Wall St regulator backs new push to shore up $24bn Treasury market

Wall St regulator backs new push to shore up $24bn Treasury market

Wall Street’s top regulator has advanced new rules to push more Treasury bond trading by high-speed traders and hedge funds through clearinghouses, in one of its most assertive attempts to shore up the $24 billion market.

Clearinghouses sit between trading counterparties and require insurance, or margin payments, to prevent a default from spilling over into the market. Requiring their wider use is an attempt to add collateral to the cash and repo markets, which trade billions of dollars a day to price US government debt, but have been tested repeatedly over the last decade.

The Securities and Exchange Commission voted unanimously on Wednesday to release the proposal for 60 days of public comment.

Washington authorities have become concerned about the fragility of the US government bond market, including a “flash rally” in 2014, the repo market crisis in 2019, and the early pandemic collapse in March 2020, which necessitated the intervention of the Federal Reserve. In recent weeks, traders’ ability to complete transactions in the Treasury market has deteriorated to its lowest level since 2020 and traders fear that the Fed’s exit from crisis policies will put further pressure on the market.

Reports from the Bank for International Settlements, the Financial Stability Board and the Office of Financial Research in recent years have accused high-frequency traders of pulling out of the Treasury market during times of stress and pointed to hedge funds to create volatility when leveraged positions backfire. . Last year, the cash treasury market traded about $3 billion a week and the repo market, where traders borrowed money short-term in exchange for collateral such as treasury bills, about 4 billion dollars a day.

SEC Chairman Gary Gensler has made Treasury market reform one of the key themes of his tenure by proposing increased oversight of loosely regulated market participants such as hedge funds and proprietary traders.

Currently, only 13% of Treasury transactions are cleared centrally, according to research by the Treasury Market Practice Group. That’s a sharp drop from 25 years ago, when the investment banks and middlemen who dominated day-to-day market trading sent most of their trades through clearinghouses.

But investment banks have withdrawn from the market and their activity has been replaced by proprietary trading companies and hedge funds, whose transactions do not go through clearing.

The SEC’s proposed rules would require all trades made on automated, anonymous interdealer brokerage platforms to go through clearinghouses, which would capture a large portion of the trades made by high-speed traders. The rules also explicitly state that cash and repo transactions by hedge funds will need to be cleared centrally.

Bryan Corbett, president of the Managed Funds Association, a trade group for hedge funds, cast doubt on the proposal, saying an approach of “arbitrarily isolating hedge funds for mandatory central clearing” could increase costs for Investors.

The SEC also wants to change the rules governing banks’ holding and clearing of margin that is put in place to support trading, to encourage banks and high-speed traders to stay in the market. Netting reduces credit and settlement risk by subtracting offsetting payments from each other.

Gensler said in a statement that the new rules would “help make a vital part of our capital markets more efficient, competitive and resilient” and support the Treasury market “especially during periods of stress that may arise in the future. “.

It comes after the SEC proposed another rule earlier this year that would require market participants trading more than $25 billion a month in Treasuries to register as broker-dealers, a legal status that allows a institution to negotiate on its own account. This rule should cover more hedge funds and high frequency traders.

Wednesday’s proposal is the latest in a series of guidelines proposed by the SEC, which cover environmental, social and governance investment claims, special purpose acquisition companies and hedge fund disclosures.

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