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US SEC set to adopt Treasury market dealer rule as part of market overhaul



© Reuters. FILE PHOTO: The seal of the U.S. Securities and Exchange Commission (SEC) is seen at their headquarters in Washington, D.C., U.S., May 12, 2021. REUTERS/Andrew Kelly/File Photo

WASHINGTON (Reuters) – The U.S. securities regulator is set on Tuesday to adopt a rule requiring proprietary traders and other firms that routinely deal in U.S. government bonds to register as broker-dealers, subjecting them to stricter oversight.

The Securities and Exchange Commission (SEC) rule is part of a broader effort to fix structural issues regulators say are causing liquidity problems in the $26 trillion Treasury market.

Those changes, which include pushing more trades through clearing houses, represent the biggest overhaul of the Treasury market in decades, market participants say.

First proposed in March 2022, the rule requires anyone trading more than $25 billion worth of Treasuries in four of the last six calendar months to register as a broker-dealer, subjecting them to capital, liquidity and other requirements.

Firms that routinely buy or sell roughly comparable or very similar securities on the same day would also be subject to the new rule.

The SEC’s five commissioners are set to vote on the rule at an open meeting that kicks off at 10:00 a.m. ET (1500 GMT).

The rule primarily targets proprietary traders, which the SEC says have become “critical sources” of Treasury market liquidity and should be subject to the same strict oversight and risk management controls as other Treasury market dealers. As many as 46 firms could be affected, the SEC previously said.

“Bringing more proprietary trading firms under the SEC’s purview would help create more transparency, level the playing field for market participants, and possibly improve market stability,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities USA.

Some investors have said in public comment letters that the threshold and daily trading test are too broad and will inadvertently capture corporations, insurers, and pensions. They have been lobbying the SEC for fixes and, as of last month, were hopeful the final rule will be softened, Reuters reported.

The SEC has said it benefits from robust industry feedback, but has not commented on potential changes.

The proposal drew criticism from major investors including BlackRock (NYSE:), as well as Washington group the Managed Funds Association. They warned the rule will not work as intended and could drain Treasury market liquidity by making it costlier for investors to participate.

“Depending on the final rule’s language, we may see an influx of new SEC dealers or a fundamental change in how market participants trade in the markets in order to avoid registration,” Ignacio Sandoval, partner at Morgan Lewis and a former SEC special counsel, wrote in emailed comments.

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