Treasury Bond Rule will be Costly for Clearinghouses

According to Businessweek, the Commodity Futures Trading Commission will be voting today on a new rule that will result in Treasury collateral being subject to a “prearranged and highly reliable funding arrangement.” Should the rule be passed, clearinghouses will be forced to back Treasury bonds with credit lines.

The rule, according to experts, could cause liquidity facility costs to double. The steep rise in operating price may lead to clearing members either passing those costs on to end customers or leaving the business outright.

It seems that, while Treasury bonds are considered to be an extremely safe investment, liquidating them could take up to a day, which many think would be too long should an event similar to the financial crisis of 2008 arise.

CFTC chairman Gary Gensler acknowledged that there will be some costs that clearinghouses will have to deal with, but he does not feel as though the market will be significantly affected.

Many clearing houses are upset with this, saying that having to back Treasury bonds with credit lines would be simply too expensive. CME Group, operator of the largest futures market in the world recently increases its credit line by 3 billion, up to $10 billion dollars. Yet even with that, CME would still be short of the $14 billion it would need to cover the exposure from its largest clearing member.