The U.S. Securities and Exchange Commission (SEC) is next week expected to vote to adopt a major rule forcing more trading of U.S. Treasuries through clearing houses, in a long-anticipated move aimed at boosting the resilience of the market.
According to a notice, the agency will vote Wednesday on the rule. It's part of a broader push by regulators to fix structural problems that have increased volatility and created liquidity crunches in the $25 trillion Treasuries market.
Most notably, Treasury market liquidity all but evaporated in March 2020 as COVID-19 pandemic fears gripped investors, prompting the Federal Reserve to prop up the market, although other crunches in recent years have also fueled regulators' concerns.
Other regulations in recent years, particularly capital hikes, have seen banks pull back as intermediaries from the Treasury market, causing some of the issues that regulators are trying to fix.
Reuters reported in late October that the SEC was expected to soon finalize the clearing rule, which was first proposed in September 2022. A central clearer acts as the buyer to every seller, and seller to every buyer, guaranteeing the transaction in case one party defaults. Advocates for central clearing say it makes markets safer.
The proposal applied to cash Treasury and repurchase agreements traded by broker dealers and hedge funds. It's partly aimed at reining in debt-fueled bets by hedge funds, Reuters also reported. But market participants say they are in the dark about how the rule will address some key issues.
"This will be an important moment for the structure of the Treasury market going forward. There are some key uncertainties about the final rule," said Nathaniel Wuerffel, head of market structure at BNY Mellon and former head of domestic markets for the New York Federal Reserve.
Those include how trades between affiliated entities will be treated, cash market transactions by hedge funds and leveraged accounts, and the implementation timeline, he said.
