(Bloomberg) -- The US Securities and Exchange Commission’s push to make the Treasury and repurchase agreement markets more transparent and resilient to stress in the financial system could actually make trading even more convoluted, according to Curvature Securities.
While a proposed mandate for a central clearing of Treasuries and repos has since become more of a “rule to ‘promote’ central clearing,” rather than a requirement, it is likely to increase the costs of trading and create liquidity issues, Curvature said.
“The SEC’s goal was central clearing, but instead they will fracture the market,” Scott Skyrm, Curvature Securities executive vice president, wrote in a note to clients on Tuesday. “We will end up with two or three central clearing counterparties, making it not central clearing, but something like bi-central clearing, or even tri-central clearing.”
At the end of 2023, the SEC finalized a rule requiring the migration of a large swath of Treasuries trading and almost all repo agreements linked to the government debt to a central counterparty clearinghouse, or CCP, to better secure the debt market. Clearinghouses are intermediaries between buyers and sellers in a trade and assume ultimate responsibility for completion of the transaction. This reduces the chance of default by one firm.
For Treasuries, Depository Trust & Clearing Corp., through its subsidiary the Fixed Income Clearing Corp., is currently the only CCP. Despite FICC’s dominance, market participants are anticipating an alternative, especially given the opacity surrounding the firm’s margin calculations, according to Skyrm. CME Group Inc., Intercontinental Exchange Inc., and LCH.Clearnet have been vying for a bigger piece of the roughly $27 trillion cash market.
But there are a number of unintended consequences associated with having more than one CCP, he said. They range from price disparities since supply and demand for cash and securities will vary between clearinghouses, different margin requirements at each exchange, increased interest-rate volatility if there are position mismatches between clearinghouses, to liquidity of securities.
This is not the first time that there’s more than one clearinghouse in the Treasury and repo markets. About 30 years ago FICC, then the Government Securities Clearing Corp., competed with Delta Clearing Corp. to become the single player in Treasuries and for repos there were three choices, one of which was FICC’s predecessor, according to Skyrm. FICC eventually won the market and has had a monopoly in the markets for the past 25 years.
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