Modern Money SmartPod
Modern Money SmartPod
ICE's Paul Hamill Outlines What's Next for US Treasury Clearing
The SEC might have delayed the implementation of its US Treasury clearing mandate, but that doesn't mean market infrastructure experts will be taking much of a break in their preparations for the rule. Paul Hamill, the chief commercial officer at ICE Clear Credit, says the SEC's delay of at least one year will be leveraged to prepare the best possible clearing solutions for market participants. In this interview, Hamill explains:
- What the delay means for the industry
- How clearing will impact liquidity and other aspects of trading for firms of all sizes within the Treasury market
- How best practices learned from the clearing of swaps and other products are being applied to clearing for the massive US Treasury market
- What kinds of risks might remain even after clearing is implemented
(Note: This transcript was created using artificial intelligence. It has not been edited verbatim.)
Sean McMahon 0:00
Sean, Hello everyone, and welcome to the Modern Money SmartPod. I'm your host, Sean McMahon, and today we've got a great show on tap for you. We're going to be talking about a very important aspect of the plumbing of today's modern financial markets, clearing of US Treasuries.
But before I bring in today's guest, just a quick reminder that now that the calendar's turned to march, it's time for us to take this show on the road. Next week, we'll be bringing you episodes from the 50th annual International Futures Industry Conference in Boca Raton, Florida. We've already booked a great lineup of guests to appear on this show from the sidelines of the conference. So I hope you'll look forward to those updates about all the buzz that's going on in Boca.
Right now, I want to welcome in today's guest, Paul Hamill. Paul is the Chief Commercial Officer for ICE Clear Credit. Paul, how you doing today?
Paul Hamill 1:07
Doing great show. Thanks for having me. Pleasure to be here.
Sean McMahon 1:11
Yeah, it's exciting to bring you on the show. We're here to talk about the clearing of US Treasuries. And as anyone who covers these markets knows, the SEC recently decided to push back the deadline for that mandate. What was your initial reaction to that news?
Paul Hamill 1:24
I think many market participants expected a delay of some kind, and I think the range of possible timelines was being floated from very short to very long. This seems like a very practical, common sense delay. I think it pushes the timeline out by enough for the market to take a breath really prepare for a change of this scale and size. It did feel as if this year was very aggressive. I mean, clearly, you know, while we were preparing to be live in time with the mandate, in this case, giving us a 12 month delay that really isn't that much more time. So we do sense some relief across the market. We can certainly use that time wisely. As with any delay, it comes down to how it gets used. If you put your tools down and pick them up 12 months from now, it wasn't really worth anything. If we keep going exactly as we have been and trying to be live, then what it does is create a big opportunity for us and the market, and that opportunity is we intend to be live by the end of this year as if the mandate were effectively still in place. And by doing so, we will create a runway through 2026 for people to voluntarily clear now, people already voluntarily, really clear in this market. So that will not be a new concept. People have talked about the desire to see choice and competition. But equally, many people have talked about, you know, the original mandate being so aggressive that they really had to choose one outcome rather than have the opportunity to try different outcomes. So if we do our thing right, and we're ready by the end of the year, then we will create that kind of choice and competition that the market has said they wanted throughout 2026 participants will have the chance to voluntarily clear ice, continue doing what they're doing. There may be other competitors, but they can do so without the pressure of being in breach of some kind of mandate, test the operational pipes, look at the risk management outcomes, look at the costs, and have that sort of window of time to really figure out where they want to see the market go. And so with all of that said, I think the delay can be used to create really advantageous outcomes for the market.
Sean McMahon 3:37
Just how big of an undertaking is it and the plumbing of the markets? What are we talking about here? To prepare for this kind of rule?
Paul Hamill 3:46
It's very significant, mainly because the Treasury market is so large, so anything that you touch in relation to the Treasury market has, you know, certainly potential to have a very, very big impact if somehow something was not quite done the right way, or are not achieved in the right sort of operational or risk management sort of outcome. It's also very large, both in terms of the number of market participants that interact with the Treasury market every day, and that group of people is in itself, very diversified, very varied, from all sorts of small, high velocity proprietary trading shops, through money market funds, asset managers, hedge funds, global players, all of whom rely on the resiliency and operational efficiency of this market every single day. So there's a lot going on in the treasury market. There's a lot of different components and participants in the treasury market, and then there's a lot of technology in the treasury market. There's many different trading venues, there's many different middleware providers, so lots of different people interacting with lots of different parts of the market through lots of different means and mechanisms. Really means when you implement something which is an operational change to that. It's going to have a significant impact.
Sean McMahon 5:02
Okay, now I want to step back for a second and take a look at the overall landscape for US Treasuries. What kind of impact will clearing have on that global marketplace?
Paul Hamill 5:12
To some extent that does depend on how it gets implemented, and to some extent, that's part of the reason why ice are in the mix at all. I mean, this is a market that hasn't, you might say, hasn't really been upgraded from or modernized from a technology or risk management or counterparty risk management standpoint, for a very long time. So we look at that and think that creates quite a big opportunity to sort of undertake a re plumbing or a re engineering of a market this size creates a big opportunity and a big responsibility to get that right. Ice operates six clearing houses globally across futures, options, ag products, energy products, but as well as credit default swap products. And it's really that those lessons we learned from the implementation of swaps clearing post Dodd Frank that give us a strong belief that we can bring to bear a modernized risk management platform that was designed in relatively recent history by many of the same impact of market players or treasuries to deliver the sort of best Class outcome for clearing of swaps, and there's a lot of things that that can unleash in terms of novation and greater potential for liquidity access in these markets. So we're very focused on taking the best of from both swaps and the other clearing solutions that we've implemented and finding ways to deliver that to the Treasury market that can maximize the potential of this change, because it is a big change, it comes with a cost and an operational shift. So really, our focus is, how do we maximize the potential of that for end investors and our customers.
Sean McMahon 6:54
Okay. And now, without getting any of the secret sauce that ice is using, are there any examples of best practices you can share from some of those other marketplaces, be it swaps or AG, that you've been able to pull into the Treasury clearing initiative.
Paul Hamill 7:08
I think one that I feel is particularly important and relatively, I think straightforward to understand as well, is right at the point of execution. So there's nothing in the rules for Treasury clearing that specify when a trade has to clear, or really how fast the trade has to clear. And so you could interpret that as a clearing house, as giving you a long window of time to do what we call the Novation part, where a trade novates from where it was executed and with whom it was executed to become a clear trade. But the longer that process takes, and the more steps there are in that process, the more residual risk there continues to be in that process. And therefore, or you could see differently, the less elimination of those residual risks you get by introducing a central Corona party. So what we're trying to focus on, and is something that we delivered in swap space, which was the immediacy of clearing, immediate novation now that requires a lot of technological partnership with trading venues, a lot of heavy lifting on the technology on the clearing side, in terms of how fast we can process trades. From a risk management standpoint, how fast we can process risk checks and message back to the market. This is a clear trade that may seem like a relatively small point, but by investing so heavily in that immediacy of Novation and that immediacy of Novation to clearing, we can deliver back a solution to the market where we eliminate many of those costly and sometimes risky operational steps in between the point of execution and clearing. That's one feature. There are many, but that's one feature that, like I said, is not in the rules specified, but we're going to do that anyway, because we think that's the best outcome for the market.
Sean McMahon 8:52
Okay, then Now getting back to the overall approach that you and the team at ICE took to structuring your clearing of US Treasuries. What were some of the biggest challenges upfront that you knew you had to tackle.
Paul Hamill 9:03
One of the biggest challenges starts with just how big the market is, right? When you're implementing something like clearing and you have a regulatory mandate like this, it starts with education, and this is this involves 1000s of participants globally trading the product. So for many of them, they don't clear treasuries today. So you're talking about a new rule, in some cases, a new concept of clearing. Some of them may be familiar with clearing and other products, but not everyone is, so there's quite a lot of education and just sheer sort of volume of the market means, how do we go out there and simplify and clarify the message of what we're trying to do and why we're trying to do it. One of the challenges with this rule is, if you compare it to say something like Dodd Frank, you know, for better or for worse, Dodd Frank came off the back of the global financial crisis. It was quite obvious to a lot of people why we were doing. What we were doing to make the swaps market more resilient in what we were trying to avoid by doing that here, you could argue these rules are more preemptive in nature and deal with more of an aggregation of smaller, potentially problematic areas of risk across the market, across participants within the market, so there's not as much of a big picture, clear reason to point to as to why we're all doing this, and what we all get out of doing this. So to try to go out there and educate on here's what you can get out of clearing even if you don't necessarily understand why we're doing it. Here's some of the benefits that can deliver. Here's some of the things we've seen in other markets, and therefore, here's why we are going to compete. There is an incumbent solution in Treasury clearing, which is, you know, to date, being a sort of voluntary clearing solution for the market. But it's not designed around these specific rules, and it's not really designed with the modernized architecture in mind that could take the market forward or make it have a big step forward in the way that we saw in the swaps market. In that, of course, is where we have to compete just on the merits of those ideas. Right? Are people going to gravitate towards a more modernized version of the Market? Some of the benefits that we saw with swaps, for example, if you introduce concepts like immediate novation to clearing, you eliminate bilateral counterparty credit risk. If you eliminate bilateral counterparty credit risk, you enable the opportunity for more people to trade with more people. Because in the past, I used to have a document with you and be onboarded with you in KYC, etc. In tomorrow's world, I can trade against your price, you can trade against my price, and we immediately give that up to the clearing house. That unlocks a lot of potential in the market in terms of introducing new sources of liquidity. I believe, personally, that's very powerful. I think we believe that's very powerful. We've seen that be very powerful in other markets. But of course, going out there and trying to paint that picture of that future in return for the effort to get there is a big part of the story, a big part of the journey, certainly early on.
Sean McMahon 12:15
Alright, so as someone who's deeply involved in this initiative, I want to ask you to take a industry wide perspective, be it one year or longer, when the SEC decides to implement this rule, are there any concerns you have for the broader structure of market for clearing US Treasuries?
Paul Hamill 12:32
I think so much of that will come down to how seriously we take both the opportunity and the responsibility of the delay from an ice perspective, we don't have a moment to lose the delay as it's as it set out currently, is time we can use in a very valuable way, every minute, every hour of every day of that time can be used. I think if people take that approach, which you know, some will, some will, to different degrees, of course, but if the market generally takes that approach, then that delay will be used to its maximum potential. And we really want to this is the biggest risks here are about execution and implementation. Like conceptually clearing is not the most complicated thing for people to understand. It's just a big operational lift. It's a big change for all the IDB platforms, all the RFQ platforms, all the middleware platforms, all the voice capture platforms, across cash, across repo, across like more educated sophistic players, less educated sophistic players, some with experience in clearing, and some that don't. So the problem set isn't really one of how complicated clearing is it's just a big execution problem, and how effectively we can do that. So there are clearly other risks associated with the implementation of clearing. It is a change in terms of how people can access each other as participants in the market, from a liquidity standpoint. And again, we're very focused on being thoughtful about creating clearing solutions that deal with what we call done with trades and done away trades overview is and our strong view, based on what our clients are saying to us, is the market will need both. But it's really important that we focus on making sure we excel in delivering either or. This is about choice and competition. It's not about favoring one solution over the other. There are risks in favoring one of those two solutions over the other, and clearly, we just want the market to have the ability to gravitate towards the best balance. I've done with and done away trades that are most appropriate for those providing liquidity and those taking liquidity and again, all that comes down to having a little bit more time to create that runway for people to test both models, see the impact of both models, see what it costs to operate both models. So I think that's a very sensible approach that I think we're taking. I expect many people in the market will also take that. And I think that's how you. Start to de risk some of those concerns. But you know, any major change like this in the big market clearly introduces a lot of operational risk and execution risk.
Sean McMahon 15:10
Okay, well, I'll echo that. This does sound like a massive undertaking for folks like you and the rest of the industry, so I appreciate you sharing your expert insights with us today.
Paul Hamill 15:18
Thanks for the opportunity.
Sean McMahon 15:22
Well, that's our show for today, but before I get out of here, one last reminder, be sure to watch for more episodes of this podcast next week, as we bring you all the news and headlines from the 50th annual International Futures Industry Conference in Boca