The US Securities and Exchange Commission (SEC) has approved new rules to expand central clearing requirements for US Treasury (UST) securities. Aimed at reducing systemic risk and stabilising the UST market, these changes will take effect by the end of 2025. Edoardo Pacenti, head of Trading Tools for Fixed Income at ION Markets, offers his perspective on the implications for market participants.

The SEC’s goal is to mitigate risks linked to counterparty defaults, which can create a cascading effect on market liquidity. By mandating central clearing for a broader range of UST transactions, such as repos, reverse repos, and inter-dealer broker trades, the rules aim to prevent market contagion and strengthen overall resilience. According to Pacenti, this will result in a sharp rise in UST clearing activity managed by the Fixed Income Clearing Corporation (FICC).

Costs and redefining dealers

Pacenti highlights increased compliance and operational costs as key hurdles for market participants. Buy-side and sell-side firms will need to implement advanced systems for real-time monitoring, margining, and risk management, which may push smaller players out of the market.

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Additionally, the SEC is redefining what constitutes a “dealer,” requiring Proprietary Trading Firms (PTFs) to register as dealers with the SEC and FINRA or enter Sponsored Member arrangements. Pacenti notes that while this change introduces significant adjustments, PTFs can leverage experiences from prior regulatory shifts, such as the 2024 move to T+1 settlement.

New revenue streams

Pacenti also sees potential opportunities. FICC members can generate revenue by offering sponsorship services to non-member firms, benefiting from collateral netting arrangements. Moreover, the arrival of new central clearing providers, such as CME Group and ICE, may lower costs and increase flexibility, enabling firms to optimise trading strategies while complying with the SEC’s rules.

Adaptation is key

In Pacenti’s view, firms that embrace the changes and invest in scalable technologies, such as automated transaction systems, will position themselves for success. While the rules bring operational and compliance challenges, they also offer opportunities for innovation in the evolving fixed-income market.