SEC to delay US Treasury clearing mandate, dealer rule

A final vote on proposed US Treasury market reforms is now expected in early 2024

After months of lobbying that drove wedges between regulatory agencies, the US Securities and Exchange Commission is expected to delay a final vote on proposed reforms to the US Treasury market until the first quarter of 2024.

The SEC was widely expected to finalise separate rules to mandate central clearing of US Treasuries and broaden the number of firms required to register as dealers on or before Wednesday, November 15 – ahead of a US Treasury Market conference hosted by the Federal Reserve Bank of New York on Thursday.

“Everybody was expecting [the rules to be finalised] probably on Wednesday to coincide with the New York market conference,” says one industry lobbyist, speaking on condition of anonymity. Those expectations changed last week, when “the rumour mill started that this was getting pushed back until Q1 of next year”.

Risk.net understands that by Wednesday morning it was clear that plans for a vote had been pushed back. The length of the delay is a matter of considerable speculation, with some sources suggesting the rules could be finalised in December. 

The initial rumours of a delay were fuelled in part by the SEC’s failure to issue a public notification that it will hold a public meeting to conduct a vote on proposed rulemaking within the next seven days as required under the Sunshine Act, a 1976 law meant to keep government transparent.

The SEC declined to comment on whether the rules have been delayed. “We don’t comment or provide updates on the timing of regulatory actions,” a spokesperson for the agency told Risk.net.

Asked about the lack of a Sunshine Act notice, the spokesperson added: “Open meetings are only one way that the Commission votes on rulemaking actions and not issuing a Sunshine Act notice does not foreclose rulemaking activity.”

The SEC’s proposed dealer rule would require firms that trade more than $25 billion of US Treasuries in four of the last six months to register as dealers, subjecting them to a range of capital and reporting requirements. It is expected to capture several large proprietary trading firms and a handful of hedge funds, leading to concerns that these firms could reduce their activity to fly under the threshold for registration.

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Critics of the proposal have argued that it could damage liquidity in the US Treasury market. Sources that spoke to Risk.net for this article speculate that pushback from the Fed and US Treasury department may have caused the SEC to delay adoption. “It feels like somebody decided we need to just hang on a minute,” says a market-making source who has been following the rulemaking process closely.

Lobbyists are understood to have been working furiously behind the scenes to delay the proposal. In December, seven members of Congress – four Republicans and three Democrats – wrote to the Treasury department urging officials there to assess the likely effect of the proposal.

“Treasury and the Fed were alerted at high levels that they needed to pay attention and weigh in,” says a lawyer for the hedge fund industry.

Lobbyists for the hedge fund Citadel have also argued that the SEC lacks the statutory authority to force buy-side Treasury market participants to register as dealers.

The market-making source says regulators were under intense pressure to rethink the proposal. “The interest and opposition to the dealer proposal seem to have ratcheted up in the last few weeks,” he says.

“My hope is that they just sort of slow down,” he adds. “Maybe somebody comes to their senses and realises that it's really not the right thing to do.”

The SEC’s clearing proposal has garnered less pushback from the industry. The rule would subject a swath of US Treasury and Treasury repo transactions to a compulsory clearing mandate. The regulator argues this will reduce settlement risk in the market while improving transparency and reducing capital costs for dealers. More recently, some in the industry have expressed concerns about the implementation timeline and cost of complying with the rule.

As recently as November 6, the International Swaps and Derivatives Association stated in an article that it expected the SEC to finalise its central clearing proposal “soon”. Sell-side analysts were of the same opinion. “Although the exact timing of the SEC's final clearing rule is uncertain, we expect it soon,” Joseph Abate, a strategist at Barclays, wrote in a note published on November 14.

However, all nine sources that spoke to Risk.net for this article now believe both proposals will be delayed until the first quarter of 2024 or December at the earliest.

Additional reporting by Janice Kirkel