Skip to main content

Enabling Better Access to Central Clearing

By DTCC Connection | 4 minute read | October 11, 2023

DTCC’s Laura Klimpel Discusses Some of FICC’s Clearing Access Models Available to Clients

Industry experts, regulators and senior market participants recently gathered at the ISDA/SIFMA AMG Derivatives Trading Forum on September 21 in New York City to discuss “The Path to Resilient Treasury Markets,” and the impact a U.S. Treasury clearing mandate from the U.S. Securities and Exchange Commission (SEC) would have on market participants, market structure, resilience, liquidity, collateral, and other financial markets, including Treasury futures and derivatives.

With a September 2022 proposal under consideration for expanded central clearing of certain cash U.S. Treasury securities and repos, the SEC has also proposed that clearing agencies like DTCC’s Fixed Income Clearing Corporation (FICC) take steps to facilitate access to client clearing. During the panel session, “Enabling Client Access and Links with Other Markets,” Laura Klimpel, General Manager of FICC and Head of SIFMU Business Development, discussed some of the client clearing access models that are available and how they might evolve if clearing increases.

Klimpel highlighted DTCC’s recent white paper, “Looking to the Horizon: Assessing a Potential Expansion of U.S. Treasury Central Clearing," and explained the research and key findings.

Related: Looking to the Horizon: Assessing a Potential Expansion of U.S. Treasury Central Clearing

“One of the surprising – or maybe not surprising – key findings in the paper is that the market is not all that familiar with the different flavors of access models that FICC has available today,” Klimpel said. “Survey respondents indicated in their feedback significant gaps in market awareness and understanding of FICC’s access models, our risk tools and our capabilities. With this proposal for central clearing moving so fast, it is critical that we ensure that there is a complete understanding of all the options – both direct, full-service membership as well as indirect membership – and then what we might need to do to enhance them.”

FICC currently offers a variety of direct and indirect participation models for buy-side and sell-side market participants, including Netting Membership, Centrally Cleared Institutional Tri-Party (CCIT™) Service Membership and sponsored membership. The different models are intended to be flexible to allow market participants to access FICC in the way that best meets their business and regulatory needs. Klimpel also described the differences in membership standards and risk profiles between the indirect and limited clearing models available – Sponsored Service, Prime Broker and Correspondent Clearing – and why a firm might be inclined to choose one of these access models over another.

“In the paper, one of the data points was that a significant number of non-member respondents stated that they are ‘not familiar’ with the fact that Registered Investment Companies – also known as ‘40 Act Funds – can actually become direct members of FICC,” said Klimpel. “Further, according to the research, a majority of FICC members remain unsure which of FICC’s access models they want to use. This, I think, speaks to the level of uncertainty about the changes ahead for indirect participant activity if this proposal is implemented as written.”

With this proposal for central clearing moving so fast, it is critical that we ensure that there is a complete understanding of all the options – both direct, full-service membership as well as indirect membership

How margin offset will work under the proposal, and the requirement for physical segregation of margin, is one of the main policy issues related to expanded Treasury clearing still to be resolved, according to Klimpel.

“Today, the direct member is required to post margin to FICC, pursuant to its risk management calculations. And the underlying client is permitted – but not required – to contribute to the margin,” Klimpel said. “Under the expanded proposal, will customers now be required to contribute to the margin? The CFTC required it as part of their derivatives mandate. But in this case, the SEC expanded clearing proposal does not – which is an interesting choice. For the time being, the way that FICC is set up, we permit, but we do not require it. The proposal, however, as written, would require that FICC hold in segregated accounts any margin postings by indirect participants for which their broker/dealer clearing intermediary is seeking a debit in the SEC Rule 15c3-3 formula, and that such separately held margin also be excluded from FICC’s default loss waterfall.”

Related: CME Group and DTCC Receive Regulatory Approval for Enhanced Treasury Cross-Margining Arrangement Launching January 2024

“We just received SEC and CFTC approvals, and we are very excited for the cross-margin agreement going live in January 2024,” said Klimpel. “The new cross-margining arrangement will permit eligible clearing members to cross-margin an expanded suite of products. And this is a great start, but we, of course, want it to go even further. We are very grateful that Commissioner Pham asked FICC and CME to co-lead a workstream of the Global Markets Advisory Committee (GMAC) Subcommittee on Global Market Structure, to consider what an end-user cross-margin arrangement could look like across the CFTC and SEC.”

The new white paper, which was issued in September, was developed to provide data and information to the industry, stakeholders, and the broader community about the potential impacts of the proposal. Based on a voluntary, anonymous, in-depth survey of market participants, both buy- and sell-side, the survey responses collected were also combined with data that FICC has available on currently cleared Treasury activity.

Laura Klimpel
Laura Klimpel DTCC Managing Director, General Manager of Fixed Income Clearing & Head of SIFMU Business Development