The US securities regulator plans to bring high-speed traders in Treasury bonds under direct supervision, ushering in more transparency to one of the world’s most important financial markets.
In a unanimous vote, members of the Securities and Exchange Commission on Monday proposed guidance that would require the trading firms to register with the agency. The move would require the traders to be more transparent about their positions and daily trading activity.
Improving the resiliency of the $21tn Treasury market, regarded as the world’s deepest and most liquid, has been a priority for Gary Gensler, SEC chair, since his appointment last year. Treasury securities set borrowing costs for the US government and are the benchmark for trillions of dollars in other assets.
Financial regulators in Washington have expressed concern over the stability of the market, particularly since March 2020 when a panic at the onset of the Covid-19 pandemic required the Federal Reserve to step in to buy large amounts of Treasuries. At the time, waves of investors wanting to sell their Treasury securities overwhelmed traders’ capacity to buy and sell.
The SEC rules take aim at the lightning-fast principal trading firms that have elbowed aside once-dominant investment banks and now account for about half of the interdealer market in Treasuries. Many are not regulated as broker-dealers and not affiliated with banks, and their trades are normally settled with market intermediaries.
“Going from unregistered to registered is a big change, full stop,” said Shane Swanson, a market structure expert at Coalition Greenwich.
Firms caught in the broadened scope of the rules will have to meet tougher standards on leveraged positions and so-called net capital requirements — which require them to maintain certain levels of capital to protect from large losses, Swanson said. Those that control less than $50mn in assets would be exempt from the proposed rules.
However, the SEC said firms with $25bn or more of trading volume a month would be required to register — an amount equivalent to roughly 0.2 per cent of the market’s total monthly trading volume, said Kevin McPartland, head of market structure and technology research at Coalition Greenwich. That would mean the rules could be applied to even relatively small firms.
“We think this is going to provide the SEC with more transparency into market-making activity in the rates market, which has long been a change that the official sector has wanted to pursue . . . It is likely to require PTFs to report more trading activity and positions held,” said Mark Cabana, head of US rates strategy at Bank of America.
The market had widely anticipated the proposal, which will now be released for public comment. In remarks at an annual Federal Reserve conference in November 2021 on the structure of the Treasury market, Gensler said that he expected the SEC to impose rules requiring trading firms to register as dealers with the commission.
“Requiring all firms that regularly make markets, or otherwise perform important liquidity-providing roles, to register as dealers or government securities dealers also could help level the playing field among firms and enhance the resiliency of our markets,” Gensler said on Monday.