MFA Cautions SEC on Treasury Market Clearing Regulations
Commentary by Steven Lofchie
The Managed Funds Assets ("MFA") recommended that regulators obtain more data before imposing clearing regulations on the Treasury market.
In a Primer on the "Treasury Market Structure," the MFA called for a "Do No Harm" approach to "modernize the market architecture." The MFA proposed:
- increasing data collection by adding (i) customer legal entity identifiers ("LEIs") and (ii) a clearing arrangement indicator to TRACE for cash trades;
- mandating reporting of repo and reverse repo transactions;
- facilitating voluntary central clearing for both secondary cash market transactions and repos in the Treasury market;
- requiring FICC clearing members to accept transactions executed by their customers with third-party executing firms;
- offering FICC segregation of customer margin; and
- introducing cross-margining for end-users for Treasury futures and cash Treasury transactions.
The MFA criticized SEC proposals for creating a negative impact on Treasury markets by:
- widening the scope of the broker-dealer registration requirement under the Exchange Act which would curtail private funds' participation in the Treasury markets, causing (i) a reduction in liquidity, (ii) a hinderance of price discovery and (iii) an increase of the cost of the capital for businesses; and
- mandating clearing in the Treasury markets which would (i) decrease market resiliency, (ii) increase transaction costs for investors and (iii) increase market concentration and risk.
Commentary
The bifurcation of the regulation of transactions in Treasuries between the SEC and the CFTC is harmful. It (i) diminishes regulatory transparency (by dividing oversight) and (ii) raises costs by making it more expensive to effect hedge transactions when neither regulatory scheme takes account of the risk reducing effect of transactions under the other regulatory scheme.