SEC Chair Gensler Highlights SEC Regulatory Efforts to Support Resiliency of Treasury Markets
Commentary by Steven Lofchie
SEC Chair Gary Gensler highlighted SEC efforts, in coordination with Treasury and the Federal Reserve Board, to "enhance the resiliency, efficiency, and competitiveness of the Treasury markets."
In his remarks before the ISDA Annual Meeting, Mr. Gensler considered the role of the government as the issuer of U.S. Government Securities and how central the $24 trillion Treasury markets are to all other financial markets. He underscored the "tools underlying our proposals: broadening central clearing, registering dealers, regulating trading platforms, and promoting greater transparency." Mr. Gensler reviewed SEC actions that:
- broaden the scope of Government Securities' market transactions required to be brought into central clearing;
- implement clearinghouse reforms to (i) no longer allow clearinghouse members to net their activity against house activity when determining margin, (ii) ensure broker-dealer customer protections and (iii) establish clearinghouse procedures that would help to facilitate customer clearing access;
- require registration with the SEC for broker-dealers providing liquidity in government securities in order to "level the playing field" among market participants; and
- bring trading platforms that facilitate trading on the Treasury secondary market through communication protocol systems under SEC regulations, accounting for the platforms’ "evolving nature and electronification."
As to the potential for default on U.S. Government Securities, Mr. Gensler stressed that, should the Treasury default on its obligations, the repercussions would likely be "very significant, hard to predict, and likely [have] lasting effects" on investors and markets.
Commentary
It is not at all obvious that the additional regulations that Chair Gensler seeks to impose will improve the markets for U.S. Government Securities. What would seem obvious is that the regulations will impose meaningful additional costs on participants in the market, at a time when the federal deficit is soaring. In short, if the cost of trading in U.S. Government Securities goes up, that increase in cost will be borne by taxpayers whose tax dollars go to pay interest on the debt.