(Bloomberg) -- The Securities and Exchange Commission is in talks with firms seeking to become central clearinghouses for US Treasuries and derivatives trading under a new agency rule designed to fortify the world’s largest debt market. 

“Several market participants have reached out to us and want to sort of enter the business,” said Haoxiang Zhu, director of the SEC’s Division of Trading and Markets, in response to a question during a virtual discussion Tuesday organized by the Institute of International Finance. “Generally we welcome additional interest from clearinghouses engaging to get into this business. Competition is good for the market.”

The discussions are a response to the SEC’s move in December to finalize a rule requiring the migration of a large swath of Treasuries trading and almost all repurchase agreements linked to the debt to a central counter-party clearinghouse, or CCP. 

Clearinghouses act as intermediaries between buyers and sellers in a trade, and assume ultimate responsibility for completion of the transaction. This reduces the chance of a default by one firm triggering wider losses in the financial system.

While Zhu didn’t name any companies interested in the clearinghouse role, CME Group Inc. Chief Executive Officer Terry Duffy said at an industry conference last month that his derivatives exchange is considering seeking regulatory approval to clear US Treasuries. 

Lone CCP

Currently the sole CCP for the $27 trillion Treasury market is the Fixed Income Clearing Corp., a subsidiary of Depository Trust & Clearing Corp. Only about 13% of daily cash Treasuries trading fully runs through the FICC.

DTCC is working to meet new requirements under the SEC plan, including enhancements to the FICC platform and changes in margining practices, said Laura Klimpel, head of fixed income and financing solutions at the firm and a member of Tuesday’s panel.

The creation of new Treasuries clearinghouses is part of a years-long effort by regulators, including the Treasury Department and the Federal Reserve, to strengthen the resilience of the market after several instances of freezes in trading. 

Read more: Rewiring of World’s Biggest Bond Market Will Transform Trading

Nathaniel Wuerffel, head of market structure at Bank of New York Mellon Corp. and a participant on the IIF panel, called the clearing initiative the most significant action  by regulators so far.

An additional $3 trillion in daily cash and repo trading combined could be pulled into central clearinghouses as a result of the SEC new rules, Wuerffell said. He noted daily cash Treasuries trading is about $730 billion and all repo activity amounts to around $4.5 trillion.

The implementation of the new clearinghouses will culminate in mid-2026 with the inclusion of repo transactions. Repos are a key tool used by hedge funds in the so-called basis trade that’s drawn scrutiny from Washington.

The International Monetary Fund in its Global Financial Stability Report released last week was the latest to flag risk in the basis trade.


--With assistance from Katherine Doherty.

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