Mandatory central clearing of US Treasuries will make the market safer, but at the expense of costlier trading and potentially curtailed volumes, according to a new Coalition Greenwich survey.

Over 70% of the 34 market participants questioned expect the cost of trading to rise due to new margin requirements and clearing fees, the study published on Wednesday found. And around 85% of respondents believe increased margin costs could cause them to reduce their trading activity. The survey included four of the top five Treasury dealers by revenue, and was conducted during the second quarter.

The upcoming Securities and Exchange Commission (SEC) rules are designed to minimise the danger of contagion from a shock collapse of any one financial institution, and follow a push by global regulators to channel trades through clearing houses. Because the clearing house assumes responsibility for completing transactions, it reduces the risk of a counterparty being unable to complete a deal. 

“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,” said Kevin McPartland, head of research at Coalition Greenwich Market Structure & Technology. “This aligns with the SEC’s goal in implementing the clearing rule.”

The rules, finalised last December, will see a large swath of cash Treasuries and almost all repurchase agreements linked to the debt use central clearing. Market participants have until Dec 31, 2025 to shift their trading for Treasuries and until June 30, 2026 for repo transactions. 

The impact of mandatory clearing may not be felt equally, with the survey finding dealers and trading venues are likely to benefit while hedge funds and non-bank liquidity providers may be negatively hit. This could lead to a shift in market dynamics and potentially alter the competitive landscape, Coalition Greenwich said.

  - Bloomberg