By Carolina Mandl and Davide Barbuscia
BOCA RATON, Florida (Reuters) -London Stock Exchange Group's London Clearing House (LCH) business is considering expanding into clearing U.S. Treasuries, its head of Americas John Horkan said on Wednesday, as competition in the market looks set to increase.
Currently, the Fixed Income Clearing Corporation, a subsidiary of trade processor DTCC, is the country's sole clearer of Treasuries. However, the U.S. Securities and Exchange Commission in December adopted new rules aimed at reducing systemic risk in the $26 trillion U.S. Treasury market by forcing more trades through clearinghouses.
LCH's Horkan said at a conference hosted by the Futures Industry Association in Boca Raton, Florida, that LCH is actively engaged with market participants about Treasury clearing.
"It's definitely something that we're looking at," he told the audience.
It comes a day after CME Group (NASDAQ:CME) said it plans to apply to clear U.S. Treasuries and Intercontinental Exchange (NYSE:ICE) said it is interested in this market.
DTCC's Head Of Fixed Income (FICC) Laura Klimpel said during a conference panel on clearing that the new U.S. Treasuries clearing mandate was likely to increase DTCC's activity by between $2.5 trillion and $4 trillion a day. Currently, it clears $7 trillion a day.
Some market participants welcomed potential competition in the market, given recent increased issuance of U.S. Treasuries.
"I think the volume and amount of issuance is really starting to cause a little bit of a bottleneck, and so the more clearing facilities the Treasury has, the better,” said Tom di Galoma, managing director and co-head of global rates trading at BTIG.
The Treasuries market is one of the most liquid in the world, and the global financial system uses the debt instruments as a benchmark for other asset classes. But it has seen liquidity issues, such as in March 2020, when pandemic fears caused market ruptures and liquidity rapidly deteriorated.
"While a single, central clearinghouse for Treasuries does offer operational and capital efficiencies, history has shown that competition ultimately leaves the market with a more robust and often lower cost solution," said Kevin McPartland, head of market structure and technology research at Coalition Greenwich.