In recent remarks, SEC Commissioner Elad Roisman considered ways to enhance the structure of the U.S. Treasury market. He discussed whether it is worth assessing if Regulation Alternative Trading System (Reg. ATS) and Regulation Systems Compliance and Integrity (Reg. SCI) should apply alternative trading systems that trade Treasury securities. ATSs are critical to the structure of the Treasury market, and, perhaps, these rule sets should apply to Treasury ATSs to strengthen the markets, he said.
Proposal. The SEC proposed to extend its regulations governing ATSs to apply to those that trade U.S. government securities. The amendments would eliminate the current exemption for ATSs that are registered broker-dealers (or exempt banks) that trade only government securities and would require them to report on a new Form ATS-G. The revisions would also subject certain ATSs to additional Reg. ATS requirements as well as to Reg. SCI. The SEC also sought public comment on the framework for electronic platforms that trade corporate debt and municipal securities.
In recognition of the important role ATSs play in the government securities market, the Commission proposed to eliminate the exemption for ATSs that only trade government securities. The Commission also proposed to subject ATSs that represent significant markets for government securities to Reg. ATS’ fair access rule. In addition, the Commission proposed to utilize the same threshold to apply Reg. SCI to large Treasury ATSs.
General comments. The Commission took a step when it proposed to apply Reg. ATS to systems that trade U.S. government securities and to apply Reg. SCI to certain of these government securities ATSs. However, Roisman said, there are other ways to strengthen the market for U.S. Treasury securities, including:
- Ensuring that regulators have full view of secondary market trading;
- Improving regulators’ understanding and, to the extent insufficient, oversight of key treasury market participants; and
- Broadening access to central clearing in the cash market.
Through its requirements, Reg. SCI has strengthened the infrastructure of equity and options markets; "[a]s trade volumes, volatility, and message traffic rose to unprecedented levels earlier this year, the ‘pipes and plumbing’ that power the U.S. equity markets held up remarkably well," the commissioner said.
As regulators, we need to timely assess market events to inform policymaking and the ability to calibrate the ATS proposal, Roisman explained.
Recommendations. However, he said, work is not complete. It is important that the same trading activity done with a broker-dealer is not treated differently from that done with a bank.
"Including trade data from banks will improve Treasury market transparency, address a potential competitive disparity, and allow regulators to pursue tailored policy initiatives to enhance market oversight," he explained.
Also crucial is improving market participant oversight, according to Roisman. Regulators should consider whether the application of specific frameworks regarding the cash Treasury market is still appropriate, he said. The ATS proposal is a step in strengthening the oversight of Treasury trading venues, but this framework may not extend to all trading venues that use request-for-quote (RFQ) or streaming quote protocols, the commissioner explained. Additionally, most principal trading firms are not SEC-registered dealers; disparate treatment of entities exposes a potential risk, according to the commissioner.
"This is obviously a gap. I do not advocate for a one-size fits all regime, where we simply impose current SEC equity market requirements on the cash Treasury market, but I do think discussing the benefits and costs of applying certain requirements is worthwhile," Roisman stated.
RFQ or streaming quote protocols provide for the interaction of actionable trading interest from multiple buyers and sellers, he noted. Some would argue that trading venues using these protocols should be subject to the ATS framework. Oversight frameworks must keep pace with evolution; it would prudent to have transparency into these venues’ operations and maintain safeguards regarding cybersecurity and system resiliency, while accounting for diversity in the Treasury market, he said.
Further consideration should be given to clarifying whether to designate principal trading firms as dealers for purposes of SEC rules, Roisman noted. They appear to buy and sell securities for their own account as part of a regular business, and some may be subject to additional regulatory regimes. Recent analysis has shown that they account for over 61 percent of trading in the interdealer market, according to the commissioner. The regulatory playing field may be becoming uneven due to disparate treatment, he opined. Placing the burden on ATSs to maintain controls for these firms that are not SEC-registered dealers is concerning because ATSs have limited insight into a principal trading firm’s trading activity, Roisman said.
"While we should never expect someone to catch a falling knife, I question whether we have the right set of obligations for those making markets in various securities, including cash Treasuries."