Economist Craig Pirrong has written a commentary analyzing the new CFTC Rule 39.33, which mandates that Treasury collateral be subject to a “prearranged and highly reliable funding arrangement.” The rule, which requires systematically important clearing organizations (“SIDCOs”) to maintain sufficient liquidity resources, does not treat U.S. Treasury securities as a qualifying liquid resource. Instead, such organizations can count government securities towards their liquid resources only if they are backed by highly reliable funding arrangements such as committed lines of credit from banks. Thus, under the CFTC rule, Treasuries will no longer be treated as equivalent to cash. Pirrong argues that this requirement makes little economic sense, since Treasuries are a better source of liquidity than bank credit lines during times of financial stress. He also states that mandating that SIDCOs obtain lines of credit from banks will impose substantial costs on such CCPs in the form of capital charges, increase the interconnectedness among financial institutions that serve as a source of contagion from derivatives defaults, and undermine incentives of SIDCOs to demand the posting of high quality collateral.” Pirrong concludes by stating that, given the cost of the mandated credit lines, the rule will constitute “a dead weight burden on the markets.”
See: “All Pain, No Gain: The CFTC’s Rule on CCP Qualifying Liquid Resources,” Streetwise Professor.
Related news: CFTC Issues Final Rules for Derivatives Clearing Organizations to Align with International Standards (Pre-Fed. Reg.) (November 18, 2013).