Wall Street hopes for relief on Treasury dealer rule after pushback
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[December 11, 2023] By
Carolina Mandl
NEW YORK (Reuters) - Asset managers, insurers and pension funds are
pushing to soften a proposed rule aimed at enhancing U.S. Treasury
market stability which could require them to register as broker dealers,
subjecting them to tougher rules, industry sources and documents show.
They are hopeful the U.S. Securities and Exchange Commission (SEC) will
compromise when finalizing the rule, first proposed in March 2022,
following conversations with agency staff in recent months, according to
two people familiar with the talks.
The rule aims to increase SEC oversight of the $25 trillion Treasury
market by requiring firms that trade lots of U.S. government bonds,
mainly proprietary traders, to register as broker-dealers, subjecting
them to capital, liquidity and other rules. These firms have become
critical sources of liquidity, but are currently subject to scant
oversight, the SEC said.
The SEC flagged that as many as 46 firms could be affected, but
investors say the number will be much larger, partly because the rule as
drafted inadvertently captures pensions and some other institutional
investors, according to industry comment letters and the sources.
One added that the SEC has been receptive to feedback and that the
industry expects it will exempt pension funds when finalizing the rule,
which is expected in early 2024 based on typical SEC rule timelines.
The proposal has drawn criticism from a range of investors including
BlackRock Inc, T. Rowe Price, Teacher Retirement System of Texas (TRS)
and Two Sigma. They have warned the rule will not work as intended and
could actually drain liquidity by making it costlier for investors to
participate.
"The SEC's dealer proposal jeopardizes the resilience of U.S. Treasury
markets ... causing many alternative asset managers and their funds to
curtail their participation in the Treasury markets," said Bryan
Corbett, CEO of industry group the Managed Funds Association said in an
email to Reuters.
An SEC spokesperson said in an email that the agency "benefits from
robust engagement from the public and will review all comments," but
declined to comment on potential changes.
The agency has recently made significant changes to other contentious
draft rules following industry complaints, including on private fund
disclosures, money market funds pricing, and activist investor
disclosures. But the changes don't always satisfy firms and in some
cases came as unpleasant surprises.
In September, private equity and hedge fund groups, some of which are
also lobbying against the Treasury market rule, sued the SEC over the
private fund rules, saying changes to the final version would hurt
investors and exceeded the SEC's authority.
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The headquarters of the U.S. Securities and Exchange Commission
(SEC) are seen in Washington, July 6, 2009. REUTERS/Jim Bourg/File
Photo
That is one of several lawsuits the SEC is facing as financial firms
grow bolder about suing regulators, with others brought by Citadel
Securities and the U.S. Chamber of Commerce this year.
Stephen Hall, legal director at Better Markets, a Washington
non-profit that advocates for financial reforms, said industry
claims the rule could hurt liquidity are purely "speculative."
MARKET DISRUPTION
The broker dealer rule is sensitive for the SEC, given the global
importance of the Treasury market, one of the people said. The rule
is part of a series of reforms that aim to boost Treasury market
resilience following liquidity crunches.
In March 2020, for example, liquidity all but evaporated as COVID-19
pandemic fears gripped investors, while in 2014 the market
experienced wild price gyrations for no obvious reason.
Another SEC rule, due to be finalized this week, would require more
firms to secure their Treasury trades with margin.
The SEC says poor oversight of proprietary trading firms has made it
harder for regulators to see into the market. Under the proposed
rule, anyone trading more than $25 billion in each of four out of
the last six calendar months would be a dealer.
The industry says the threshold is far too low and will lead some
firms to back out of Treasuries to stay beneath it.
The American Council of Life Insurers (ACLI) wrote that its members
could end up disposing of long-term bonds to stay under the
threshold, while BlackRock said markets "may become less liquid due
to lower participation."
It could have implications beyond the Treasury market, some firms
say. As a broker-dealer, money managers would lose certain
protections afforded to investors, while hedge funds would be barred
from participating in initial public offerings, they say.
Two Sigma warned the SEC in its letter that the rule could "remove
significant sources of liquidity" from the equity market too.
While Better Markets' Hall said it was possible the rule could cause
some Treasury market liquidity providers to pull back, but by
enhancing market integrity it was "just as likely to cause other
market participants to increase their liquidity-providing
activities."
(Reporting by Carolina Mandl, in New York; editing by Megan Davies,
Michelle Price and Nick Zieminski)
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