SEC Revamps USD26tn Treasury Market

The Securities and Exchange Commission (SEC) in the US has started initiating a major restructuring of the USD26tn Treasury market, the world’s largest and most liquid. The reform, the most significant in decades, is seen as key to strengthening market resilience in times of stress. The overhaul follows the five-member U.S. Securities and Exchange Commission voting 4-1 in December to finalise the new rules, which had been proposed over a year ago.  

The restructuring, led by SEC Chair Gary Gensler, means that in time the vast majority of Treasuries trading will shift to the central counterparty clearinghouse (CCC). The clearinghouse will assume responsibility for the transaction, so guaranteeing settlement for the buyer and seller and is set to be phased in by mid-2026. This will also include all repurchase or "repo" agreements.  

The changes come in response to liquidity challenges seen in the market over the last few years. These issues have heightened regulatory worries regarding the Treasury market's capacity to operate under stress. Notably, the “dash for cash” in March 2020, amid the COVID-19 pandemic, when liquidity in the Treasury market all but vanished, leading to intervention by the Fed as the market maker of last resort. Since then, both sell and buyside traders have continued to experience some liquidity problems with certain securities, especially those that are deep “off the run”.  

The proposed SEC framework aims to align the Treasury market more closely with other markets like equities, futures, and swaps, where central clearing is a common practice. Currently, only 13% of the $700 billion-a-day cash Treasury trades are fully cleared by the CCC while 19% are partially cleared. 

Due to the clearinghouse assuming responsibility for completing the transaction, the chances of a counterparty being unable to complete a deal are negligible. However, the reduction in systemic danger will come at a price: dealers will face higher risk-management costs, larger margin requirements and fees payable to the clearing house.