SEC clearing mandate alters Treasury funding for stablecoins

The Securities and Exchange Commission has finalized rules that require specified Treasury trades involving clearing members to be routed through central clearinghouses. The agency set Dec. 31 as the compliance date for eligible outright purchases and sales of Treasuries and June 30, 2027 for eligible repurchase agreements. On Sept. 22, Commissioner Mark Uyeda indicated the agency did not intend to extend those deadlines.

A central clearinghouse becomes the buyer to every seller and the seller to every buyer in qualifying trades. That structure provides a single counterparty for covered transactions and allows offsetting obligations to be netted. Netting can reduce the cash and balance-sheet resources firms need to settle offsetting trades.

Clearinghouses require members to post margin and maintain other prefunded resources to cover losses if a member defaults. Market participants must hold cash or eligible securities to meet margin calls. Fees and margin requirements change the cost of trading and financing even when netting lowers some settlement obligations.

The repurchase agreement, or repo, market is central to Treasury funding. In a repo, a seller of Treasuries agrees to repurchase them later, effectively borrowing cash against the securities. The Secured Overnight Financing Rate, or SOFR, measures the cost of overnight borrowing secured by Treasuries. Federal Reserve research shows the transactions used to calculate SOFR rose from about $1 trillion in early 2022 to roughly $3 trillion, indicating the scale of activity affected by the new clearing requirements.

Access to clearing is not uniform. The Fixed Income Clearing Corporation offers a Sponsored Service in which an approved sponsor handles operations and guarantees specified obligations for clients. FICC also runs a Collateral-in-Lieu program that lets eligible cash lenders rely on Treasury collateral instead of posting initial margin in cash. A DTCC survey of FICC members found 79% of responding netting members already had account setups in place, while about one-third expected to offer Treasury cash clearing to clients.

Stablecoin issuers that back tokens with short-term Treasuries rely on the ability to convert those securities into bank dollars when token holders redeem. Token transfers on blockchains can occur outside bank and market operating hours, but clearinghouses, brokers and banks operate on business schedules. Issuers that receive blockchain redemption requests when markets are closed depend on banking and clearing partners to convert reserves into bank deposits.

To bridge timing gaps, issuers may hold additional cash or arrange committed financing to meet redemptions. The clearing rules change the way dealers and other intermediaries trade and finance Treasuries and will affect how reserve managers access those services. The SEC deadlines require firms to adjust clearing access and reserve-management arrangements; market participants will reveal how those arrangements work in practice as the compliance dates arrive.