evaluate your total costs; including compliance and operational costs when choosing your counterparties relationships.
Establish New Relationships: Where necessary, establish relationships with new counterparties that comply with the central clearing rules

3. Refining Operating Models and Margin Management Process

FICC has been the sole clearing house providing UST clearing services until recently, with CME Securities Clearing and ICE Clear Credit both entered the clearing space. Clearing houses are actively establishing their clients’ account structure and margin process to meet the March 2025 deadline for UST Clearing.

Analyze Operating Models: Depending on the models and the clearing houses, there will be different operating models of account segregation, interoperability, and cross margining considerations. Work with your clearing house(s) and discuss options.
Update Margin Management Process: Consider the margin call process and timing between clearing houses and direct participants, and between direct and in-direct participants in terms of netting, pre-funding, substitutions, and intraday liquidity.
Implement Changes: Have a clear change management program to effect changes in areas of compliance, eoperational process and control, reporting and technology.

4. Leveraging AI and ML to Automate and Manage Risk

Technology can play a significant role in streamlining and accelerating the preparation process for UST Clearing. Take the opportunity to evaluate suitable AI and ML solutions to make your operations more efficient and effective. Here are a few recommended use cases:

Automate Documentation: Use vertical AI solutions to automate the creation and updating of "Done With" documentation and harvest data in a structured format for automated upstream and downstream processes.
Collateral and Margin Management: Use AI to extract unstructured data and process margin calls, perform reconciliation and train the AI model through exceptions.
Optimize Trading Strategies: Utilize AI to analyze trading data, monitor pre-trade limits, and use ML to perform predictive analytics to optimize strategies for compliant trading.

Conclusion

Preparing operationally for UST Clearing requires a comprehensive approach that addresses documentation, counterparties, operating models, margin management, and the use of AI and ML to accelerate implementation of policies and procedures. By taking these steps, firms can proactively meet the new requirements and seize the opportunities presented in the US Treasury market.

If I can be of any help, reach out at: connie.leung@mg-insight.com

Connie Leung MG Insight Principal - Business Consulting and Transformation (Collateral Management Practitioner)