March 23, 2023

The US SEC to Tackle Resilience Concerns Through Market Reforms

The United States Security and Exchange Commission (SEC) is working to propose a draft policy by which it would be able to strengthen the resilience of the Treasury market and its $24 trillion financial worth. The US Treasury market is the largest in the world and it is the benchmark for all assets denominated in the US Dollar globally.

Addressing the Chaos

The proposed reform, as stated in a notice published by the SEC last week, will be geared toward expanding the usage of central clearing. The reform is a result of the chaotic situations in the financial market in the past few years and they have generated questions about functionality in stressful times like this.

It should be noted that liquidity in the Treasury market almost completely evaporated in 2020 at the height of the COVID pandemic and investors feared greatly. This made the US Federal Reserve give more props to the market at that time. Reuters reported comments from certain traders who said they still see problems with the liquidity status of some securities in the market.

Since the liquidity crisis of 2020, the US SEC, alongside some other regulators in the country, has invested itself in exploring options and finding the best reforms that would cushion resilience in the market. The five commissioners of the Security and Exchange Commission are set to cast votes on the Commission’s proposed reform in the course of its meeting on Wednesday.

New Reform Must Aid Capital Input

The Commission’s notice stated further that it is going to really have considerations regarding the amendment of some clearing regulations for participants in the Treasury market. The publication, however, did not give further information about it. 

The central clearing that is currently in use involves a process where traders send their trades into a clearing house. It then requires that the counterparties involved pay in cash in order to guarantee the execution of the trade in case any of the parties default. 

On the whole, the amount of Treasury cash deals that are cleared centrally is only 13%, as reported by the Treasury Department in 2021. The Security and Exchange Commission Chairman, Gary Gensler, has called for the expansion of the central clearing of Treasuries. 

The proviso is that the utilized process contributes to increasing resilience through the addition of more capital to the market whenever it comes under stress.

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