U.S. SEC to propose new treasury market reforms next week

WASHINGTON  – The U.S. Securities and Exchange Commission (SEC) will on Sept. 14 propose draft rules reforming how U.S. treasuries are traded and cleared, according to a notice published by the agency on Wednesday.

U.S. regulators have been working on reforms to the structure of the $23-trillion treasury market following a number of liquidity crunches, including a meltdown in the market as the COVID-19 pandemic shut down the U.S. economy in March 2020. That episode prompted the U.S. Federal Reserve to step in and start buying up Treasury securities.

As treasury debt continues to grow and treasury dealers’ market-making capacity remains limited, the Treasury market remains highly vulnerable to further dysfunction under stress, regulatory experts including former Treasury Secretary Tim Geithner warned in a report this year.

With the Fed kicking off “quantitative tightening” in June, letting its treasury bonds reach maturity without buying more, the market has experienced wild price swings, Reuters reported last month.

The treasuries market is the world’s largest bond market and serves as a global benchmark for a swathe of other asset classes, making its price gyrations especially worrying.

The SEC notice said the agency would consider amendments to certain clearing rules for treasury market participants, without providing details. Central clearing involves sending trades to a clearing house, which demands both counterparties put up cash to guarantee the trade’s execution in the event either defaults.

SEC Chair Gary Gensler has in the past advocated for expanding centralized clearing of Treasury securities on the basis it increases resilience by bringing additional capital into the market during times of stress.