SEC Proposes Rules on Treasury Market Structure

Last month, the SEC proposed new rules for Treasury market clearinghouses after volatility spiked in Treasury markets during March 2020, as well as other volatile points for Treasury markets in 2019 and 2014. In his statement of support, SEC Chair Gary Gensler stated the rule as proposed would “put forward changes in two areas: the scope of what is cleared, and a set of reforms related to customer clearing.” All five of the SEC's commissioners voted to propose the rule change, which is now subject to industry feedback.

Specifically, the proposed rules would require clearinghouse members (normally large banks and trading firms) to push their clients' trades, often those of other dealers, hedge funds and principal trading firms through the clearinghouse. Gensler noted that in 2017, only 13% of Treasury cash transactions were centrally cleared. Additionally, the SEC’s proposal would change rules around how clearinghouse members treat client margin, requiring members to pass on margin they gather from clients to the clearinghouse. According to the SEC, the proposed regulations would apply to parties to transactions in the repo and reverse repo markets, including money market mutual funds. The proposed rule states, “According to data filed with the Commission, money market funds investments in U.S. Treasury repo, both bilateral and triparty, amounted to approximately $2.3 trillion in June 2022.” This proposal follows on the heels of the SEC proposed reforms in the money market fund space, which includes instituting swing pricing for certain funds, as a response to the March 2020 volatility (the Forum submitted comments to the proposal which can be found here).

In his remarks, Gensler noted that “while central clearing does not eliminate all risk, it certainly does lower it.” The comment period will close 60 days after the proposed rule is published in the Federal Register.

Click here to read the proposed rule.
Click here to read an SEC factsheet on the proposed rule.