The Securities and Exchange Commission (SEC) of the United States is set to propose draft rules on Wednesday to strengthen the $24 trillion Treasury market, the world’s largest bond market and a global benchmark for dollar assets.
According to a notice published last week by the SEC, the reforms will aim to expand the use of centralized clearing and come in the wake of recent market snafus that have raised concerns about the market’s ability to function during times of stress.
Most notably, Treasury market liquidity all but evaporated in March 2020 as COVID-19 pandemic fears gripped investors, prompting the Federal Reserve to prop up the market. Traders say they continue to see liquidity problems with some securities, Reuters reported last month.
Since 2020, the SEC and other U.S. regulators have been exploring reforms to boost the market’s resilience. The SEC’s five commissioners are scheduled to vote on its proposed changes during an open meeting at around 10 a.m. EDT (1400 GMT) on Wednesday.
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 requires both counterparties put up cash to guarantee the trade’s execution in the event either defaults.
Overall, just 13% of Treasury cash transactions are centrally cleared, according to estimates in a 2021 Treasury Department report.
SEC Chair Gary Gensler has advocated expanding centralized clearing of Treasuries on the basis that the process increases resilience by bringing additional capital into the market during times of stress.