With about only four months left before the U.S. Securities and Exchange Commission’s requirement that secondary market transactions in cash and repurchase agreements for U.S. Treasuries start being processed through a clearinghouse takes effect, Wall Street operations, compliance, risk and technology managers are quickly addressing some of its complex provisions and unresolved guidelines.
Mandating central clearing in the Treasury market is widely considered to be one of the most dramatic U.S. regulatory changes since the SEC required the settlement cycle for U.S. securities transactions to shorten from two days to one day (T+1) on May 28, 2024. Legal, trading, middle and back-office operations, risk, and technology departments will all need to be on deck to make the needed adjustments for the so-called U.S. Treasury clearing rule.
Backed by the good faith and credit of the U.S. government, U.S. Treasuries are widely owned by domestic and foreign institutional and retail investors as well as central banks, public and private organizations. A report published in July 2026 by the Fixed Income Clearing Corp. (FICC), a subsidiary of U.S. market infrastructure Depository Trust & Clearing Corp. (DTCC), about market preparedness for the U.S. Treasury clearing rule for cash transactions indicated that 70 percent of surveyed members of the FICC’s Government Securities Division (GSD) processing those trades have the necessary FICC account setups in place while the remainder are in the process of doing so. That shows great progress, but there are some lingering industry concerns, according to the dozen legal, operations, IT and compliance managers who spoke with FinOps Report over the past month on condition of anonymity.
Inter-affiliate, cross-border, and triparty repurchase transactions as well as failed settlements are causing the most angst. “We are developing the documentation and workflow procedures needed to determine which transactions are in or out of scope, to record our decisions, and to run connectivity tests with clients and clearinghouses,” asserted one operations manager at an East Coast brokerage representing the consensus approach. “Yet with so much in flux we are worried about whether we will be ready in time.” The SEC has yet to make a final decisions on some aspects of the new U.S. Treasury clearing rule which would allow financial firms some leeway to bypass central clearing. As a result, they are relying on the status quo, but hoping for the best.
On February 25, 2025, the SEC extended the deadline for central clearing of secondary transactions in U.S. Treasuries — bills, notes, and bonds– by one year to address industry concerns over compliance challenges. As of December 31, 2026, cash trades in U.S. Treasuries must be centrally cleared and as of June 30, 2027 the same applies to repurchase transactions, otherwise known as repos. Cash trades reflect the purchase and sale of U.S. Treasuries with transactions settled on a delivery versus payment basis (delivery of securities for cash) while repos reflect the sale of U.S. Treasuries with the promise to repurchase them at a specified later date for a slightly higher price. In a triparty repo, a custodian bank serves as an intermediary administrator to handle the valuation and transfer of collateral as well as the exchange of securities to reduce operational errors. Since 2019, BNY (BNY) has served as the dominant triparty repo clearing agent for U.S. Treasuries.
The U.S. Treasury market now has over US$31 trillion worth of securities outstanding– notes, bills, and bonds– with daily trading volume exceeding USD$1.2 trillion. As the largest and most liquid segment of the global fixed income market it underpins global monetary policy, financial stability, and interest rate benchmarks. Therefore, it is understandable that the SEC would become concerned that the default or bankruptcy of one player could have a domino effect on others — namely active participants such as principal traders, interdealer brokers, and hedge fund managers. As reported by FinOps Report back in December 2023, the October 2014 flash rally, the September 2019 repo market disruption and the March 2020 market shock were enough to prompt the U.S. regulatory agency to believe that central clearing of U.S. Treasuries is essential to preserving the stability of the market.
Having U.S. trades centrally cleared means that a clearinghouse stands as the middleman between buyers and sellers to set uniform margin rules which ultimately affect the value and type of collateral which must be posted by financial firms to ensure that trades don’t have to be unwound if a default or bankruptcy occurs. As a rule of thumb, collateral requirements are higher for centrally cleared trades than for those processed strictly between counterparties, otherwise known as bilateral trades. According to FICC’s recent survey over USD1.2 trillion in daily cash transactions in U.S. Treasuries is already cleared through GSD leaving USD300 million to USD400 million outside its purview. As the incumbent clearinghouse, FICC has the dominant share of the market for processing transactions in U.S. Treasuries while the CME Group and ICE entered the field only recently. CME Securities Clearing (CMESC), a CME subsidiary, won the SEC’s approval to clear trades in U.S. Treasuries in December 2025 while ICE Clear Credit, an ICE subsidiary, did so in January 2026.
While the largest banks and broker-dealers are likely to become direct members of one or more clearinghouses, small to mid-sized players and fund managers will typically rely on indirect access either through sponsors or agent intermediaries at FICC (CMESC and ICE Clear Credit use different terminology). As financial firms prepare their new operational workflows and legal contracts, they must also determine whether it is feasible to win an exemption from central clearing for some transactions. The SEC will allow a financial firm to avoid central clearing for its inter-affiliate trades only if all of the affiliate’s outward-facing or external trades are centrally cleared. That’s a stipulation which many market players have criticized as being overly restrictive, but the SEC feels is necessary to ensure that too many trades don’t skirt the clearing requirement.
The legal and operational challenges of managing central clearing for cross-border transactions and triparty repos in U.S. Treasuries aren’t far from the minds of financial executives across the globe. The SEC has not even addressed what should happen to cash and repo Treasury deals which fail to settle on time either due to the fault of a counterparty or an unforeseen power outage. Cash trades in U.S. Treasuries settle on T+1, while most repo trades are settled on a T+0 basis. That means that the “start leg” or the initial exchange of securities for cash is completed on the same day a trade is executed while the “end leg” or repayment of cash plus interest takes place the next business day. Such “overnight repos” make up about 80 percent of the daily trading volume in the U.S. Treasury repo market. Neither the U.S. Treasury, nor FICC publish any figures on what percentage of all transactions in U.S. Treasuries fail to settle on time, but according to unofficial industry estimates it is less than one percent.
Inter-affiliate Trades
So far, inter-affiliate repos appear to top the list of transactions keeping Wall Street operations and compliance managers awake at night, based on their interviews with FinOps Report. The sheer volume of trades and complexity of following the SEC’s criteria to avail themselves of the narrow exemption for central clearing makes inter-affiliate repos ripe for error. “Inter-affiliate repos are the operational backbone of large financial institutions, acting as the internal plumbing that shifts cash and collateral across their global corporate networks,” explained Joanna Fields, chief executive officer of risk management and technology consultancy Aplomb Strategies in New York.
The SEC has narrowly defined affiliates as firms which have a common control and consolidated financial reports based on U.S. Generally Accepting Accounting Principles (GAAP) or International Financial Reporting Standards (IFRS). External or “outward-facing” trades are those an affiliate does with an unrelated third-party outside of the same corporate family. Initially, the SEC categorized only banks, broker-dealers and futures commission merchants (and their foreign equivalents) as affiliates. However, in June 2026, the U.S. regulatory agency allowed private funds to be added to the list under certain circumstances.
Presuming a financial firm were to agree to the SEC’s condition to nab a clearing exemption for its inter-affiliate trades, its technology and risk managers will have their work cut out for them. Front-office systems must be coded to decide whether an affiliate fits the SEC’s definition; separate cash from repo trades and categorize trades as inter-affiliate, external, or bilateral. Financial firms must set up a risk management program for their inter-affiliate trades which includes tracking the number of trades, the reasons for the transactions, as well as their market, liquidity, and credit risk. The number and details of external or “outward trades” also needs to be documented.
An SEC examiner will likely want to access a sample of some transactions and compare the results to the written objectives of the firm outlined in its compliance manual. That rulebook must also outline the rationale for any exemption to the clearing rule and the escalation process for any errors. “We are being diligent in keeping accurate detailed records in case of an audit,” one compliance manager told FinOps Report. “We can’t afford to make any mistakes by misclassifying trades as inter-affiliate, or by not centrally clearing all external trades.” Just one external trade falling through the cracks could prompt a financial firm to review all of its previous transactions and its clearing exemption for all of its inter-affiliate repo trades will likely be revoked. It will be close to impossible to reverse that decision, said some operations managers who are making certain external trades fall into the clearing bucket.
So far, the SEC has not granted any clearing exemptions for inter-affiliate cash transactions in U.S. Treasuries because it doesn’t want a large carve-out to its rule that could weaken its goal of risk reduction. However, Wall Street is hopeful the SEC will change its mind since the regulatory agency said the matter is under review. The Securities Industry and Financial Markets Association (SIFMA), the Washington D.C-based lobbying group for U.S. broker-dealers and other industry players, on April 10, 2026 asked the SEC to drop the external or outward-facing condition for repo trades between two non-U.S. affiliates or a non-U.S. affiliate and a non-U.S. counterparty based as long as a volume-based condition were met.
Called the SIFMA 10 percent non-US affiliate relief, the volume-based limit of less than 10 percent of a financial firm’s total U.S. Treasuries trading volume is aimed at global financial firms which use repos to manage their liquidity and collateral operations through multiple affiliates across multiple jurisdictions. While the SEC appears eager to review industry feedback on its parameters for a clearing exemption for inter-affiliate repo trades, it is unlikely to agree to SIFMA’s request. It is simply too operationally difficult to ensure the proposed threshold is not breached, bemoaned several compliance managers. They are more hopeful the SEC will simply expand the list of affilates which can try to bypass the U.S. Treasury clearing rule.
Cross-Border Trades
Affiliates which do business with non-US entities will certainly bring those firms into the SEC’s scope for central clearing of transactions in U.S. Treasuries because so far the SEC has to date not granted any exemptions for cross-border trades. If one of the counterparties to a transaction is a member of FICC or another clearinghouse the foreign counterparty will be forced to clear its trades through FICC or another clearinghouse. Foreign banks and fund managers active in the U.S. Treasury market will have to decide whether to become direct or indirect members of a clearinghouse.
Foreign financial firms which cannot become direct members will likely rely on sponsored membership rather than intermediate agents because the former is operationally easier to implement and could result in lower capital requirements under the Basel III Accord, a global regulatory framework to strengthen risk management at banks in the wake of the 2007 to 2009 financial crisis. According to the FICC’s latest survey, it has 2,850 sponsored members including fund managers. The clearinghouse does not break out the total number of its sponsored members by country or industry sector.
Regardless of whether a foreign financial firm selects sponsors or agents as intermediaries to access a U.S. clearinghouse it must meet the legal, credit, and operational requirements of the service provider. In addition, because not all foreign countries allow their financial institutions to adopt the sponsored approach, some foreign financial firms might have to use an agent or forgo trading with a U.S. counterparty altogether. The FICC’s survey said that 66 jurisdictions allow their financial firms to obtain sponsored membership in the clearinghouse. The DTCC publishes a list of countries which permit sponsored membership and it is presumed that any country not on that list prohibits the practice. Based on the latest list published on July 29, 2026, Canada, the U.K., all members of the European Union, Norway, Switzerland, Australia, China, Hong Kong, Singapore, Hong Kong, and Japan allow sponsored membership. However, all of the Latin American countries, with the exception of Mexico, do not. India and Malaysia are also excluded from the DTCC’s list.
Even more concerning for foreign banks, said some legal experts, is that the U.S. Treasury clearing rule appears to require that all trades in U.S. Treasuries conducted with members of FICC or another clearinghouse to be centrally cleared even if the trades were not executed in the U.S. Many foreign banks operate through multiple branches and legal entities across jurisdictions so having all trades in U.S. Treasuries pulled into the rule would affect client documentation, margin requirements, risk management calculations, and collateral operations.
The SEC has requested comment on a proposal from the Institute for International Bankers (IIB) to exempt non-U.S. based transactions in U.S. Treasuries from its clearing requirement. The New York-based trade group representing the U.S. operations of internationally-headquartered financial firms made its last petition to the U.S. regulatory agency on August 4, 2026 building on earlier requests in February, April, and May. However, since the SEC has not announced a decision so far some legal experts predict that a shift in trading strategy could occur. “Absent relief from the SEC, foreign financial firms might decide to trade with foreign counterparts or perhaps seek to avoid the U.S. Treasury market altogether,” cautioned Michele Navazio, a partner in the law firm of Haynes Boone in New York who co-heads its derivatives practice. (The SEC has extended the public comment period for SIFMA and the IIB’s recommendations to August 31).
Compliance managers at several foreign banks, who spoke to FinOps Report, said they are in contract negotiations with sponsors to gain access to FICC’s clearing services. They declined to discuss any changes to their trading strategy and would not elaborate on any operational tweaks they would have to make to accommodate the new U.S. Treasury clearing rule. However, all insisted the changes were monumental. “It’s a complicated regulation being addressed by our legal and operations departments,” is all one compliance manager at a German bank would say. “Since bilateral trading has been the norm, we will have to adjust our contracts and make adjustments to front, middle and back-office systems.”
Triparty Repos
Although the SEC has clarified when triparty repos will fall under the scope of the U.S. Treasury clearing rule, trading and collateral operations managers told FinOps Report that the regulatory agency’s explanation will be tough to follow. At issue is what happens to triparty repos if U.S. Treasuries are part of the collateral mix. “U.S. Treasuries could be used to cover any temporary shortfall in mortgage-backed securities under a triparty repo agreement if the seller cannot deliver enough mortgage-backed securities in time,” said Fields.
Bowing to industry concerns over its initial unclear policy, in September 2025 the SEC’s Division of Trading & Markets explained that the decision on how to address triparty repos with a mixed-basket of collateral depends on intent. If U.S. Treasuries were always intended to be used as collateral and that decision was made at the time a triparty repo trade was executed then the trade must be processed through a clearinghouse. However, if U.S. Treasuries were substituted as permissible collateral before the triparty repo transaction settled then the trade is exempt from clearing. The reason for the distinction: the SEC does not consider trades involving collateral substitution to be secondary market transactions requiring clearing.
Will firms be able to track their intent to use U.S. Treasuries all along instead of only as substitute collateral? Maybe not, if their front-office systems are not correctly coded to do so with sufficient detail at the time the repo trade is executed, Wall Street operations managers told FinOps Report. Front and middle office systems at fund management firms must also link the collateral allocation with the pre-agreed intent of the trade and the list of eligible collateral. If that does not occur, the trade may have to default to become centrally cleared instead of being exempt. Fund managers must also be wary of substituting U.S. Treasuries for mortgage-backed securities as collateral too often because the SEC could view the pattern as an attempt to bypass the U.S. Treasury clearing rule, said legal experts.
To ensure the right triparty repo transactions find their way into the clearing process, custodians and fund managers will need to do a bit of automated hand-holding with each other. They must reconcile their records of a trade from its inception to clearance to determine which trades were in or out of the central clearing scope and to flag any discrepancies. “Custodians must maintain the single golden record of a fund manager’s aggregate position for clearing and match each clearinghouse’s confirmed holdings against its master ledger,” recommended Fields of Aplomb Strategies. “Breaks will need to be flagged and escalated when reported positions or corporate actions do not match.”
The SEC has not prescribed what kind of “evidence” needs to be recorded to demonstrate “intent” other than to suggest that trade confirmations would show that counterparties intended to do a repo deal based on asset-backed securities, instead of on U.S. Treasuries. Tri-party repo agreements and collateral schedules between fund managers and custodian banks may also need to be tweaked to reflect the SEC’s 2025 guidance. Including U.S. Treasuries on the collateral eligibility schedule is not by itself proof of intent. Instead of only stating the types of eligible collateral, contracts might explicitly say that the primary collateral type to be used is non-U.S. Treasuries and that U.S. Treasuries are only permitted as a substitution. Such a change would ensure that only the right transactions would be cleared.
Compliance officers at several fund management firms who spoke with FinOps Report said they were in talks with their custodian bank over potential alterations in contractual language. Operations managers at those same firms also said they were coordinating their preparations for the U.S. Treasury clearing rule for tri-party repos with their custodian bank without elaborating further. (BNY declined to comment for this article, but in published commentaries has said it is prepared for the U.S. Treasury clearing rule).
Failed Settlements
The SEC’s delay in clarifying what happens to U.S. Treasury transactions which fail to settle on time has led to some speculation on what its decision might be. Cash deals typically fail to settle on time when a counterparty does not deliver securities or collateral by deadline. Repo deals fail to settle on time when securities or collateral is not delivered by deadline. One firm’s failed settlement could lead to a cascade of fails at multiple broker-dealers.
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“Trades with failed settlements cannot be resubmitted to a clearinghouse and will likely have to be unwound with the guilty party compensating its counterparty,” predicted Haynes Boone’s Navazio. Operations managers at several broker-dealers told FinOps Report that if the SEC does not issue any explanation by the time central clearing must take place, they will likely be forced to abide by a clearinghouse’s rulebook.
Each of the three clearinghouses for U.S. Treasury transactions will fine the party responsible for the settlement fail and credit the harmed counterparty’s account. However, only the FICC has published its formula and based on that formula, it would appear that an FICC’s member responsible for a failed settlement could now get a free ride. The DTCC subsidiary follows the recommendation of the Treasury Market Practices Group (TMPG), an industry-led committee, to charge a guilty member interest on an annual rate of three percent of the settlement value of a failed trade minus the Federal funds target rate in effect the day before the settlement fail. Because the Federal funds target rate is above the three percent threshold (it’s at 3.5 percent to 3.75 percent), there would be no charge.
The SEC will likely view a systems or other snafu at a firm, such as a power outage, which causes a settlement fail as the firm’s fault. Therefore, the firm might be required to compensate a counterparty. However, should a clearinghouse face a power outage, the SEC would require the clearinghouse to implement its disaster recovery plan and promptly report the event to the SEC. The settlement fail in this case would likely be considered excusable and not subject to a penalty. The trade could be reinput into the clearinghouse, remain bilateral between counterparties which set collateral requirements on their own, or even cancelled.
What Now?
Although U.S. repo transactions won’t fall under the U.S. Treasury clearing rule for about another year, firms are overlapping their preparations with cash trades because of the additional legal and operational work required. Foreign firms are likely to have started thinking about how they will access the U.S. market through one of the clearinghouses or change their trading counterparties to avoid central clearing. Failed settlements will either be explicitly addressed by the SEC or firms will have to rely on a clearinghouse’s decision or even contractual terms with counterparties. Failing to address the new U.S. Treasury clearing rule won’t be acceptable. No firm can afford to be fined by the SEC, a clearinghouse, or both. Financial cost aside, the reputational risk is simply too great.
Chris Kentouris
Kentourisc@gmail.com
917.510.3226
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