The U.S. Securities and Exchange Commission is set to adopt the Treasury Market Dealer Rule as part of market reform

The U.S. Securities and Exchange Commission is set to adopt the Treasury Market Dealer Rule as part of market reform

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

The SEC rule is part of a broader effort to fix structural problems that regulators say are causing liquidity problems in the $26 trillion Treasury market.

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

First proposed in March 2022, the rule would require anyone who traded more than $25 billion worth of Treasury securities in four of the last six calendar months to register as a broker, subjecting them to capital, liquidity and other requirements.

Companies that routinely buy or sell identical or very similar securities on the same day will also be subject to the new rule.

The SEC’s five commissioners are scheduled to vote on the rule in an open meeting starting at 10:00 a.m. ET (1500 GMT).

The rule primarily targets proprietary traders, who the SEC says have become “significant sources” of Treasury market liquidity and must be subject to the same stringent oversight and risk management controls as other dealers in the Treasury market. The Securities and Exchange Commission previously said as many as 46 companies could be affected.

“Putting more proprietary trading firms under SEC oversight would help create more transparency, level the playing field for market participants, and potentially improve market stability,” said Gennady Goldberg, head of U.S. interest rates strategy at TD Securities USA. .

Some investors said in public comment letters that the minimums and day trading test are too broad and would inadvertently capture corporations, insurance companies and pensions. They have been pressing the SEC for reforms, and as of last month, were hoping to ease the final rule, Reuters reported.

The SEC said it benefits from strong industry feedback, but did not comment on potential changes.

The proposal has drawn criticism from major investors, including BlackRock, as well as a Washington group of managed funds. They warned that the rule would not work as intended and could drain Treasury market liquidity by making it more expensive for investors to participate.

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

(Reporting by Michelle Price, David Barbuscia and Carolina Mandel; Editing by Bill Berkrot)

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