New York, Jan 27 (Reuters) - Wall Street is seeking an extension to meet a rule mandating centralized Treasury clearing, with banks and funds trading U.S. government bonds facing a 2026 deadline.
The Securities and Exchange Commission, in December 2023, introduced a rule aimed at reducing systemic risk in the $28 trillion Treasury market, the world's largest bond market, by channeling more trades through clearing houses. The rules, intended to enhance market transparency, will be phased in by June 2026.
The Securities Industry and Financial Markets Association (SIFMA) and other trade associations penned a letter to the SEC on Friday, requesting a one-year extension for the cash and repo clearing deadlines. The repo market involves the exchange of short-term loans backed by Treasuries.
"We believe that the final implementation of the Clearing Rule will benefit this market," stated SIFMA and other signatories.
Nevertheless, emphasizing the significance of the Treasury market to the financial system and the economy, and the anticipated substantial Treasury securities issuance in the forthcoming years, the letter called for a smooth transition period to avoid market disruptions.
The SEC abstained from commenting.
Additionally, other signatories including MFA, representing hedge funds and private funds, the Alternative Investment Management Association, FIA Principal Traders Group, and the International Swaps and Derivatives Association, echoed concerns in the letter.
"Association members worry that, without an extension, the transition to central clearing might encounter severe obstacles, leading to disruptions in the cash and repo markets for Treasury securities and harming the financial system," expressed the letter.
The request for a timeline extension has been attributed to uncertainties about how mandatory central clearing would function and concerns that the remaining two years might be inadequate for a smooth transition, as per Reuters last year.
Originally, the rule stipulated that clearing houses had until March 2025 to comply with risk management provisions, customer asset protection, and access to clearance and settlement services. Member institutions were to commence central clearing of cash market Treasury transactions by December 2025 and for repo transactions by June 30, 2026.
The central clearing rule is a pivotal reform in a broader governmental initiative aiming to address structural issues believed to be the root cause of market volatility and liquidity challenges in the Treasury market.
Mark Uyeda, a Republican SEC member, has been appointed as acting chair, replacing Gary Gensler, the former SEC chair nominated by President Joe Biden, who had a contentious relationship with Wall Street and the crypto sector.