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US regulators are putting high-speed traders and some hedge funds under direct supervision in the $26 trillion Treasury market, by enacting a rule aimed at boosting its stability in the wake of a series of crises.
The Securities and Exchange Commission in Washington voted 3-2 in favor of the rule on Tuesday, which will force high-speed traders and some market hedge funds to register with the agency as dealers.
Such companies have become major players in a market previously dominated by banks, as regulations introduced after the global financial crisis made it more expensive for major lenders to trade Treasuries.
The rules require companies designated as dealers to be more transparent about their trading positions and activity and force them to hold capital to support their deals.
Because high-frequency traders and hedge funds are not regulated in a way that reflects their importance, “investors and markets lack important protections,” the SEC said.
The standards are part of a drive to increase regulatory oversight of the world's largest and most important bond market.
Authorities have been concerned about the stability of the Treasury market since the March 2020 collapse forced the Federal Reserve to intervene and support the market. Last year, regulators also turned their attention to the disruptive potential of highly leveraged hedge fund trades.
The rule would require market participants who assume “significant liquidity-providing roles” — that is, those companies that facilitate buying and selling in the secondary market by regularly quoting prices — to register with the Securities and Exchange Commission and become members of self-regulatory organizations.
The SEC's final proposal backed away from an earlier, more expansive definition of a trader after strong opposition from hedge funds, which argued they were investors, not market intermediaries.
Citadel founder Ken Griffin told the Financial Times last year that the SEC should focus its efforts on the big banks that facilitated trading in the Treasury market rather than increasing costs for the industry.
In the initial proposal, any firm that traded more than $25 billion in Treasuries a month, for four of the past six months, would have been forced to register, a requirement that would sweep away a broad swath of the hedge fund market. This quantitative test has been dropped entirely, and fewer funds will have to be registered under the new qualitative requirements.
However, the SEC has made clear that it will retain the ability to designate companies as dealers on a case-by-case basis.
Brian Corbett, CEO of the Managed Funds Association, an industry group representing hedge funds, called the final rule a “significant improvement” over the SEC's previous proposal.
However, he added, “Alternative asset managers are not dealers, and the State Department is concerned that the rule may not be sufficient to exclude them and private funds from regulation as dealers.”
The vote builds on efforts by SEC Chairman Gary Gensler to reform the trillion-dollar market that underpins the U.S. financial system.
In December, the regulator voted to adopt a landmark rule that would require more Treasury trades to be cleared centrally, in an effort to reduce risks in the sector. A central clearing house stands between buyer and seller and prevents failed trades from cascading through the market.
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