Research Summary
The report discusses the evolution of the U.S. Treasury market, highlighting the rise of principal trading firms (PTFs) and the shift from central clearing to bilateral trading. It also mentions the SEC’s recent mandate for more secondary market trades to be centrally cleared by 2025.
Key Takeaways
The Rise of Principal Trading Firms
- Emergence of PTFs: The report highlights the emergence of principal trading firms (PTFs) in the mid-2000s. These high-frequency traders, using advanced algorithms, began to dominate the interdealer markets, leading to increased complexity in the Treasury cash market.
Shift from Central Clearing to Bilateral Trading
- Decline in Central Clearing: The report notes a significant shift from central clearing to bilateral trading. This was due to the rise in the number of FICC non-members, including PTFs, smaller dealers, and buy-side firms, which led to a surge in bilateral trading. As a result, the share of centrally cleared trades declined, reducing the market’s exposure to FICC protections.
Current State of the Treasury Market
- Bilateral Clearing Dominance: Today, 70 to 80% of secondary market transactions are bilaterally cleared. The largest PTFs have gained equal market share to the largest broker-dealers, accounting for half the volume on interdealer broker platforms and ~55% of the volume on the most recently issued 10-year Treasuries.
SEC’s Mandate for Central Clearing
- Return to Central Clearing: The SEC has announced that more secondary market trades must be centrally cleared by December 31st, 2025. This will require a significant rewiring of the Treasury market’s infrastructure and a large transfer of risk to the FICC.
Implications of the SEC’s Mandate
- Impact on Market Players: The SEC’s mandate will require market players to adjust to a new centrally cleared regime. This could potentially increase costs for firms and may lead to changes in trading strategies and market dynamics.
Actionable Insights
- Understanding the Changing Landscape: Market participants should familiarize themselves with the changing dynamics of the Treasury market, particularly the shift from bilateral to central clearing. This will help them adapt their strategies accordingly.
- Preparing for the SEC’s Mandate: Firms should start preparing for the SEC’s mandate for more secondary market trades to be centrally cleared by 2025. This may involve adjusting trading strategies, reassessing risk management practices, and potentially investing in new infrastructure.
- Monitoring the Role of PTFs: Market participants should keep a close eye on the role of PTFs in the Treasury market. Understanding their strategies and impact on market dynamics could provide valuable insights for trading and risk management.
