Hedge funds and proprietary trading firms that regularly trade Treasuries are set to be labeled as dealers by the Securities and Exchange Commission — a tag that brings greater compliance costs and scrutiny.
The SEC on Tuesday boosted oversight of trading by the firms, which are increasingly responsible for liquidity in the world’s biggest government bond market. The new regulations also apply to market participants in other government bonds, equities and other securities.
Wall Street’s main regulator under Chair Gary Gensler has homed in on the Treasuries market and the private funds industry as needing more guardrails. Tuesday’s overhaul could force dozens of firms to register as dealers and face new regulations.
Under the rules, dealers would include firms that buy and sell securities for their own account as part of the regular course of their business. The label also carries more oversight from the industry-backed Financial Industry Regulatory Authority Inc.
The new rules would apply to many trading firms that earn revenue from capturing bid-ask spreads, or those that express interest at or near the best available prices on both sides of the market for the same security. Those that manage $50 million or less in assets would be exempt, according to the commission.
The private funds industry has lobbied against the rules since they were proposed in 2022. Industry groups even went as far as calling the proposed requirements an existential threat to certain trading strategies. They said the changes, if enacted, could spur firms to leave markets to avoid the additional costs.
The SEC’s final plan eliminates some elements that drew the most ire from industry, such as a trigger for registration of $25 billion in monthly securities transactions.
“These measures are common sense,” Gensler said in remarks for Tuesday’s agency meeting to consider the new rules. “Congress did not intend for registration and regulatory requirements to apply to some dealers and not to others.”
Still, it’s unclear whether the changes will be enough to stave off a legal challenge. The private funds industry is already suing the SEC over other new regulations.
The Alternative Investment Management Association trade group said it would review the final rule and consider its next steps.
“Although the Commission did not adopt some problematic aspects that were included in the proposed rule, the final rule may nonetheless capture certain funds and strategies and therefore subject them to potential registration as a dealer and government securities dealer,” Jack Inglis, the head of the group, said in a statement.
Hester Peirce, one of the SEC’s two Republican commissioners, said she wouldn’t support the rule. Peirce said it “turns traders, many of which are customers, into dealers.”
The SEC has maintained that registering is necessary because firms that make up such a large amount of Treasuries trading volume. The regulator said the plan will ensure that firms engaged in similar activities are regulated in a similar way as many firms active in the market are already labeled as dealers.
The agency’s three Democrats led by Gensler voted to implement the new rules, while its two GOP commissioners opposed them. The regulations will go into effect 60 days after publication in the Federal Register. Companies would have to comply with the registration requirements one year after that date.
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