SEC Withdraws Appeal on Treasury Dealer Rule

In February 2025 the U.S. Securities and Exchange Commission (SEC) announced its intention to withdraw their appeal against a federal court decision that vacated a controversial expansion of the Treasury dealer rule. The proposed rule would require proprietary trading firms, among others, to register as broker-dealers.  In November 2024, a federal judge in the Northern District of Texas vacated the new rules on grounds that the SEC overstepped its bounds in establishing the new rule. This move signals a retreat from one of the most significant financial market structure overhauls in recent years, and a win for those who argued that the rule would do more harm than good.

Background: The Controversial Treasury Dealer Rule 15b9-1

Initially introduced under former SEC Chair Gary Gensler, Rule 15b9-1 sought to require proprietary traders and other market participants dealing in U.S. government bonds to register as broker-dealers, subjecting them to heightened regulatory scrutiny.  While intended to bolster liquidity and oversight in the US Treasury market, the rule was met with strong resistance from industry participants, including hedge funds, private investment firms, and cryptocurrency organizations. 

Industry Response: Criticisms and Concerns

As the regulatory details emerged, critics swiftly argued that the rule’s expansive reach threatened to ensnare non-traditional market participants, reduce market liquidity, and ultimately increase borrowing costs:

• The rule was overly broad. It captured entities that were not traditionally classified as dealers, including hedge funds that trade for their own account, rather than serving customers.
• It would reduce liquidity. By imposing registration requirements on previously exempt participants, the rule risked discouraging trading activity, making Treasury markets more volatile.
• It would increase borrowing costs. With lower liquidity, Treasury yields could rise, leading to higher debt costs for the U.S. government, and, ultimately affecting taxpayers.

The SEC’s decision to withdraw its appeal comes under the leadership of Acting Chair Mark Uyeda, marking a departure from the previous administration’s regulatory stance. The withdrawal of the appeal is good news for market participants and allows them to continue operating without the regulatory burden. 

Regulatory Shift: From Broker-Dealer Registration to Central Clearing

Looking forward, it is important for market participants to focus on the new requirement to centrally clear eligible U.S. Treasury trades. In December 2023, the SEC approved final rules requiring firms to begin centrally clearing eligible Treasury securities by the end of 2025 and repurchase agreements (repos) by June 2026. On February 25 2025, the SEC extended the compliance dates by one year to December 31, 2026 for the cash market trades and June 30, 2027 for eligible repo market trades. 

SIFMA and other financial trade associations have requested a 12-month extension to these timelines, but to date that has not been approved. There is broad support within the financial industry for Central Clearing, as it reduces settlement risk and increases visibility into clearing and settlement flows. 

Impacts to Firms Relying on Bilateral Settlements

The SEC’s mandate for central clearing of U.S. Treasury securities requires buy-side firms, hedge funds, broker-dealers, and asset managers to address new regulatory and operational challenges. Firms relying on bilateral settlements now face the need to:

• select an appropriate clearing model;
• upgrade systems to manage margin calls and compliance; and
• strengthen risk management frameworks.

Operations and Regulatory Compliance Support to Navigate Change

Oyster Consulting provides expertise and guidance to prepare for this transition, empowering your firm to adapt with confidence. With decades of expertise in compliance and financial technology, we understand the complexities your firm faces. Our team will assess your firm’s operations systems, help you choose the best clearing model, and develop tailored policies, risk management processes, and reporting frameworks.