Analysis: US SEC drafts could bolster resilience of $24 trillion Treasury market – Reuters | Jewelry Dukan

The US Treasury Department building is seen September 29, 2008 in Washington. REUTERS/Jim Bourg/File Photo

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16 September (Reuters) – Rules proposed by the US Securities and Exchange Commission (SEC) to encourage centralized clearing of government bonds could help boost the resilience of the $24 trillion market and pave the way for more trading, bypassing the big banks that have traditionally dominated the market.

The SEC’s reform proposals, unveiled 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.

In recent years, the market has suffered from reduced liquidity, with trading stagnant in March 2020 as COVID-19 restrictions roiled financial markets.

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The SEC proposed expanding the number of market participants required for centralized clearing of Treasuries for hedge funds, principal trading firms and some other types of leveraged accounts. The regulator will also require central clearing houses and their members to develop rules and methods that extend clearing access to all investors. Continue reading

Clearing houses mitigate systemic risk by sitting in the thick of trade and guaranteeing payments. They take margin from each counterparty to reduce risk.

It will take months, if not years, to refine and implement the final details of the rules. However, they should “improve the financial stability of the market, its transparency and arguably its costs,” said Darrell Duffie, a Stanford finance professor.

The treasury market is currently divided between bilateral trading, where an investor deals directly with a major bank, and all-to-all platforms, where banks, major trading firms and some hedge funds trade anonymously with each other through a centralized order book. similar to stocks and futures exchanges.

With a central clearinghouse guaranteeing more trades, more of the treasury market could migrate to all-to-all trading venues, which could offer better liquidity and lower trading costs. Large dealers, trading bilaterally with most fund managers, face increasing balance sheet constraints concurrently with a rapidly growing market.

The treasury market has grown from $5 trillion in 2007 and is projected to reach $40 trillion by 2032, according to estimates by the Congressional Budget Office.

“Central clearing is an important step that can improve market stability and resilience, improve efficiency, expand intermediation capacity and enable further developments related to trade,” said Stephen Berger, global head of government and regulatory policy at Citadel Securities , one of the largest market makers in Treasuries.

The Pacific Investment Management Company (Pimco) said in a note last week that it wanted the entire treasury market to transition to all-to-all trading, saying intermediary deals would make the market “more fragile, less liquid and more vulnerable to do shocks. ”

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Still, the bond trading giant said it disagreed with a clearing mandate, arguing that Treasuries do not have “significant” counterparty risk and that clearing costs may discourage some participants from entering the market.

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

“In order to have mandatory clearing as proposed, we must first open clearing to everyone,” said Graham Harper, head of public policy and market structure at DRW. Success will depend largely on how FICC implements the changes and how its members interpret and implement those changes in relation to their clients, he said.

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

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

“The costs of operational, technology and compliance upgrades could be significant in the mid-term. The benefits could outweigh the costs over the long term, but getting to that point will be complex,” said Kevin McPartland, head of market structure and technology research at Coalition Greenwich.

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Additional reporting by Pete Schroeder: Editing by Alden Bentley, Michelle Price and Diane Craft

Our standards: The Thomson Reuters Trust Principles.

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