Wall Street's top watchdog is re-invigorating his push to boost regulation of leveraged trading in U.S. Treasuries, which he says poses an acute risk to financial stability.
During a wide-ranging interview at Bloomberg's Washington bureau, Securities and Exchange Commission Chair Gary Gensler rang alarm bells over the amount of leverage in U.S. government bond trading. He touted regulations that the agency had proposed to enhance oversight.
The SEC last September introduced a plan that would require hedge funds to start centrally clearing many of their transactions in the $24 trillion U.S. Treasury market. The effort drew pushback from the industry, which said it could drive up trading costs and hamper competition.
Although he didn't address the feedback directly, Gensler appeared unmoved by the industry's arguments against further regulation. He called Treasuries the "base of what everything else is built on in our capital markets." He said that driving more trading to clearinghouses could reduce risk.
"We keep seeing jitters in this market," he said. "What we're looking at is ensuring that the firms making markets, acting as dealers, actually register as dealers."
Since the 2008 financial crisis, clearinghouses have been a growing fixture of US financial markets. Still, despite their growth, only a fraction of Treasuries transactions go through them, Gensler has said.
Central clearing
Clearing entities for Treasuries, which are directly overseen by the SEC, can provide trade matching, settlement of transactions and risk management services. As an intermediary, clearinghouses effectively act as the buyer for a seller of securities and the seller for buyers to smooth trading.
"Central clearing, though it has its costs, also is a risk-reducing mechanism in the markets. Because you put a clearinghouse in the middle and all the various parties of the market then what's called net-down their positions at the clearinghouse," Gensler said.
Although the plan may be tweaked to address public comments, the SEC is expected to hold a vote to finalize it in the coming months.
Beyond Treasuries, Gensler also discussed risks associated with cybersecurity. On Wednesday, the SEC finalized rules that would require public companies to report major hacks within four business days.
"If you had a cyber incident that management determines is material, hundreds of millions of files lost or something, or compromised, investors benefit from that disclosure," Gensler said in an interview on Bloomberg Television on Thursday.
China access
Meanwhile, Gensler reiterated that American officials must be able to review the audit papers of Chinese companies that trade in the U.S. American and Chinese authorities inked a landmark agreement in 2022 to allow U.S. audit inspectors access for the first time. The deal came after a decades-long impasse between the US and China over the issue.
Despite the progress, a recent report on the initial round of inspections earlier this year cited "major deficiencies" at the major auditing firms it inspected. The regulator said that problems with vetting clients accounts or internal controls were to be expected when firms are held accountable for the first time.
"Last year, the PCAOB went over, did the initial audits under that set of provisions and determined that they got the appropriate access in those initial inspections. 2023 is a new year," Gensler said on Thursday. "That access is a critical aspect of those companies' access to our capital markets."
— With assistance from Kailey Leinz and Dani Burger
