Unlock the Editor’s Digest without cost

Roula Khalaf, Editor of the FT, selects her favorite tales on this weekly publication.

US regulators on Wednesday voted to require extra Treasury bond trades to be cleared centrally, a landmark reform geared toward bolstering the resilience of one of many world’s most necessary monetary markets.

The Securities and Exchange Commission in Washington voted 4 to 1 in favour of a proposal that would require a further $1tn of each day trades to be dealt with by an unbiased clearing home. That might imply market members must stump up collateral to again these positions or cap the quantity they’ll borrow in so-called repo trades.

“[The new rules] will scale back danger throughout a significant a part of our capital markets in regular instances and stress instances,” stated Gary Gensler, chair of the SEC. “That advantages traders, issuers and the markets connecting them.”

Regulators wish to shore up the market — which units the worth of US authorities debt and is the reference level for property throughout the globe — following repeated bouts of instability over the previous decade, most notably the “sprint for money” that despatched Treasuries into freefall at first of the Covid-19 pandemic in March 2020. Then, the Fed was pressured to purchase massive quantities of Treasuries to regular the market.

The SEC framework will deliver the Treasury market extra into line with equities, futures and swaps, the place clearing is frequent. A clearing home stands between a purchaser and vendor and prevents failed trades from cascading by way of the market. Solely 13 per cent of Treasury trades are totally cleared, whereas 19 per cent have some a part of the commerce that’s cleared centrally, based on the Treasury Market Practices Group.

For the reason that monetary disaster, hedge funds and high-speed merchants have grow to be more and more dominant in Treasury buying and selling, and lots of settle their trades bilaterally, slightly than going by way of a central clearing home.

The brand new regulation might assist rein within the proliferation of extremely leveraged bets on the Treasury market positioned by hedge funds in recent times, which have come beneath growing scrutiny from regulators and central banks in 2023. Gensler has additionally undertaken a broad push to revamp guidelines for buying and selling, with an agenda that features extra oversight of frivolously regulated entities similar to hedge funds and proprietary merchants.

“That is probably the most vital day for the construction of the US Treasury market in a long time,” stated Nate Wuerffel, head of market construction at BNY Mellon. He added that the brand new guidelines would make the market extra resilient however “embed new prices within the system” within the type of margin necessities and costs paid to the central clearing home.

Nevertheless, the ultimate rule voted on by the SEC on Wednesday will cowl fewer Treasuries trades than proposed in a draft version printed in September final yr.

The ultimate rule applies to some money buying and selling, and extra broadly to the repo market, the place banks and traders borrow money for the brief time period, providing high-quality collateral similar to Treasuries in return. Hedge funds and leveraged merchants is not going to be required to clear offers centrally within the money market, as initially proposed, following pushback from the business.

Regardless of the exemption for some money buying and selling, the rule might seize a further $1tn of each day repo and reverse repo trades for clearing, based on estimates from DTCC, the principle US clearing home for Treasuries.

Some consultants in Treasury market regulation fear that the reforms might inadvertently enhance system-wide dangers by concentrating them in a single clearing establishment.

“This raises existentially critical issues about easy methods to publicly handle an establishment that’s prone to be the largest and most systemic agency to hit the market in historical past,” stated Yesha Yadav, a professor at Vanderbilt College regulation faculty in Tennessee. 

Many market members have anxious that the reforms might imply that broker-dealers could be required to seek out further margin to again their clients’ trades when the market is at its most stretched. To offset these issues, the SEC has tweaked its guidelines to ease some margin necessities.

The SEC goals for the principles to return into impact in December 2025 on the money aspect and June 2026 on the repo aspect.