The Securities and Exchange Commission has narrowed the reach of its coming U.S. Treasury clearing mandate for two categories of repurchase agreements. An order issued October 30 grants conditional relief for some transactions involving non-U.S. counterparties and expands the range of affiliated entities that can use an existing inter-affiliate exclusion. The change addresses cross-border and internal funding problems raised by market participants without withdrawing the broader push toward central clearing.

Two targeted exemptions

Under the 2023 Treasury clearing rules, covered clearing agencies must require direct participants to submit eligible secondary-market transactions for clearance and settlement. The new order removes specified repos from that definition. One exemption applies to a limited amount of qualifying non-U.S. activity involving foreign clients, foreign clearing participants, qualifying overseas affiliates or foreign branches. A second covers repos between a direct participant and a majority-owned affiliate included in consolidated financial statements, provided that affiliate is not an investment company under the Investment Company Act.

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Limits on overseas activity

The non-U.S. exemption is not unlimited. A firm may qualify if the rolling daily average of covered overseas activity over the previous three quarters is below either a percentage cap or $5 billion. The percentage cap begins at 25% when repo compliance starts on June 30, 2027, then falls to 20% in July 2028, 15% in July 2029 and 10% after June 30, 2030. The denominator includes the firm's cleared repo activity but excludes inter-affiliate repos.

Direct participants relying on the relief must attest to each relevant Treasury clearing agency that they monitor and comply with the limits. If a firm breaches the condition, it must notify the clearing agency immediately and either explain how it will return to compliance or stop relying on the exemption. Those controls are intended to prevent the exception from becoming a broad substitute for central clearing.

Why the SEC changed course

The Institute of International Bankers and the Securities Industry and Financial Markets Association had asked the SEC to address legal and operational friction at the rule's cross-border edges. Their concerns included uncertainty about whether netting arrangements are enforceable in some jurisdictions, local registration requirements, time-zone differences and transactions executed when no U.S. Treasury clearing agency is open. The SEC said the combined exemption should allow overseas liquidity and collateral management while preserving the risk-reduction benefits of clearing for most covered trades.

Who is affected

The order is most relevant to banks, broker-dealers and other direct clearing participants with foreign branches, overseas clients or corporate affiliates. It also affects Treasury clearing agencies, which must receive attestations and monitor compliance. The expanded affiliate relief may reduce the need to clear internal funding transactions for entities that share majority ownership and consolidated reporting but are not banks or dealers. Investment-company affiliates remain outside that expansion because the SEC said their market positions may present additional risk to the direct participant.

The wider mandate remains

The SEC has not delayed the compliance timetable in this order. Eligible cash-market Treasury transactions are due to enter mandatory clearing by December 31, 2026, while covered repo transactions follow on June 30, 2027. The practical effect of the new relief will depend on how many firms fit the thresholds, how clearing agencies apply the monitoring requirements and whether cross-border legal issues persist. For now, the order represents a bounded implementation adjustment rather than a reversal of Treasury-market reform.

Sources

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