Bessent Sees Easing Capital Rule on US Treasuries This Summer

Treasury Secretary Scott Bessent indicated that US regulators are nearing a decision to ease the supplementary leverage ratio (SLR) rule, which has constrained banks' trading in the $29 trillion Treasuries market. Bessent stated on Bloomberg Television that the Federal Reserve, OCC, and FDIC are addressing the issue and a decision could be reached this summer. Easing the SLR could potentially boost liquidity and trading activity in the Treasury market.

Analysis

Treasury Secretary Scott Bessent has signaled a potential easing of the supplementary leverage ratio (SLR) by US regulators, possibly as early as this summer, which could significantly affect banks' trading activities in the $29 trillion US Treasuries market. This rule has been perceived as a constraint on banks' capacity to participate in this market. The Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Federal Deposit Insurance Corp. (FDIC) are reportedly close to a decision on this matter. An adjustment to the SLR is anticipated to enhance market liquidity and could stimulate increased trading volumes in Treasuries, a development supported by a moderately positive market sentiment and an optimistic tone regarding its potential impact.

Key Decisions for Investors

• Investors should closely monitor announcements from the Federal Reserve, OCC, and FDIC regarding potential modifications to the supplementary leverage ratio this summer, as changes could directly influence liquidity and trading conditions in the U.S. Treasury market.
• Consider the potential for improved operating flexibility and profitability for financial institutions, particularly large banks with significant trading desks, should the SLR be eased, as this could reduce capital constraints on their Treasury market activities.
• Evaluate the broader implications for fixed-income markets, as increased bank participation due to SLR adjustments could lead to enhanced market depth, potentially tighter bid-ask spreads, and more efficient price discovery in U.S. Treasuries.