The SEC looks to help stabilize the $26 trillion Treasury bond market with new rules

• The SEC passed new rules on Wednesday that would force more bond trades to go through a clearinghouse.
• Regulators want to pull $1 trillion of direct Treasury transactions under the umbrella of a clearinghouse.

After witnessing some shocks in the Treasury market, Wall Street regulators have passed new rules to keep a sharper eye on bond trades.

In a 4-1 vote on Wednesday, the Securities and Exchange Commission backed the reforms, which would force more trades through an independent clearinghouse.

"Today's final rules, taken together, will reduce risk across a vital part of our capital markets in normal times and stress times," SEC Chair Gary Gensler said.

A clearinghouse is essentially a trusted middleman who stands between the buyer and the seller and makes sure each party goes through their end of the deal. It also allows regulators to monitor trades more closely. Most equities, futures, and swaps, go through clearinghouses.

But that's not the case with Treasury bonds, so regulators are expanding requirements on cash Treasury and repurchase or "repo" deals that must be centrally cleared. That would mean participants put up collateral or limit the amount they borrow.

That comes as highly leveraged investors like hedge funds have become increasingly involved in the bond market since the 2008 financial crash, with many trades settled between the buyer and seller directly.

Meanwhile, Treasurys have gone through some choppy spells in the past decade, raising concerns about one of the backbones of the global financial market.

For example, in March 2020 as investors were reeling during the onset of the COVID-19 pandemic, a rush to shore up liquidity shocked the Treasury market, forcing the Federal Reserve to step in with hefty purchases.

The proposed SEC rules are to come into effect beginning December 2025 for cash trading and June 2026 for the repo market.

The Managed Funds Association trade group said in a statement that supports efforts to increase central clearing in the Treasury market and applauded the SEC for not singling out alternative asset managers for "disparate treatment" in the cash clearing mandate.

"However, we are disappointed that the SEC did not exclude tri-party repo transactions from the clearing mandate, as counterparty risk is already mitigated and well regulated by banking entities. Ultimately, how the SEC and the Fixed Income Clearing Corporation implement the final rule, especially as it pertains to fair access to client clearing and cross margining, will determine the rule's impact on market liquidity and efficiency in the Treasury markets," MFA Chief Counsel and Head of Global Regulatory Affairs Jennifer Han said in a statement.