Increased Oversight on Firms Dealing in Treasuries: SEC Poised to Approve New Rule

The Securities and Exchange Commission (SEC) is on the verge of approving a new rule that will enhance oversight on certain firms involved in regular Treasuries trading. However, the agency has scaled back some provisions that hedge funds had warned would significantly raise their costs.

This morning, the SEC is set to vote on a long-awaited proposal aimed at compelling certain proprietary trading firms to register as dealers. The rule forms part of a broader federal initiative to address potential liquidity concerns in the $26 trillion Treasuries market, which serves as a vital foundation for the global economy. Registering as a dealer subjects firms to greater regulatory scrutiny and higher capital requirements.

Initially, the proposed rule required firms to register if they had traded over $25 billion in Treasuries within a specific timeframe. Trade groups, including the Managed Funds Association representing hedge funds, argued that this would affect almost every firm on Wall Street. Furthermore, the original rule encompassed firms engaged in both buying and selling similar securities on the same day.

However, the final rule has eliminated the dollar threshold and introduced more lenient measures. Under the revised rule, a firm must register if it offers to buy and sell the same securities at or near the best available prices in the market or generates most of its revenue from capturing bid-ask spreads or liquidity incentives provided by trading venues.

Moreover, the final rule includes exemptions for asset managers controlling less than $50 million, central banks, and other entities primarily not involved in providing liquidity.

While initially directed at Treasury liquidity concerns, the rule also extends its application to other securities. An SEC official has confirmed that the rule will cover firms offering liquidity for crypto securities. This move addresses the longstanding argument made by crypto firms that most major cryptocurrencies do not fall within SEC oversight.

Undoubtedly, hedge funds will continue their ongoing battles with the SEC regarding attempts to subject them to stricter regulation. However, this time they seem to have gained some relief.