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

The U.S. Securities and Exchange Commission (SEC) has finalized new rules, effective from February 6, 2024, requiring certain market participants to register as "dealers" or "government securities dealers." These participants are those who take on significant liquidity-providing roles in the markets. The SEC's initiative is aimed at enhancing market integrity, resiliency, and transparency by ensuring that firms engaging in dealer-like activities are subject to registration and regulatory requirements, as highlighted by SEC Chair Gary Gensler. The rules, known as Exchange Act Rules 3a5-4 and 3a44-2, define activities that, if engaged in as part of a regular business, would necessitate registration under Sections 15 and 15C of the Securities Exchange Act of 1934​​.

This development is part of a broader effort to address structural issues and liquidity challenges in the $26 trillion Treasury market. By incorporating more trades through clearinghouses, these rules mark a significant overhaul aimed at increasing market stability. Despite objections from Republican commissioners who deemed the rule too broad and potentially burdensome, the rule targets proprietary traders among others, recognizing their pivotal role in market liquidity. The final rule has undergone adjustments from its initial proposal, including the removal of a quantitative test and a qualitative test that would have widened the scope of firms required to register as dealers. This move is expected to affect approximately 43 companies, with modifications intended to alleviate concerns from various market participants, including hedge funds that could still be covered under the qualitative aspects of the definition​​.

The new regulations signify a strategic shift towards greater oversight and standardized regulatory compliance for entities that significantly influence market liquidity. This move by the SEC underscores a balancing act between enhancing market resilience during stress periods and potentially impacting trading costs and liquidity under normal conditions. The adoption of these rules follows a public commentary period and reflects a detailed consideration of feedback from a wide range of stakeholders, emphasizing the SEC's commitment to investor protection and market stability.