As the ticking clock grows louder for the launch of mandatory Treasury clearing for cash transactions, the International Swaps and Derivatives Association (ISDA) is urging market participants to start preparing for the change that is set for the end of the year.

Speaking at the ISDA Treasury Forum, CEO Scott O’Malia said the implementation of mandatory US Treasury clearing is not one that firms can take lightly, although most firms are deeply committed to its success and are already well advanced in their preparations.

The US Treasury market is the most liquid financial market, with outstanding issuance of more than $30 trn, he said, adding that US Treasuries are also widely used as collateral, which is vital for the smooth functioning of the derivatives market.

The ISDA CEO said market participants should by now be up to speed with the different clearing models that will be available from the three approved central counterparties: Fixed Income Clearing Corporation (FICC), CME Securities Clearing and ICE Clear Credit.

“That means understanding the obligations for clearing members and clients, and the arrangements for collateral segregation, accounting and netting. ISDA has published a comparison of the different clearing models, which can be used as a reference point to support implementation.”

On the client documentation, O’Malia said templates for done-with transactions, in which clients execute and clear with the same entity, have been ready for some time. “However, documentation for done-away transactions, in which different entities are used for execution and clearing, has been more challenging but is now very close to completion.”

With those templates nearly complete, firms must get on with the significant task of amending and updating their documentation with all their counterparties, he added.

As for netting for client cleared repos, the standards body chief said ISDA now co-owns the client clearing documents with the Securities Industry and Financial Markets Association and is commissioning opinions in key jurisdictions outside the US to add the documentation to ISDA’s existing global opinions framework.

“These opinions will confirm the enforceability of netting for client cleared repos—a key requirement for banks as they scale their clearing operations globally. Commissioning the opinions within ISDA’s framework will ensure consistency and efficiency across markets.”

O’Malia noted important progress has also been made on cross-margining, which is an important component of cleared markets. “By allowing firms to offset their margin requirements in a portfolio of Treasury cash, repo and futures transactions, cross-margining unlocks crucial efficiencies and ensures margin accurately reflects risk.”

The SEC and the Commodity Futures Trading Commission (CFTC) in April approved an exemptive order and proposed rule change to permit extension of the Fixed Income Clearing Corporation and CME Group cross-margining arrangement to clients.

“This is an important step forward in extending the substantial benefits of cross-margining to the broader market.”

However, O’Malia said there also needs to be recognition of offsetting risks in the US capital framework.

“Under the standardised approach for counterparty credit risk, banks must be able to realise the benefits of netting across repos and derivatives. Without this, they will be hit with inappropriately high capital requirements that will constrain their ability to provide liquidity in US Treasury markets.”

The latest Basel III endgame proposal is a step in the right direction, permitting cross-product netting, he said.

“This is an improvement on the original endgame proposal, but the methodology set out in the latest version is too conservative and lacks risk sensitivity. ISDA has been working to develop a recommendation for a more appropriate methodology that properly aligns capital with risk.”