Treasury market participants expect US regulators to soon finalize a major rule aimed at reining in debt-fueled bets by hedge funds and bolstering financial stability. They worry it could also reshape the industry and create new problems.
The US Securities and Exchange Commission rule, which was first proposed in September last year, would force much more of the trading in the $25 trillion Treasuries market, including a market for short-term financing called repurchase agreements (repo), to central clearing. A central clearer acts as the buyer to every seller, and seller to every buyer.
Market participants widely expect the SEC to finalize the rule within weeks, perhaps as soon as mid-November, according to trade group Securities Industry and Financial Markets Association (SIFMA) and half a dozen banking and hedge fund industry sources.
But crucial details are unclear, including whether the SEC would want the industry to shift to central clearing in one go or allow it to do so in phases, and how much time the industry would have to implement it, the sources said.
SIFMA has been asking the SEC to give the industry three to five years to implement the rules. Toomey said they currently expect the SEC might give two. Wall Street has started making some preparations but it’s early days. “It’s very much a big bang approach,” said Rob Toomey, SIFMA’s head of capital markets, referring to the SEC’s rule. “There are costs embedded in this. Who bears those costs remains a big question.”
How it will shape the industry is not fully understood. In recent months, for example, J.P. Morgan has reduced its position in the section of the repo market where the SEC wants banks to do more business, financial statements show. But custody banks such as Bank of New York Mellon and State Street are doing a lot more business, the disclosures show. The divergent approach has not been previously reported.
The rules would affect other market participants as well. How they are shaped could determine whether the few remaining independent brokers in the market survive. Some of the hedge funds that borrow most heavily to take advantage of small differences in Treasury prices could find the trade is no longer profitable and stop.