After years of regulatory adjustments, Washington is pushing through the most comprehensive overhaul of the world’s largest bond market in decades.
Securities and Exchange Commission Chair Gary Gensler, formerly overseeing federal debt management at the US Treasury, advocates requiring the majority of Treasuries trading to move to a central counterparty clearinghouse, concluding in mid-2026 with the inclusion of all repurchase agreement transactions. This initiative is among the most significant since the 1991 Treasury auction scandal, reducing the risk of contagion from a financial institution collapse but raising risk-management costs for dealers.
For Gensler and regulators, this move is crucial for strengthening resilience in the $26 trillion US Treasuries market. Only 13% of the $700 billion-a-day cash Treasuries trading fully goes through the market’s sole clearinghouse, prompting a phased-in approach.
The transformation will reshape market interactions, according to Nathaniel Wuerffel of Bank of New York Mellon Corp. The exemption for hedge funds in cash trading is a partial win, but their more active role in the repo market, comprising about $4 trillion daily, faces increased central clearing scrutiny.
Gensler emphasizes central clearing as a net risk reducer, but higher volatility coupled with new risk-management costs may impact day-to-day liquidity. Clearinghouses will set standards for margins, affecting hedge funds’ basis trades, where leverage exploits price differences.
The single current operator, the Fixed Income Clearing Corp., handles all Treasuries clearing, raising concerns about concentration risk. Expanding central clearing participation is seen as an evolution, potentially freeing up balance sheets and boosting liquidity.
While central clearing may enhance market resilience, challenges persist, including dealer balance sheet constraints, increased capital requirements, and rising Treasury supply. Proposed rule changes and forthcoming SEC regulations aim to align the market structure, pushing more trading onto clearinghouses.
The Inter-Agency Working Group on Treasury Market Surveillance has introduced measures, including a Treasury plan to buy back existing securities later this year. The SEC’s central clearing rules are integral to enhancing Treasury market resilience, says Josh Frost, the Treasury’s assistant secretary for financial markets.
