On April 8, ISDA CEO Scott O’Malia testified on the implementation of mandatory US Treasury clearing before the US House of Representatives Committee on Financial Services Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity.

“The US Treasury market is systemically important and underpins the smooth functioning of markets globally, including adjacent derivatives markets. It is therefore critical that we look carefully at rules from the SEC, CFTC and prudential regulators to ensure they support – rather than impair – US Treasury market liquidity and resiliency,” he said in his written testimony.

Several key issues need to be resolved, including the recalibration of the supplementary leverage ratio to ensure banks have the balance sheet capacity to provide intermediation and client clearing services in the US Treasury market, removing an unnecessary and disproportionate tax on clearing by making changes to the proposed Basel III endgame and surcharge for global systemically important banks, and ensuring the margining and capital treatment of client exposures reflects the actual risk of a client’s overall portfolio.

“Unless changes are made, bank balance sheet capacity will come under strain, threatening the ability of banks to absorb the massive supply of new Treasury issuance and facilitate client clearing. Disruption in the US Treasury repo market could also impair the exchange of collateral for cleared and non-cleared derivatives,” he added.

Details of the hearing are available here.

Click on the PDF to read the full testimony.