DTCC’s FICC Seeks SEC Nod for Collateral-in-Lieu Service
FICC has filed with the Securities and Exchange Commission (SEC) to introduce a new service — the Sponsored General Collateral (GC) Collateral-in-Lieu. It aims to improve efficiency and address margin challenges ahead of the U.S. Treasury Clearing mandate. The Depository Trust & Clearing Corporation (DTCC) operates critical market infrastructure in the United States. Its Fixed Income Clearing Corporation (FICC) subsidiary handles clearing and settlement of U.S. government securities.
What is the Collateral-in-Lieu Service?
The Collateral-in-Lieu service is a proposed enhancement to FICC’s Sponsored Service. It lets Sponsors and clients use a CCP lien on haircuts posted in tri-party repo as collateral. This CCP lien works “in lieu” of both the Sponsor guaranty of client performance and margin posted to the CCP in most cases. The design targets the “double-margining” problem. It occurs because Sponsors usually post haircuts to money market funds to cover overcollateralization requirements while also posting margin to the CCP for the same trades.
Why It Matters for the Treasury Clearing Mandate?
The U.S. Treasury Clearing mandate requires more trades to pass through central clearing. Market participants have raised concerns about margin and capital efficiency under this new requirement. The Collateral-in-Lieu service helps address these concerns by reducing the need for duplicate margin. It provides a way for the industry to meet regulatory demands without adding unnecessary capital strain.
Features of the Proposed Service
The service replaces the need for a Sponsor guaranty and margin posting with a CCP lien on existing tri-party haircuts. It uses BNY’s tri-party infrastructure for collateral management and settlement of repo trades. Both “done-away” and “done-with” styles of trade execution will be supported. It makes the service flexible and compatible with different trading preferences.
Benefits for Sponsors and Clients
This move will offer these benefits:
Improved Capital Efficiency
Sponsors no longer need to post both haircut collateral to money market funds and margin to the CCP. The CCP lien replaces duplicate requirements and reduces capital usage.
Lower Margin Costs
The service reduces overall margin obligations by addressing the double-margining problem. It directly lowers the cost of participating in cleared repo trades.
Operational Continuity
It lets Sponsors and clients use existing legal agreements and processes from the Sponsored repo. It avoids major operational changes and reduces implementation burden.
Regulatory Compliance Readiness
The design supports the upcoming U.S. Treasury Clearing mandate. Sponsors and clients get a compliant clearing solution without unnecessary strain.
Flexibility in Trade Execution
The service supports both “done-away” and “done-with” trades. Sponsors and clients can choose the execution style that best suits their strategies.
About DTCC
The Depository Trust & Clearing Corporation (DTCC) is a U.S.-based financial services company. It provides clearing, settlement, and information services for various securities, including equities, bonds, and derivatives. DTCC emerged from the merger of the Depository Trust Company (DTC) and the National Securities Clearing Corporation (NSCC). Both were founded in the 1970s to address the paperwork crisis in the securities industry. DTCC’s primary goal is to enhance the efficiency and security of financial markets by automating and centralizing the post-trade process.
Summing Up
The Collateral-in-Lieu service will prepare the Treasury market for central clearing in a cost-efficient way. FICC positions the market for smoother compliance and stronger operational efficiency.
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