Analysis- Draft SEC rules could boost resilience of  trillion Treasury market

Analysis- Draft SEC rules could boost resilience of $24 trillion Treasury market

Written by Karen Brittle

(Reuters) – Proposed rules by the U.S. Securities and Exchange Commission (SEC) to boost central clearing in Treasuries could help boost resilience in the $24 trillion market and could pave the way for more trading bypassing the traditionally dominant big banks. market.

The proposed reforms from the Securities and Exchange Commission, which were revealed on Wednesday, are part of an effort by several regulators, the Treasury Department and the Federal Reserve to increase liquidity and reduce volatility in the world’s largest bond market.

In recent years, the market has suffered from low liquidity, with trading halted in March 2020 when COVID-19 restrictions disrupted financial markets.

The Securities and Exchange Commission has proposed increasing the number of market participants required to liquidate Treasury securities centrally for hedging, major trading firms, and some other types of leveraged accounts. The regulator will also require central clearinghouses and their members to develop rules and methods that extend clearing access to all investors.

Clearinghouses mitigate systemic risk by sitting in the middle of trades and ensuring payments. They take a margin from each opposing party to help reduce risk.

Refining and implementing the final details of the rules will take months, if not years. However, they must improve the market’s “financial stability, transparency and arguable cost,” said Daryl Duffy, a professor of finance at Stanford University.

The treasury market is currently divided between binary trading, where the investor deals directly with a large bank, and β€œall-for-all” platforms where banks, major trading firms and some hedge funds trade with each other anonymously through a centralized order book – similar to stock and futures exchanges.

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With a central clearinghouse ensuring more trades, more of the treasury market could move into β€œall-inclusive” trading venues, which could provide better liquidity and lower trading costs. Big traders who trade binary with most fund managers are facing more balance sheet constraints at the same time that the market is expanding rapidly.

The Treasury market grew from $5 trillion in 2007 and is expected to reach $40 trillion by 2032, according to estimates by the Congressional Budget Office.

β€œCentral clearing is an important step that can enhance market stability and flexibility, improve efficiency, expand brokerage capacity and allow for further developments in terms of trading,” said Stephen Berger, global head of government and regulatory policy at Citadel Securities. One of the largest market makers in Treasuries.

Pacific Investment Management (Pimco) said in a note last week that it wants the entire treasury market to transition to mass trading, saying intermediate deals make the market “more fragile, less liquid and more vulnerable to shocks.”

complicated, expensive

However, the bond trading giant said it did not agree with the clearing mandate, arguing that Treasuries do not have “meaningful” counterparty risk and that clearing costs may discourage some participants from entering the market.

DTCC-owned Fixed Income Clearing Corporation (FICC) is the only clearinghouse currently clearing Treasuries, but it focuses on trades among its members. The SEC proposal would require the FICC and its members to enable clearing by other market participants, such as fund managers who are not usually direct members.

β€œIn order to have mandatory clearing as proposed, we first have to open clearing for everyone,” said Graham Harper, head of public policy and market structure at DRW. He said that success will largely depend on how FICC implements the changes and how its members interpret and implement those changes in relation to their clients.

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The DTCC said it would welcome “further discussions” with industry and regulators regarding the clearing proposals.

Meanwhile, for many investors, the benefits of clearing must be weighed against the costs, including clearing fees, additional margin, and the costs of building technology and legal infrastructure.

said Kevin Mac Bartland, head of market structure and technology research at Greenwich Consortium.

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