U.S. SEC Unveils Treasury Market Clearing Reforms To Address Resilience Fears

The U.S. Securities and Exchange Commission (SEC) on Wednesday unveiled draft rules to boost the use of central clearing in the $24 trillion Treasury market in a bid to boost its resilience.

The proposals, which would apply to cash Treasury and repurchase agreements traded by a range of firms including broker dealers and hedge funds, follow liquidity crunches in recent years which have raised regulatory concerns about the Treasury market's ability to function during times of stress.

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. Traders say they continue to see liquidity problems with some securities, Reuters reported last month.

Since 2020, the SEC and other U.S. regulators have been exploring reforms to boost the market's resilience. The SEC's proposal, if finalized, would mark some of the most significant changes to the Treasury market, the world's largest bond market used to benchmark assets globally, in decades.

The draft rules stop short, however, of imposing a general clearing mandate. Instead they aim to increase central clearing by imposing new rules on clearing houses that would require their members - typically big banks and trading firms - to push their clients' trades, such as those of hedge funds and other asset managers, through the clearing house.

Central clearers are part of the market plumbing, sitting in the middle of the market as the buyer to every seller and the seller to every buyer. Central clearers require counterparties put up margin to guarantee the trade's execution in the event either defaults.

SEC Chair Gary Gensler has advocated expanding centralized clearing of Treasuries on the basis that the process increases resilience by bringing additional capital into the market during times of stress.

"I think that these rules would reduce risk across a vital part of our capital markets, both in normal and stress times," Gensler said in a statement during an SEC open meeting to consider the rule on Wednesday.

Overall, just 13% of Treasury cash transactions are centrally cleared, according to estimates in a 2021 Treasury Department report.

While the changes would apply to any clearing house that clears Treasuries, they effectively target the Depository Trust and Clearing Corporation whose Fixed Income Clearing Corp. subsidiary is currently the chief clearer of Treasuries.

A spokesperson for the DTCC did not immediately provide comment.