CFTC Clarifies Use of U.S. Treasury ETFs as Eligible Margin Collateral for Uncleared Swaps

The Commodity Futures Trading Commission’s Market Participants Division issued an interpretive letter confirming that shares of certain U.S. Treasury exchange-traded funds (UST ETFs) may be accepted as eligible margin collateral for uncleared swaps. This move answers longstanding calls from market participants to broaden the range of collateral permitted under CFTC Regulation 23.156 and reflects input from the CFTC’s Global Markets Advisory Committee (GMAC).

The interpretation addresses a specific provision of the CFTC Margin Rule, which permits “redeemable securities in a pooled investment fund” to be posted as initial margin (IM) or variation margin (VM) for uncleared swap transactions. The Division concluded that shares of qualifying UST ETFs fall under this category, provided they meet the regulatory conditions defined in 23.156(a)(1)(ix).

The change applies to swap dealers and major swap participants operating without a prudential regulator. These entities, collectively known as covered swap entities (CSEs), are permitted to post and collect UST ETF shares as IM with any counterparty, and as VM with financial end users.

Eligible UST ETFs Must Satisfy Specific Conditions

The interpretation follows a formal recommendation made by the GMAC’s Global Market Structure Subcommittee in March 2024. The Subcommittee argued that UST ETFs offered high levels of liquidity, diversification, and operational efficiency and should therefore be treated on par with traditional pooled investment funds. It noted that these ETFs mitigate single-asset risk, support transparent pricing, and provide liquidity even during periods of market stress.

During the bond market volatility of 2020, for example, UST ETFs such as the iShares 20+ Year Treasury Bond ETF (TLT) demonstrated tighter bid-ask spreads than individual Treasury securities. The Subcommittee also highlighted that ETFs manage reinvestment and rebalancing internally, simplifying the collateral posting process for firms with large or complex exposures.

In its letter, the Division outlined three key requirements that UST ETFs must satisfy to qualify as eligible collateral. First, the ETF must issue and redeem shares based on daily net asset value (NAV), ensuring that securities remain closely tied to underlying market prices. Second, the ETF’s holdings must consist solely of U.S. Treasury securities and immediately available U.S. dollar cash funds. Third, the fund must not lend or transfer assets through repurchase agreements or similar arrangements.

The Division confirmed that these conditions align with the intent of the CFTC Margin Rule, which aims to ensure that margin collateral remains liquid and retains value during financial stress. The ETFs must also meet operational criteria consistent with SEC Rule 6c-11, which governs ETFs structured as open-end investment companies.

Implications for Market Liquidity and Operations

Allowing UST ETFs to be used as margin collateral is expected to enhance operational efficiency and lower costs for market participants. The structure of ETFs, which allows trading in both primary and secondary markets, offers additional flexibility in meeting margin calls. Unlike direct holdings of Treasury securities, ETFs reduce the administrative complexity associated with managing multiple bond maturities and CUSIP numbers.

The ability to post ETF shares as collateral also broadens the range of liquid assets available to end users, especially those now subject to IM requirements following the final phases of implementation. The Division suggested that this step may help reduce systemic risk by lowering the cost and complexity of complying with the CFTC Margin Rule.

Haircut Methodology Remains Consistent

Under the interpretation, CSEs must continue to apply haircuts to the posted UST ETF shares in accordance with Regulation 23.156(a)(3). Two methods are permitted: either calculating a weighted average discount on all assets held by the fund at the end of the prior month or applying the haircut applicable to the fund’s asset with the longest residual maturity. For instance, an ETF holding Treasury bonds with maturities over five years would be subject to a 4 percent haircut.

These haircut requirements are designed to account for the risk that the market value of non-cash collateral may decline between a counterparty default and the liquidation of positions.

ETF Structure Aligns With Regulatory Objectives

In its decision, the Division referenced prior determinations made by the Securities and Exchange Commission. The SEC, through Rule 6c-11 adopted in 2019, allows ETFs meeting certain conditions to operate as open-end investment companies without needing special exemptions. The SEC treats shares of such ETFs as “redeemable securities” based on their ability to maintain pricing close to NAV through arbitrage and secondary market liquidity.

This alignment between SEC and CFTC interpretations addresses past market confusion over whether ETF shares met the definition of redeemable securities. The CFTC had not previously defined that term within its own Margin Rule, creating hesitancy among dealers to accept ETF shares as eligible collateral.

Industry Support and Outlook

The GMAC’s Subcommittee had urged the Commission not only to clarify the eligibility of UST ETFs for uncleared swaps but also to encourage prudential regulators to adopt a similar view. Uniform treatment across regulatory frameworks would reduce inconsistencies and simplify compliance for entities subject to both CFTC and prudential oversight.

Allowing ETF shares to serve as margin collateral could better align margin practices for uncleared swaps with those already adopted in cleared derivatives markets, where certain UST ETFs are accepted by central counterparties. The move is expected to support market stability by improving collateral flexibility without weakening the standards around eligible assets.

The staff interpretation represents the views of the CFTC’s Market Participants Division and does not necessarily reflect the views of the Commission as a whole. It offers a practical path forward for market participants navigating collateral requirements while seeking operational efficiency and cost savings.

For questions regarding the interpretation, the Division recommends contacting Associate Director Liliya Bozhanova or Attorney Advisor Christine McKeveny at the CFTC.

The CFTC Margin Rule, adopted in 2016, implements Section 4s(e) of the Commodity Exchange Act. It requires that covered swap entities exchange IM and VM for uncleared swaps and restricts the types of collateral that can be posted or collected. Regulation 23.156 outlines those eligible assets, which include government securities, cash, gold, and certain securities issued by pooled investment funds. The regulation also specifies operational and liquidity standards to ensure that collateral is reliable and resilient under stressed conditions.

Shares of U.S. Treasury ETFs now fall within this framework, subject to the defined limitations. The interpretative guidance issued by the CFTC is expected to improve market confidence and streamline margin operations, particularly as more participants become subject to uncleared margin rules.