SEC set to implement rule overhauling treasury market

The US Securities and Exchange Commission (SEC) is poised to implement a rule on Tuesday that mandates proprietary traders and firms engaged in regular trading of US government bonds to register as broker-dealers. The regulatory measure, part of a broader market overhaul, targets structural issues impacting the Treasury market.

The rule, initially proposed in March 2022, stipulates that entities trading over $25 billion in Treasuries over four of the last six months must register as broker-dealers. This registration subjects them to heightened oversight, including compliance with capital, liquidity, and other regulatory requirements. Additionally, firms engaging in frequent same-day transactions of comparable or very similar securities would also fall under the purview of this new regulation.

The SEC's five commissioners are scheduled to vote on the rule during an open meeting at 10:00 am ET. The proposal primarily focuses on proprietary traders, identified by the SEC as crucial sources of Treasury market liquidity, subjecting them to the same rigorous oversight and risk management controls as other market dealers. Up to 46 firms could be impacted by this rule, according to previous statements by the SEC.

Gennadiy Goldberg, Head of US Rates Strategy at TD Securities USA, believes that bringing more proprietary trading firms under SEC supervision would enhance transparency, level the playing field, and potentially improve market stability.

However, some investors have expressed concerns about the broad scope of the $25 billion threshold and daily trading test, fearing unintentional inclusion of corporations, insurers, and pensions. Lobbying for adjustments, investors hope the final rule will be softened.

Criticism has also come from major investors such as BlackRock and the Managed Funds Association, warning that the rule may not achieve its intended goals and could adversely impact Treasury market liquidity. Ignacio Sandoval, a partner at Morgan Lewis and a former SEC special counsel, anticipates potential changes in market participant behaviour to avoid registration if the final rule is stringent.

(With Reuters inputs)