The US Securities and Exchange Commission’s (SEC) efforts to increase transparency and resilience in the Treasury and repurchase agreement (repo) markets may inadvertently complicate trading, warns Curvature Securities according to Bloomberg.
While the SEC originally aimed to mandate central clearing for Treasuries and repos, this has shifted to a rule promoting such clearing, raising concerns about increased trading costs and liquidity issues, according to Curvature.
In a client note on Tuesday, Scott Skyrm, executive vice president at Curvature Securities, argued the market could become fractured rather than unified under central clearing. “We will end up with two or three central clearing counterparties (CCPs), making it not central clearing, but something like bi-central or tri-central clearing,” he wrote.
The SEC finalised a rule in late 2023 requiring a large portion of Treasury trading and nearly all repo agreements to be cleared through a CCP to enhance market security. Currently, the Fixed Income Clearing Corporation (FICC), a subsidiary of Depository Trust & Clearing Corp., dominates this space. However, competition from CME Group, Intercontinental Exchange, and LCH.Clearnet is emerging.
Skyrm highlighted several potential risks of having multiple CCPs, including price disparities, differing margin requirements, increased interest-rate volatility, and liquidity issues. FICC has maintained a monopoly for the past 25 years.
