Wall St regulator makes fresh push to shore up $24tn Treasury market

Wall Street’s top regulator has upgraded new rules to push more Treasury bond deals through clearinghouses by high-speed traders and hedge funds in one of its most vocal efforts to shore up the $24tn market.

Clearing houses stand between trading counterparties and require insurance, or margin payments, to prevent a default through the market. The need for their widespread use is an attempt to add safeguards to the cash and repo markets, which trade billions of dollars per day. US government debt But the test has been repeated over the past decade.

The Securities and Exchange Commission on Wednesday unanimously voted to issue a resolution for 60 days of public comment.

Officials in Washington have become concerned about the fragility of the US government bond market, particularly a “flash rally” in 2014, the repo market crisis in 2019 and the initial pandemic recession in March 2020, which required intervention by the Federal Reserve. In recent weeks, traders’ ability to trade in the Treasury market has deteriorated to its lowest level since 2020 and traders worry that crisis-era policies will drive the Fed out. further stress on the market.

report from Bank for International SettlementsThe financial stability board And this Financial Research Office Recent years have blamed high-frequency traders for withdrawing from the Treasury market during moments of tension and pointed to hedge funds creating volatility when leveraged positions backfire. Last year, the Treasury cash market traded around $3tn per week and the repo market, where traders borrow cash short-term in exchange for collateral such as treasuries, averaged around $4tn a day.

SEC Chairman Gary Gensler has reformed the Treasury market, one of the key themes of his tenure, by proposing increased surveillance of lightly regulated market participants such as hedge funds and proprietary traders.

Currently, only 13 percent of Treasury transactions are approved centrally, according to Research From the Treasury Market Practice Group. This is a sharp drop from 25 years ago, when investment banks and intermediaries that dominated daily trading in the market sent most of their deals through clearing houses.

But investment banks have withdrawn from the market and their activity has been replaced by proprietary trading firms and hedge funds, whose deals do not go through clearing.

The SEC’s proposed regulations would require all trades made through clearinghouses on automated and anonymous interdealer broker platforms would capture the majority of trades done by high-speed traders. The rules also clearly state that cash and repo trading carried out by hedge funds would require approval from the Centre.

Brian Corbett, president of the Managed Funds Association, a trade group for hedge funds, cast doubt on the proposal, saying that an approach to “arbitrarily isolate hedge funds for mandatory central clearing” could raise costs for investors. .

The SEC also wants to change the rules for banks to keep and purge margins imposed to stop trading, to encourage banks and high-speed traders to stay in the market. Netting cuts credit and settlement risk by subtracting offset payments against each other.

Gensler said in a statement that the new rules will “help make a significant portion of our capital markets more efficient, competitive and resilient” and support the Treasury market “particularly during times of future stress”.

It comes after the SEC proposed earlier this year one more rule That would compel market participants to register as dealers for trading more than $25bn per month in Treasuries, a legal position that allows an entity to trade on its behalf. That rule is expected to cover more hedge funds and high-frequency traders.

Wednesday’s proposal is the latest in a flurry of guidelines proposed by the SEC, which include disclosures of environmental, social and governance investment claims, special purpose takeover companies and hedge funds.

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