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Business/Finance See other Business/Finance Articles Title: Clearing Firms Gird for Treasury Default Some of the largest U.S. clearing firms are preparing for a potential U.S. Treasury default, the latest group to gird for the fallout if the government can't break its budget impasse. By Katy Burne, Jacob Bunge Some of the largest U.S. clearing firms are preparing for a potential U.S. Treasury default, the latest group to gird for the fallout if the government can’t break its budget impasse. Citigroup Inc. and State Street Corp. have been discussing ways in which they might impose limits on clients’ use of short-term U.S. Treasury bills due in the coming weeks as collateral, according to people familiar with the matter. Citigroup has started telling some clients it would rather not take Treasurys maturing Oct. 24 or Oct. 31 as collateral, according to people familiar with the matter. The people said there was no set policy in place, but that the bank was sounding out certain clients about whether they could instead substitute Treasurys that mature later. Units of State Street have been discussing which Treasury bills it may restrict as collateral for loans and trades, according to a person familiar with the matter. A spokesman for State Street said the firm is “monitoring negotiations in Washington and evaluating how we can protect our clients,” but had “not implemented any changes with respect to [its] collateral policy.” The clearing firms’ steps are similar to efforts by banks and money-market-fund managers to avoid being stuck with losses on short-term Treasury bills, which have been falling in value amid a stalemate over U.S. borrowing limits. The U.S. has said it will have $30 billion to meet its obligations on Oct. 17 and could face default at the end of the month. While major clearinghouses haven’t yet made it more expensive for clients to use such Treasury debt as collateral, a trading cost known as a “haircut,” the talks among Wall Street’s top risk professionals and their customers show the seriousness with which they are considering potential declines in the value of government securities in the event of a default. Clearinghouses accept Treasurys and other assets as collateral held against outstanding trades, a cushion that helps minimize the damage to member firms if one of them collapses. Applying a greater haircut to the value of U.S. Treasurys gives the clearinghouse a larger buffer against losses in the event that the bonds fall in price. When a clearinghouse imposes larger haircuts, the members often pass along their higher cost to clients. They can also post cash collateral or in some cases other eligible high-quality securities. Depository Trust & Clearing Corp., which clears and settles a range of transactions in securities from equities to mortgage bonds, “continues to monitor overall market activity, with a particular focus on the Treasury market,” a spokeswoman said. She said DTCC was “assessing if we will need to make any types of adjustments in our valuations of securities required for collateral in our clearing fund” but added this was a “precautionary exercise.” A spokesman for Options Clearing Corp., which processes trades on all U.S. stock-options exchanges and a handful of futures platforms, said OCC hasn’t made any changes to the way it values Treasurys. Officials for the Chicago-based facility were tracking debt-market conditions “in real time,” however, and had participated in several conference calls on the topic in recent days, he said. A spokeswoman for CME Group Inc. said the Chicago-based futures exchange operator was participating in default planning conference calls and “monitoring volatility and potential impacts and contingency planning for event risk.” CME applies a 0.5% haircut to the market value of U.S. Treasury bills. CME’s clearinghouse officials said they believe that if the U.S. government fails to make necessary payments on time, it would be a “technical, short-term issue” and pricing, volatility and liquidity of Treasurys wouldn’t change much, according to a spokeswoman. That would let CME’s clearinghouse continue to accept Treasurys as collateral for outstanding trades in futures and options, she said. A spokeswoman for IntercontinentalExchange Inc., which runs a clearinghouses for derivatives, said company executives “continuously monitor risks and evaluate mitigation for various scenarios” including by “by working with regulators and sharing contingency plans.” The spokeswoman added that ICE was “in daily communication” with its regulator, the Commodity Futures Trading Commission, and is working “closely with our clearing members.” A clearinghouse at London-based LCH.Clearnet Group Ltd. applies a 0.25% haircut to Treasury bills. A spokeswoman had no comment. The clearing firms’ preparations follow steps taken by large money-market fund managers in recent weeks—including Fidelity Investments Inc., BlackRock Inc., Charles Schwab Corp. and Bank of America Corp.—to sell short-term U.S. debt or avoid buying bills due at the end of the month or in early November. Asset manager BlackRock said it had been “taking prudent actions to protect” investors, such as convening “daily a group of senior investors, risk managers and executives to ensure our systems, products and processes are prepared” for a default, a spokeswoman said. Poster Comment: Use the stream host to get past the paywall. Post Comment Private Reply Ignore Thread
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