The US Securities and Exchange Commission proposed a key reform to boost central clearing’s use in the finance market. BNY Mellion said that the authorities need to implement this reform over an extended period to avoid disruptions, especially when it is a time of changing market dynamics.
According to Reuters.com, “The SEC central clearing rule, first proposed in September last year, would apply to the cash Treasury and repurchase agreements (repo) markets, where banks and other players such as hedge funds borrow short-term loans backed by Treasuries and other securities. Under the rule, more trades would be sent to a clearing house, requiring counterparties to put up cash to guarantee execution in the event of defaults.”
Many, like BNY Mellon, expect the SEC to finalize the rule as soon as possible. However, it is still unclear how much time the industry would take to implement the rule. Others also show worry about higher costs of trading that are linked to central clearing. This could discourage various investors from trading. This would undermine the objective of the rule to improve liquidity and resilience in the US bond market.
BNY Mellon also raised concern about the need for safety and liquidity in the Treasury market. It said that if the SEC is trying to rapidly implement a fundamental reassembly of the Treasury market, there will be a risk of deterioration of the market functioning.
Furthermore, this year, there have been multiple liquidity crunches. This raised regulatory concerns regarding the Treasury market’s ability to function during stressful times. In March 2020, the Treasury market seized up due to investors’ fears regarding the pandemic. This prompted the US Federal Reserve to buy Treasuries to support the market.