Home Finance News Treasury market reforms draw flak from funds and high-speed traders

Treasury market reforms draw flak from funds and high-speed traders


Some of the world’s largest high-frequency traders, funds and cryptocurrency advocates are pushing back against reforms to the $23tn US Treasury bond market that they say will hit the wrong targets and curb trading.

Citadel, Two Sigma, Virtu Financial and T Rowe Price are among those sounding the alarm on the sweeping scope of the rules proposed by the US Securities and Exchange Commission.

The standards are intended to cover the high-speed traders and hedge funds that are crucial participants in one of the world’s most important markets, because it sets the borrowing costs for securities worldwide.

Gary Gensler, chair of the SEC, has made improving the market’s resilience to shocks a priority. A series of regulatory reports has argued that hedge funds and proprietary traders have played a central role in crises over the past decade, pulling back from making markets in moments of stress or generating volatility when leveraged positions backfire, such as in the March 2020 market panic.

Under the proposed rules, firms other than mutual funds that trade more than $25bn a month in Treasuries would have to register as “dealers” with the SEC, subjecting themselves to greater capital requirements and more scrutiny. The average daily trading volume of the Treasury market is $668.2bn, according to the Securities Industry and Financial Markets Association.

Critics says the agency’s planned rules are so broad that they will capture dozens of fund managers and companies whose trading is relatively sparse. Investment advisers worry the rules would radically change their fiduciary duties.

Many of the largest high-speed traders, such as Citadel’s securities trading business along with Virtu Financial, DRW and Jump Trading have already voluntarily registered as dealers. Citadel’s affiliated hedge fund group is not registered.

Stephen Berger, global head of government and regulatory policy at Citadel, said he feared many funds would leave the market because of the rules.

“And that couldn’t come at a worse time, with a market that has already quadrupled in size since the financial crisis and is expected to grow further,” he said.

The SEC is considering the proposal at a time when the largest buyer in the Treasury market, the Federal Reserve, shrinks its balance sheet. During the coronavirus pandemic the Fed had been buying as much as $80bn worth of Treasuries a month.

Registering as a dealer would fundamentally change the business model of many hedge funds, which typically have smaller balance sheets and often borrow money to place bets. Critics also say this would capture hedge funds that trade in Treasuries to manage their cash positions or manage their risk, not for speculation.

“It’s going to be some of the hedge funds that are going to have the hardest time with this,” said Kevin McPartland, head of market structure and technology research at Coalition Greenwich.

Investment advisers worry the SEC proposal will ensnare them and private funds, pooled investment vehicles that are typically managed by registered advisers. Life insurers say they could be caught because the rules cover the repurchase, or repo, market in which they are active participants. Crypto advocates warn it will damage their nascent industry.

Thirty of the 32 organisations that have submitted written comments about the proposal published in March expressed concern. In their letters and in interviews with the Financial Times, many said they are more likely to leave the cash Treasury market and trade related derivatives than to accept the new standards.

“This ill-conceived rule would inadvertently expose alternative asset managers and their investors to extensive additional risks and costs and impede the ability of institutional investors to deliver for their beneficiaries,” said Jennifer Han, head of global regulatory affairs at the Managed Funds Association, an industry group that represents hedge funds including Bridgewater, AQR and DE Shaw.

The SEC did not respond to requests for comment. The US Treasury department declined to comment.

Others backed the SEC’s efforts to address shortcomings in the Treasury market.

Yesha Yadav, a professor at Vanderbilt Law School, said reporting requirements also included in the proposal would allow for more transparency in the often opaque market and offer insights into flash crashes or market manipulation. Capital requirements could stop traders from taking leveraged positions that are many times the size of their balance sheets, she added.

The Financial Industry Regulatory Authority, with whom organisations register as dealers, also wrote about the benefits of the added transparency.

“This closes a significant regulatory gap that has grown up with the rise of high-frequency trading practices,” said Stephen Hall, the legal director of Better Markets, a financial reform advocate which has supported the SEC’s proposal. “If you’re engaged in dealing activity then you should be treated as a dealer from a regulatory standpoint.” 


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