Proposed reforms that would expand central clearing and settlement in the U.S. Treasury market would reduce systemic risk, Moody’s Investors Service says.
In a new report, the rating agency said rule changes proposed last week by the U.S. Securities and Exchange Commission (SEC) to step up central clearing in the secondary markets for U.S. Treasury securities would enhance the oversight, transparency and risk management of transactions involving Treasury securities, and reduce systemic risk.
The proposed reforms follow recent episodes of turmoil in U.S. Treasury markets, including the stress inflicted by the onset on the Covid-19 pandemic in early 2020, that have raised questions about the market’s capacity to absorb these kinds of shocks, the report said.
Among other things, the SEC’s proposed changes would require firms that participate directly in central clearinghouses to use the central counterparty to clear and settle all cash, repo and reverse repo transactions in U.S. Treasury securities.
If these changes are adopted, Moody’s said they “would likely increase centrally cleared transactions involving inter-dealer brokers, electronic trading firms and hedge funds” — adding that this would improve regulatory oversight of these transactions and the firms’ practices.
Currently, more than two thirds (68%) of cash transactions in secondary markets for U.S. Treasury securities are not centrally cleared, and 38% of primary dealers’ repo activity and 60% of reverse repo activity isn’t centrally cleared either, Moody’s noted.
“The SEC said that while the proposal would not, by itself, necessarily prevent future market disruptions, it would reduce counterparty credit risk and improve transparency,” the report said.