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: SEC set to advance reforms to head off next crisis in $24 trillion market for U.S. government debt


The Securities and Exchange Commission is taking another step to address concerns over stability in the markets for U.S. government debt, with the agency set to propose new rules Wednesday to encourage central clearing Treasury security trades.

U.S. government debt loads

have increased rapidly in recent decades, as the federal government combatted the economic effects of the 2008 financial crisis and the COVID-19 pandemic at the same time that an aging population has led to greater spending on healthcare and Social Security.

The market for U.S. Treasuries has grown to more than $24 trillion, expanding nearly ten fold over the past 20 years at the same time that major regulatory changes have blunted the ability of some bank-owned dealers of government debt to increase their purchases.

These dynamics have contributed to a series of liquidity crunches in the market, starting with the 2014 “flash rally” in Treasuries, followed by pressures in the Treasury repo market in September of 2019 and a liquidity crisis in March of 2020 related to the outbreak of COVID-19.

SEC Chairman Gary Gensler said in a statement Wednesday that encouraging more trades in the Treasury market to go through a central clearinghouse would help to bring more liquidity and certainty to it.

“Clearinghouses and central clearing play a vital role in our capital markets,” Gensler said. “Rather than having thousands of bilateral relationships amongst market participants, clearinghouses sit in the middle as the buyer to every seller and the seller to every buyer.”

A clearinghouse facilitates trades between market participants by guaranteeing the validity of trades and ensuring that buyers and sellers honor their obligations. This reduces risk in the market and adds stability to the financial system.

The rules being considered Wednesday would force clearinghouses to change their rules to require that their members submit for clearing all eligible secondary market transactions. The hope is this will greatly increase the share of trades in the market that are centrally cleared, with a recent study by the Treasury Market Practice Group estimating that only 13% of trades are currently centrally cleared.

The rule proposal is the latest in a series of potential new regulations aimed at overhauling the Treasury market. High-frequency trading firms are already organizing to oppose new rules that would require them to register as dealers of government debt, while the agency is also considering new regulations that would increase oversight of platforms that facilitate bilateral Treasury trades.

Further adding urgency to the reforms is the Federal Reserve’s ongoing program of quantitative tightening, which involves shrinking the central banks holdings of government debt

The Fed recently began accelerating that process, adding $95 billion per month in extra Treasury and mortgage-backed security debt to the market each month, on top of the substantial borrowing the U.S. government must engage in already to meet its liabilities.

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