SEC Enacts New Registration Mandate for Key Market Players to Bolster Oversight

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The SEC introduced new rules requiring liquidity providers to register as dealers or dealers in government securities in February 2024, with the goal of improving market stability and transparency.

The US Securities and Exchange Commission (SEC) has finalized new rules, effective February 6, 2024, requiring certain market participants to register as “dealers” or “dealers in government securities.” These participants are the ones who assume significant roles in providing liquidity to the markets. The SEC’s initiative is aimed at increasing market integrity, resilience and transparency by ensuring that firms engaging in dealer-like activities are subject to registration and regulatory requirements, as SEC Chairman Gary Gensler emphasized. The rules, known as Exchange Act Rules 3a5-4 and 3a44-2, set forth activities that, if conducted as part of the regular course of business, would require registration under Sections 15 and 15C of the Securities Exchange Act of 1934.

The development is part of a broader effort to address structural problems and liquidity challenges in the $26 trillion government bond market. By including more transactions through clearing houses, these rules mark a significant change aimed at increasing market stability. Despite objections from Republican commissioners who felt the rule was too broad and potentially burdensome, the rule targeted proprietary traders, among others, recognizing their central role in market liquidity. The final rule underwent revisions from its original proposal, including the elimination of a quantitative test and a qualitative test that would have expanded the scope of firms required to register as dealers. The move is expected to affect approximately 43 companies, with modifications intended to ease the concerns of various market participants, including hedge funds, which may still be covered by the qualitative aspects of the definition.

The new regulations mean a strategic shift towards greater oversight and standardized regulatory compliance for entities that significantly affect market liquidity. The SEC’s move highlights the balancing act between increasing market resilience during periods of stress and the potential impact on trading costs and liquidity under normal conditions. The adoption of these rules follows a public comment period and reflects detailed consideration of feedback from a wide range of stakeholders, underscoring the SEC’s commitment to investor protection and market stability.

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