In December 2023, the United States Securities and Exchanges Commission published their Final Rule prescribing mandatory clearing for “eligible secondary market transactions” involving US Treasury Securities. In-scope transactions must be cleared and settled through a central clearing agency. The rule extends to those who are a party to “eligible secondary market transactions” regardless of their jurisdiction. This includes market participants in the UK, the European Union, APAC and other jurisdictions in addition to the US. The purpose of this article is to examine the requirements of the clearing mandate, to review the legal issues and documentation requirements which it raises.

Key Points

• The United States Securities and Exchanges Commission has introduced a requirement for central clearing of sales, purchases and repurchase transactions of US Treasury Securities.

• Market participants will need to establish new clearing relationships underpinned by supporting legal documentation in a dramatic industry reform aimed at increasing resilience in the US Treasury Securities market.

• The new rules will take effect in December 2026 and July 2027. This article outlines the changes, their global impact and the legal documentation which needs to be put in place before these deadlines.

Background, timing and reasons why

The background to the clearing mandate (the Mandate) is that the US Treasury Securities market has been subject to strains in recent years, experiencing three significant shocks: 2014’s “flash rally”, 2019’s “repo trading shock” and 2020’s COVID-19 shock. Each of these placed stresses on pricing and liquidity in the wider financial markets and the real economy, including requiring Federal Reserve intervention. The total value of Treasury Securities currently in issue is estimated at $28.3trn, with daily trading volumes of over $800bn and the market is a central pillar of US government funding. A review of risks to the market under the current infrastructure resulted in the proposal for mandatory clearing. The SEC’s Final Rule also highlights benefits such as the creation of additional balance sheet capacity for market participants, operational efficiency and reduced funding costs. Participants using more than one Clearing Agency may gain from cost transparency and competition.

Who and what is in-scope

Market participants who engage in secondary market sales and purchases of, or repurchase transactions involving, Treasury Securities are potentially in-scope. This rule is not limited to US firms but applies to all direct clearing participants, as well as to their affiliates.

Repo transactions

The definition of “eligible secondary market transactions” includes “repo” and “reverse” repo transactions of Treasury Securities in which one party is a direct participant at a central clearing agency (CCA), being a party who has direct access to the CCA’s clearing services (a Direct Participant).

A repo is legally structured as a purchase and sale of securities combined with an agreement to reverse the transaction at a future date. Economically it has the features of a loan of cash collateralised by securities. Treasury Securities are widely used in such transactions since they have a strong credit profile, are readily available and can be easily sold if the cash advance is not repaid on the agreed date. Whereas the cash advanced is a fixed amount, the market value of the securities provided as collateral varies daily based on market trading and so the “borrower” of the cash will top up the collateral if their value falls, or the “lender” will return collateral if the value increases, so that the cash advanced always matches the value of the collateral posted (known as “margining”).

The Mandate also includes tri-party repo agreements (where in addition to the two counterparties, a custodian is appointed to hold the securities as collateral and provide associated services). Significant numbers of repo transactions are entered into by banks who are also Direct Participants, as such the Mandate will cover a large percentage of repo market activity.

Secondary markets sales and purchases of Treasury Securities

The second group of “eligible secondary market transactions” relates to cash purchases and sales in the secondary markets and contains two items:

• sales and purchases of Treasury Securities entered into by a Direct Participant if the Direct Participant (A) brings together multiple buyers and sellers using a trading facility (such as a limit order book) and (B) is a counterparty to both the buyer and seller in two separate transactions; and

• sales and purchases of Treasury Securities between a Direct Participant and a counterparty that is a registered broker-dealer, government securities dealer, or government securities broker, certain hedge funds, or an account at a registered broker-dealer, government securities dealer, or government securities broker where such account may borrow an amount in excess of one-half of the value of

the account or may have gross notional exposure of the transactions in the account that is more than twice the value of the account.

Exemptions

There are a number of exemptions from the scope of the Mandate, including:

• Central Banks.

• Certain named international financial entities such as the European Investment Bank, the European Bank for Reconstruction and Development, the International Monetary Fund and the North American Development Bank.

• Sovereign entities including central government, its agencies, departments and state and local government.

• Other clearing agencies, such as those providing clearing for derivative transactions.

• Transactions between Direct Participants and their affiliates.

• Natural persons.

The Mandate applies directly to CCAs which in turn will introduce new compliance rules for their Direct Participants. The Direct Participants will pass these rules on to their customers through their legal agreements. The Mandate does not make specific provision in respect of jurisdictions outside of the US but rather applies to those who meet the above criteria for inclusion based on their activities in respect of either buying, selling or repo’ing Treasury Securities. This regulation therefore has a global impact, given the size of the US government debt markets and number of international participants.

The clearing environment: how it works

Repo clearing occurs today but is not comprehensive and often includes only one counterparty’s “leg” of the transaction, usually the sell-side institution. The only CCA currently providing clearing services is the Fixed Income Clearing Corporation (FICC), which is part of the Depositary Trust and Clearing Corporation (DTCC) in the US. The expectation is for other clearers to enter the market to offer competition and choice. The Mandate requires both parties to transactions to clear their respective legs of the transaction. For a sale and purchase of a Treasury Security, the settlement process will be short, but repos are typically open for longer periods, such as three to six months.

The Direct Participant is a clearing member holding an account directly at a CCA. However, buy-side and smaller sell-side counterparties will not be clearing members, such membership being beyond the reach of most market participants, for economic and other reasons. Non-clearing members will obtain access clearing through a Direct Participant. This can be the party with whom they are entering into the bilateral

transaction, who in addition to the trade will provide (under separate agreement) access to clearing services at the CCA. This is known as the “done-with” model for cleared transactions. Alternatively, the non-clearing member will be able to use another clearing member to deliver its transaction to the CCA, separate from the counterparty to the bilateral transaction. This is known as the “done-away” model for cleared transactions. Therefore, an important legal principal to understand in analysing and documenting these relationships is the capacity in which each party is acting and what their responsibilities are in each instance.

The formal steps to clear a transaction are:

• Pre-trade checks to confirm the trade is clearable at the agreed CCA and within its clearing limits.

• Execution of the trade (whether a bilateral, order book or electronic platform trade).

• Submission of the transaction to the CCA by the Direct Participant and trade matching and acceptance by the CCA.

• The formal (legal) novation of the trade to the CCA.

• The transfer of the assets (cash, securities) to the CCA.

• Subsequent margin calls driven by CCA communication to Direct Participants, and by Direct Participants to their bilateral counterparties.

The transaction being cleared is legally novated from the parties to the CCA, so that the CCA will now take the principal risk of the transaction and will suffer potential loss if there is a default. (The CCA is often referred to as the buyer to every seller and the seller to every buyer.) This represents an end to the original bi-lateral transactions as now each of the original counterparties transact with the CCA.

To reduce losses the clearing agency has requirements which it will insist on including:

• Acceptance criteria for clearing membership for its Direct Participants.

• Acceptance criteria for transactions, and the ability to reject transactions submitted which do not meet those criteria.

• Rights in the event of a default by a party to the transaction.

• Entry into formal legal contracts, documenting these terms and conditions and the rights of the CCA.

• Calling for margin to reduce its exposures.

The FICC has different clearing options. Direct Participants can be Netting Members which will allow them to self-clear their own transactions and avail of netting services of

the FICC. Centrally Cleared Institution Triparty membership allows the largest cash lenders to clear tri-party repo transactions. Sponsoring membership allows Direct Participants to provide clearing to indirect participants, submitting trades on their behalf and posting margin; the sponsoring member acting as guarantor of the indirect participant. Direct Participants can also offer Agent clearing membership whereby they will direct their client’s trades to a clearing member, assuming liability for those counterparties. These options require parties in-scope to consider multiple issues in accessing CCA services, including netting benefits, liability, risk management, margining and collateral requirements and additional services such as reporting and margin management. The choice of clearing service will be an important first step for market participants new to clearing.

The legal challenge

Onboarding for clearing services

The new clearing requirements will create new legal relationships which will need to be documented in legal agreements, which will impact existing relationships and agreements. In the first instance those looking to become clearing members will need to onboard with CCAs, a process which can be complex and lengthy and should be started early. Non-clearing members needing access to clearing will need in turn to onboard with clearing members. The terms and conditions to access clearing are likely to leave limited room for negotiation of bespoke terms but there will be technical specifications to be agreed, and elections made.

Where other clearers beyond FICC enter the market, those seeking clearing services will need to repeat the onboarding process with each CCA that they engage.

Trading agreements

Legal documentation governing sales and purchases, and repos, of Treasury Securities currently falls into two categories: bespoke agreements, usually on the financial institution’s template terms with variable scope for negotiation; and market standard documentation such as the Master Repurchase Agreement (MRA) (New York law) or Global Master Repurchase Agreement (GMRA) (English law) provided by the industry representative SIFMA for repo market participants. These market standard agreements, whose terms can be negotiated between the trading parties by way of a schedule, govern multiple repo transactions and set commercial terms on payment and delivery, termination and default and allow for netting of exposures under different transactions into a single amount. Original contracts will need to remain in place, since the cleared transaction begins as a bespoke transaction between the two parties, before being formally novated to the CCA and governed by clearing documentation. Additionally, should a trade be rejected for clearing it may revert to its original bilateral form, governed by the original agreement.

SIFMA is developing market standard clearing documentation which aligns with their current suite of repo trading agreements. They have published template agreements for “done-with” trading and are currently developing agreements for “done-away” clearing. These include options to amend existing MRA or GMRAs.

From a legal point of view, it is important to understand the different issues which are raised by clearing. The first point is that clearing is a service provided to clearing members by the CCA, whereby the CCA is undertaking legally enforceable obligations. The CCA is also taking credit risk when clearing transactions and is therefore looking for methods to reduce such risk and to recoup losses if failures occur. The CCA is also reliant on intermediaries in the clearing chain. The second point is that to effect clearing, legal title to assets is being transferred and new legal relationships are being created, notably the CCA becoming the counterparty to both of the parties on either side of the trade whilst clearing takes place.

As such, with the addition of the cross-border nature of markets, legal documentation is long, complex and heavily negotiated.

The challenge for market participants to put in place the required legal documentation is significant, with each market participant needing to ensure completed documentation for both clearing and trading which enable compliance with the Mandate. The FICC estimates that the number of indirect clearing members using its service will double from the current figure of 3,500 because of the Mandate, and each will require either new or amended agreements. As the industry body ISDA stated to the US House of Representatives Committee on Financial Services:

“Dealers will then need to execute the new documents with thousands of counterparties, as well as obtain netting opinions in the U.S. and a number of foreign jurisdictions to ensure efficient capital treatment.”

For financial institutions which use their own templates, these changes may prompt a review of their current terms and generate the need for multiple amendments. In addition, for European and UK market participants, the transition to T+1 securities settlement which will be happening at the same time, may also generate a concurrent document review and amendment workstream of the same agreements.

As mentioned above, legal opinion coverage for new and amended documents will need to be obtained. SIFMA intends to extend its legal opinion library to its suite of trading and clearing documents but many market participants also have bespoke legal opinions due to either gaps in standard industry legal opinions or where documentation is bespoke. These legal opinions cover enforceability of the legal agreements and close-out netting and provide guidance on specific provisions to include for different jurisdictions and so are a required part of the repapering exercise that the industry will be undertaking.

Comparison to EMIR derivatives clearing

Many in the industry will be familiar with the clearing (and initial margin) experience for financial derivatives introduced globally after the 2009 financial crisis. The structure of the clearing model proposed in response to the Mandate is similar to the EMIR model and documentation. It is also likely that we will see a repeat of key challenges such as the volume of documentation to be completed with multiple counterparties and the lack of experienced legal resources, as well as an imbalance between institutions and clients in general knowledge and awareness, readiness and engagement. The EMIR experience was notable for the slow responsiveness of buy-side clients to sell-side outreach due to their challenges around account opening with clearers, operational changes, collateral allocation, and co-ordinating responses with their affiliates. From the perspective of the sell-side, delay impacted their ability to trade with clients which in turn threatened their competitiveness and maintenance of market share.

Open issues

The industry is calling for regulators to further review the supplementary leverage ratio on banks which it believes constricts their balance sheets capacity to act as intermediaries in the US Treasury Market. It is asking for a review of the conditions around inter-affiliate exemptions, of the treatment of cross-margining between different clearing houses and clarification on mixed collateral tri-party repos.

Conclusion

The timeframes for compliance are very ambitious and have already been pushed back a year by the SEC. There is a lot of work to be completed for market participants to be ready. In addition to legal document review, negotiation and execution, there is also significant operational and systems change required, as well as the allocation of financial resources to support collateral requirements.

The significant number of market participants means that this will be a demanding industry project likely to dominate agendas in the next two years.

References

The Mandate is set out in Final Rule 17 CFR Parts 240 Standards for Covered Clearing Agencies for US Treasury Securities and Application of the Broker-Dealer Customer Protection Rule with Respect to US Treasury Securities (r 17ad-22(e)(18).

Keith Blizzard

Temple Square Chambers

October 2025