Regulators Should Help Treasury Market Evolve, Citadel Says

  • DTCC membership needs to be expanded, Citadel’s White says
  • Direct Match failed in August after it couldn’t get into DTCC

Regulatory intervention is needed to improve the structure of the $13.4 trillion U.S. Treasury market, said Nicola White, global chief operating officer for fixed income at Citadel Securities.

Membership in the clearing system operated by the Depository Trust and Clearing Corp., which facilitates the transfer of cash for bonds, needs to be expanded, White said, speaking on a panel at a Futures Industry Association conference in Chicago. In August, Direct Match Holdings Inc. had to abandon its plan to offer asset managers anonymous, exchange-style trading when it couldn’t secure access to the DTCC through State Street Corp. after an initial agreement with the bank fell through.

“We’re seeing it affect competition within the U.S. Treasury market,” White said. “We haven’t seen the industry come to a solution on its own” and “having it driven from the regulatory side of this would help move the timeline forward.”

Banks still dominate Treasury trading and get to act as gatekeepers that can block potential competitors, unlike other major markets like U.S. stocks. IEX Group Inc. just opened the nation’s 13th stock exchange, a year after seeking regulatory approval. It didn’t need a bank partner to get wired into the market. With Treasuries -- one of the world’s key assets -- Wall Street’s biggest banks still pull the strings.

Isaac Chang, co-head of global trading for AQR Capital Management, compared the Treasury market issues to how central clearing was mandated in the swap market by the Dodd-Frank Act of 2010. While bank-to-bank swap trading was backed by a clearinghouse beginning in 1998, the firms didn’t extend that service to their clients until after the financial crisis when the new U.S. law required it.

About $500 billion of Treasuries trade each day, according to the Securities Industry and Financial Markets Association. Just under half of that takes place one-on-one between dealers and their clients, according to a report last year by the Federal Reserve Bank of New York. This segment is dominated by five banks that control 60 percent of volume, up from 44 percent a decade ago, according to consulting firm Greenwich Associates, which didn’t name the firms.

The days of those two markets existing side-by-side are ending, said Billy Hult, president of Tradeweb Markets. “We are going to be a willing participant to it coming to an end,” he said on the panel. “That is an evolution that will happen and is important to the marketplace.”

Non-banks such as Citadel Securities, the market-making unit of the Chicago hedge fund founded by Ken Griffin, are becoming more important to Treasury trading as banks retreat because new regulations make the trading more costly for them.

“It’s extremely important to Citadel and it’s extremely important to the market” to have firms be able to hold on to difficult to trade Treasury bonds for trading purposes, White said. The market is too important to not have such market makers, she added. “It has to change.”

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