NY Fed official tells bond market to get ready for central clearing

BY Reuters | ECONOMIC | 06/05/24 11:32 AM EDT

By Michael S. Derby

(Reuters) - A top Federal Reserve Bank of New York official said Wednesday it's time now for market participants to get prepared for new clearing rules looming in the Treasury bond market.

Citing a new rule by the Securities and Exchange Commission mandating central clearing in the government bond market, Michelle Neal, who leads the New York Fed's Markets Group, said "given the importance and scope of this market structure change, it is crucial for market participants to engage now to identify how the SEC rule affects their businesses and to develop plans for clearing eligible transactions."

"Treasury cash clearing is required to go into effect by the end of 2025, and repo clearing is required to go into effect by June 30, 2026," Neal said in the text of a speech to be given before the ISDA/SIFMA Treasury Forum in New York. "While these dates may sound far off now, the time will pass quickly given the complexities involved."

Neal said in her remarks the new central clearing system will have a tangible impact on markets. "Practically speaking, these changes are expected to result in a significant migration of Treasury repo and reverse repo into central clearing," she said, adding "principal trading firm electronic cash trading will likely move into central clearing."

Neal also noted that the new regime brings transparency benefits as well. "More trades going through [central clearing platforms] also would increase visibility into clearing and settlement flows for the official sector, providing improved market monitoring," she said.

(Reporting by Michael S. Derby; Editing by Chizu Nomiyama)

In general the bond market is volatile, and fixed income securities carry interest rate risk. (As interest rates rise, bond prices usually fall, and vice versa. This effect is usually more pronounced for longer-term securities.) Fixed income securities also carry inflation risk and credit and default risks for both issuers and counterparties. Unlike individual bonds, most bond funds do not have a maturity date, so avoiding losses caused by price volatility by holding them until maturity is not possible.

Lower-quality debt securities generally offer higher yields, but also involve greater risk of default or price changes due to potential changes in the credit quality of the issuer. Any fixed income security sold or redeemed prior to maturity may be subject to loss.

Before investing, consider the funds' investment objectives, risks, charges, and expenses. Contact Fidelity for a prospectus or, if available, a summary prospectus containing this information. Read it carefully.

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