US regulators have brought high-speed traders, some hedge funds and the $26tn Treasury Bond market under direct supervision. This is a measure to improve its stability after a series crises.
The Securities and Exchange Commission voted in Washington on Tuesday by a margin of three to two in favor of the rule, which will require high-speed traders and hedge funds who are active in the market register as dealers with the agency.
These firms are now the main players in a market that was once dominated primarily by banks. Regulations introduced after the global financial crises made it more expensive for traditional lenders to trade Treasury.
The rule requires that firms designated as dealers be more transparent in their trading and positions, and to have capital backing their deals.
The SEC stated that because high-frequency traders and hedge funds were not regulated to reflect their importance, both investors and markets lacked important protections.
The standards are part a larger effort to increase oversight on the largest and most important global bond market.
Since March 2020, when a crash forced the Federal Reserve into action to support the Treasury market, authorities have been worried about the stability of the Treasury market. Over the last year, regulators also focused on the potential for disruption of hedge funds trading.
Market participants who play a “significant role in providing liquidity” – i.e. those companies that facilitate the buying and selling of secondary market products by regularly quoting price – will be required to register with SEC and join self-regulatory organizations.
After vehement objections from hedge funds who argued they were investors and not market intermediaries, the SEC has revised its final proposal.
Citadel founder Ken Griffin said last year that SEC should concentrate its efforts on big banks who facilitate trading in the Treasury Market rather than increase costs for the industry.
In the original proposal, firms trading more than 25bn dollars of Treasuries per month for four out of the last six calendar months would have had to register. This provision would have affected a large segment of the market. This quantitative test has been dropped, and under the new qualitative requirements fewer funds are required to register.
The SEC has made it clear that they will retain the right to designate companies as dealers based on individual cases.
Bryan Corbett is the chief executive officer of the Managed Funds Association. This industry group represents hedge funds. He called the final rule “significantly improved” over the SEC’s earlier proposal.
He added, however, that “alternative assets managers are not dealers and MFA is worried that the rule might not go far enough to exclude them and private funds and be regulated as dealers”.
The vote is a continuation of efforts made by SEC Chair Gary Gensler in reforming the multi-trillion dollar market that underpins the US financial system.
In December, the regulator adopted a groundbreaking rule which could force more Treasury bonds to be cleared by a central clearing house in an effort to reduce the risk in the industry. A central clearinghouse stands between a seller and buyer to prevent failed trades from spreading through the market.