International Swaps and Derivatives Association warns mandatory US Treasury clearing could strain bank balance sheets without regulatory rule changes

The International Swaps and Derivatives Association published written testimony from its chief executive, Scott O’Malia, to the US House of Representatives Committee on Financial Services Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity on the implementation of mandatory US Treasury clearing. The testimony argues that given the systemic role of the US Treasury market, Securities and Exchange Commission, Commodity Futures Trading Commission and prudential regulator rules should be calibrated to support market liquidity and resilience. O’Malia said that absent changes, bank balance sheet capacity could come under strain, limiting banks’ ability to absorb significant new Treasury issuance and facilitate client clearing. He also warned that disruption in the US Treasury repurchase agreement market could impair the exchange of collateral for both cleared and non-cleared derivatives.