Changes to Clearing Could Quickly Alter U.S. Treasury Market Structure

The U.S. Treasury market structure has been heavily influenced by the clearing arrangements that serve as its foundation. Those arrangements, and the market structure itself, could be on the verge of rapid and dramatic change.

The market for U.S. Treasurys is bifurcated between an interdealer market and a dealer-to-customer market. The two markets have evolved into completely different structures. The interdealer market is nearly fully electronic and the dealer-to-client market is still roughly 50% voice.

The divide between the two has historically been reinforced by clearing arrangements that served as a moat separating the two. In particular, clearing arrangements have hampered the ability of principal trading firms to access customers directly.

Clearing arrangements in U.S. Treasurys have a history, and that history is the key to understanding the current structure of the market, says Ken Monahan, Senior Analyst for Greenwich Associates Market Structure and Technology and author of Invisible Frontiers: How Clearing Shapes U.S. Treasury Market Structure.

The new report examines the design and history of U.S. Treasury clearing arrangements in order to assess their impact on todays market structure and project how that structure might evolve in light of some profound changes in clearing. The report concludes that clearing, long a monopoly in the U.S., may move toward a more competitive European model and that changes at the incumbent central counterparty (CCP) may also make the secondary market structure more competitive.