Treasury market braces for seismic SEC rule

- Advertisement -

Treasury market participants expect US regulators to soon finalize a major rule aimed at reining in debt-fueled bets by hedge funds and bolstering financial stability. They worry it could also reshape the industry and create new problems.

The US Securities and Exchange Commission rule, which was first proposed in September last year, would force much more of the trading in the $25 trillion Treasuries market, including a market for short-term financing called repurchase agreements (repo), to central clearing. A central clearer acts as the buyer to every seller, and seller to every buyer.

Market participants widely expect the SEC to finalize the rule within weeks, perhaps as soon as mid-November, according to trade group SIFMA and half a dozen banking and hedge fund industry sources.

- Advertisement -

But crucial details are unclear, including whether the SEC would want the industry to shift to central clearing in one go or allow it to do so in phases, and how much time the industry would have to implement it, the sources said.

The rule would come as other regulations in recent years have seen banks pull back as intermediaries from the Treasury market, causing some of the issues that regulators are trying to fix. The industry fears central clearing, if not done right, could undermine that goal: it will increase costs, which would risk more traders withdrawing.

How it will shape the industry is not fully understood. In recent months, for example, JPMorgan Chase has reduced its position in the section of the repo market where the SEC wants banks to do more business, financial statements show. But custody banks such as Bank of New York Mellon and State Street are doing a lot more business, the disclosures show. The divergent approach has not been previously reported.

The rules would affect other market participants as well. How they are shaped could determine whether the few remaining independent brokers in the market survive.

Some of the hedge funds that borrow most heavily to take advantage of small differences in Treasury prices could find the trade is no longer profitable and stop.

“It’s very much a big bang approach,” said Rob Toomey, SIFMA’s head of capital markets, referring to the SEC’s rule. “There are costs embedded in this. Who bears those costs remains a big question.”

SIFMA, which has lobbied the SEC, expects the final rule next month, ahead of a Treasury market conference on Nov. 16.

Author

- Advertisement -
Previous article
Next article

Share post: