Treasury market participants expect U.S. 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.
, would force much more of the trading in the $25 trillion Treasuries market, including a market for short-term financing called repurchase agreements , to central clearing. A central clearer acts as the buyer to every seller, and seller to every buyer.
The rule would come as other regulations in recent years have seen banks pull back as intermediaries from the Treasury market, causing some of the issues that regulators are trying to fix. The industry fears central clearing, if not done right, could undermine that goal: it will increase costs, which would risk more traders withdrawing.has reduced its position in the section of the repo market where the SEC wants banks to do more business, financial statements show.
The SEC declined to comment. SEC Chair Gary Gensler has previously said the rule-making process generally takes 12 to 24 months.Treasury markets underpin global finance, but the foundation is cracked. U.S. government debt has ballooned in recent years but buyers have dwindled. There is broad consensus on the need for Treasury market reform, including the benefits of central clearing -- even among the industry sources interviewed for this article. Most of them requested anonymity to speak candidly about the situation.
In the repo market, for example, where investors borrow cash for the short term against treasuries, most of the trading is done bilaterally between brokers and customers, like hedge funds. The SEC rule would force the banks to move that to central clearing.
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