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Analysis – SEC draft rule could boost resilience in $24 trillion Treasury market

By Karen Brettell

(Reuters) – U.S. Securities and Exchange Commission (SEC) proposed rules to promote central clearing of Treasuries could help boost the dollar’s ​​resilience 40 trillion market and could pave the way for more transactions bypassing the big banks that have traditionally dominated the market.

The proposed reforms by the U.S. Securities and Exchange Commission on Wednesday are part of efforts by multiple regulators, the Treasury Department and the Federal Reserve to increase liquidity and reduce volatility in the world’s largest bond market.

Market liquidity has declined in recent years, with trading in March

when COVID- 19 restrictions disrupted financial markets In trouble.

The SEC proposes to expand the number of market participants required to centrally clear Treasuries to hedge funds, major trading firms, and some other types of leveraged accounts. The regulator will also require the central clearinghouse and its members to develop rules and methods to expand clearing access to all investors.

Clearinghouses reduce systemic risk by intervening in transactions and guaranteeing payments. They take margin from each counterparty to help reduce risk.

The final details of refining and implementing the rules will take months or even years. However, they should improve “the financial stability, transparency and arguably cost of the market,” said Darrell Duffy, a professor of finance at Stanford University.

The treasury bond market is currently divided into bilateral trades, where investors trade directly with the big banks, as well as “all-around” platforms where banks, major trading firms and some hedge funds trade anonymously with each other through a centralized order book – Similar to stock and futures exchanges.

With the central clearing house guaranteeing more trades, more of the Treasury market can be migrated to “all-to-many” trading venues, which may provide better liquidity and lower transaction costs . Large dealers that do bilateral deals with most fund managers face more balance sheet constraints at a time when the market is expanding rapidly.

U.S. Treasury market growth from 2007 $5 trillion to 40 is expected to reach 40 trillions of dollars 2032, according to estimates by the Congressional Budget Office.

“Central clearing is an important step towards enhancing market stability and resilience, increasing efficiency, and expanding intermediation.” said Stephen Berger, global head of government and regulatory policy at Citadel Securities, one of the largest Treasury market makers

Pacific Investment Management Corp. (PIMCO) said in a report last week that it wants the entire U.S. Treasury market to move to all-to-all trades, saying intermediary trades make the market “more fragile, Less liquid and more vulnerable to shocks. “

complex and costly

Despite this, the bond trading giant said it disagreed with the clearing mandate, arguing that there was no “meaningful” counterparty for U.S. Treasuries risk, and

DTCC’s Fixed Income Clearing Corp (FICC) is currently the only clearing house that clears U.S. Treasuries, but it focuses on transactions between its members. The SEC’s proposal would require The FICC and its members allow clearing by other market participants, such as fund managers who are usually not direct members.

“In order for mandatory clearing as proposed, we must first open clearing to everyone,” DRW Public Graham Harper, head of policy and market structure, said success will largely depend on how the FICC implements these changes and how its members interpret and implement these changes in relation to clients.

DTCC stated that they welcome and

At the same time, for many investors, there is a need to weigh the benefits and costs of liquidation, including liquidation fees , additional profits, and the cost of building technical and legal infrastructure.

“Costs for mid-term operational, technical and compliance upgrades can be high. The benefits may outweigh the costs in the long run, but the road to that point will be complex,” said Kevin McPartland, head of market structure and technology research at Greenwich Alliance.



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