US Treasury market braces for overhaul as vote on clearing looms

By Douglas Gillison, Laura Matthews and Carolina Mandl

NEW YORK/WASHINGTON (Reuters) – Wall Street’s top regulator on Wednesday was poised to overhaul rules for the $26 trillion U.S. Treasury market, moving to tamp down the buildup of systemic risk by requiring more trading to be cleared centrally while exempting some transactions by hedge funds.

The five-member U.S. Securities and Exchange Commission was scheduled to meet Wednesday morning in Washington to consider the proposal, first issued over a year ago as part of a broader effort to boost Treasury market resilience in the event of turbulence and liquidity crunches, when sellers and buyers find it hard to complete transactions.

If adopted, the reforms will mark the most significant changes to the world’s largest bond market, a global benchmark for assets, in decades.

“This is going to significantly change the Treasury market landscape,” said Angelo Manolatos, macro strategist at Wells Fargo Securities, citing “a lot of costs.”

The new regulations could also increase systemic risks by concentrating risk in the clearing house, he added.

The draft rule, which applies to cash Treasury and repurchase or “repo” agreements, was partly aimed at reining in debt-fueled bets by hedge funds and proprietary trading firms. These firms have accounted for a growing chunk of the market over the past decade but are lightly regulated, allowing few insights into their activities.

In a nod to worries expressed by industry groups, SEC officials told reporters ahead of Wednesday’s vote that they had softened some of the provisions originally proposed in 2022.

Notably, purchases and sales of Treasuries between broker-dealers who are members of clearing agencies and hedge funds or levered accounts will not require central clearing as officials said central clearing in the “repo” market would largely cover related risks.

A central clearer acts as the buyer to every seller, and seller to every buyer. Overall, just 13% of Treasury cash transactions are centrally cleared, according to estimates in a 2021 Treasury Department report, referring to the outright purchase and sale of those securities.

Under the new rule, central clearing agencies would also have to keep the collateral for their members separate from that held on behalf of their members’ customers.

Advocates for central clearing, including the SEC, say the rule makes markets safer, while critics say it adds costs and should allow time to be phased in.

“It is critical that policymakers do not blindly tinker with (the Treasury market’s) underpinnings,” wrote Jennifer Han, head of Global Regulatory Affairs at the Managed Funds Association in a Dec. 4 letter.

Another key issue is whether the SEC will require minimum “haircuts” on collateral pledged against trades, which would raise trading costs and potentially reduce market liquidity. A haircut is a percentage deduction from the collateral value.

“The implementation timeline is quite important,” said Gennadiy Goldberg, head of US rates strategy at TD Securities USA. “And what are the haircuts? Those are the two big questions that the market is going to be asking.”

Industry practice suggests that a large share of hedge funds trading in repo markets put up no haircut, indicating that they are fueling activity using enormous amounts of cheap debt.

According to the final version of the rule unveiled Wednesday, clearing agencies will have until March 2025 to comply with provisions on risk management, protection of customer assets and access to clearance and settlement services.

Their members will have until December 2025 to begin central clearing of cash market Treasury transactions and June of 2026 for repo transactions.


The rule is part of a series of reforms designed to boost Treasury market resilience following liquidity crunches. In March 2020, for example, liquidity all but evaporated as COVID-19 pandemic fears gripped investors.

The DTCC said in a comment letter that during times of market stress, market participants submit a greater volume of transactions for clearing to limit their credit risk.

Jason Williams, director of U.S. rates research at Citi, said there were benefits to having additional margin in the system but balancing that are higher costs.

“It’s going to be an interesting juggling act,” he added.

(Additional reporting by Gertrude Chavez-Dreyfuss in New York; Writing by Michelle Price and Megan Davies; Editing by Richard Chang & Shri Navaratnam)