Washington (Reuters) – The United StatesThe Securities and Exchange Commission (SEC) will propose draught rules to make the $23 trillion Treasury market more stable. This is the world’s largest bond market and a benchmark for dollar assets around the world.
The SEC wants to make changes because of the following:
What is going on in the Treasury market?
In the past ten years, the Treasury market has gone through changes that have made regulators nervous. In 2014, it went through what is called a “flash crash.” In 2019, there were problems in the Treasury repurchase agreement market.
Then, when investors got worried about the COVID-19 pandemic at the beginning of March 2020, liquidity on the Treasury market dropped to levels seen during the 2008 financial crisis. This made the U.S. The Federal Reserve will start buying up Treasury bonds.
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Reuters reported last month that the market has seen more price swings since the Fed started “quantitative tightening” in June. This is when the Fed stopped buying new Treasuries and let the old ones run out. Experts on regulation have warned that the market is still vulnerable to more problems.
What the hell is wrong?
Even though the problems are complicated, regulators mostly agree on the biggest one: the rapid growth of the Treasury market in recent years has outpaced the ability of dealers, who have traditionally provided liquidity, to meet demand for liquidity when the market is in trouble.
Since 2010, the value of Treasury securities that are still in circulation has gone up by more than 100%. At the same time, though, capital reforms put in place after the crisis of 2008 have made it harder for dealers to buy and sell bonds. According to a 2020 research paper led by Nellie Liang, who is now the Treasury Department’s Under Secretary, the amount of Treasury securities held by dealers has decreased from 10% in 2008 to 3.1% in 2019.
SEC Chair Gary Gensler has also said that there have been more high-frequency trading firms on the market. These firms are subject to less oversight than dealers and do not report their Treasury trades.
What are the SEC’s plans for change?
There are three major work streams going on at the agency.
It plans to propose rules next week that will help make the Treasury Market more centrally cleared.
Central clearing is when trades are sent to a clearing house, which requires both parties to put up cash to make sure the trade goes through even if one of them doesn’t pay.
A 2021 Treasury report says that only 13% of cash transactions are estimated to be cleared centrally.
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Gensler has pushed for more centralised clearing of Treasuries on the grounds that it makes the market more stable by bringing in more capital during times of stress.
Gensler said in July that the SEC is also working on rules to make trading platforms for Treasuries more stable and to make sure that high frequency trading firms are registered as dealers and subject to capital requirements and other checks.