September 4, 2024 — Experts from some of the U.S. Treasury market’s most active and influential firms believe mandatory central clearing will result in a market that is safer and more resilient but will also make trading more expensive and potentially curtail trading volumes. 

Since the rules were finalized by the SEC in December 2023, market participants have tried to predict the impact of the new regulations and debated the potential pros and cons for all sides. To better understand how market participants view the regulations as the implementation date approaches, Coalition Greenwich interviewed key practitioners from some of the market’s most important and influential firms, including four of the top five Treasury dealers by revenue, the largest pension funds, asset managers and hedge funds in the world by assets, and some of the largest non-bank Treasury market liquidity providers.

Higher Costs, Lower Risk
These market participants largely agree on several key points. First, clearing will increase costs. The majority of respondents (over 70%) expect the cost of trading to rise due to new margin requirements and clearing fees. Second, approximately 85% of respondents believe increased margin costs could cause them to reduce their trading activity in the market and finally, clearing will, despite some potential negatives, improve market safety and resilience.

“Despite the expected increase in costs, the majority of respondents believe that clearing will make the market safer and more resilient in times of stress, reducing systemic risk and contagion risk,” says Kevin McPartland, Head of Research at Coalition Greenwich Market Structure & Technology and author of The Impact of Treasury and Repo Clearing Mandates: The Industry View. “This aligns with the SEC’s goal in implementing the clearing rule.”

Study participants believe the move to central clearing will not affect all market participants equally, with the researching should that dealers and trading venues are likely to benefit while hedge funds and non-bank liquidity providers may be negatively impacted. This could lead to a shift in market dynamics and potentially alter the competitive landscape. 

“Market participants expect dealers and trading venues to come out as winners from central clearing, while hedge funds and non-bank liquidity providers may find a harder road ahead,” says Kevin McPartland.

The Impact of Treasury and Repo Clearing Mandates: The Industry View includes data on the expected impact of U.S. Treasury and Repo clearing on trading costs, liquidity, margin requirements, trading activity, systemic risk and other key areas, as well as on electronic trading venues, clearing houses and other individual market participants.