By Karen Brettell

(Reuters) - Proposed rules by the U.S. Securities and Exchange Commission (SEC) to boost central clearing in Treasuries could help to shore up resiliency in the $24 trillion market and may pave the way for more trading that bypasses the large banks that have traditionally dominated the market.

The SEC’s proposed reforms, unveiled on Wednesday, are part of an effort by multiple regulators, the Treasury Department and the Federal Reserve to increase liquidity and reduce volatility in the world's largest bond market.

In recent years the market has suffered from reduced liquidity, with trading seizing up in March 2020 when COVID-19 restrictions roiled financial markets.

The SEC proposed expanding the number of market participants that are required to centrally clear Treasuries to hedge funds, principal trading firms and some other types of leveraged accounts. The regulator also will require central clearinghouses and their members to develop rules and methods that expand clearing access to all investors.

Clearinghouses mitigate systemic risks by sitting in the middle of trades and guaranteeing payments. They take margin from each counterparty to help reduce risks.

It will take months if not years to refine and implement the final details of the rules. However, they should improve "the financial stability of the market, its transparency and arguably cost," said Darrell Duffie, a finance professor at Stanford University.

The Treasury market is currently bifurcated between bilateral trading, where an investor deals directly with a big bank, and 'all-to-all' platforms where banks, principal trading firms and some hedge funds trade anonymously with each other through a centralized order book - similar to stocks and futures exchanges.

With a central clearing house guaranteeing more trades, more of the Treasury market could migrate to "all-to-all" trading venues, which may offer better liquidity and lower trading costs. Large dealers that trade bilaterally with most fund managers are facing more balance sheet constraints at the same time as the market is rapidly expanding.

The Treasury market has grown from $5 trillion in 2007 and is expected to reach $40 trillion by 2032, according to estimates by the Congressional Budget Office.

"Central clearing is an important step that can enhance the stability and resiliency of the market, improve efficiency, expand intermediation capacity and allow further evolutions to occur with respect to trading," said Stephen Berger, global head of government and regulatory policy at Citadel Securities, one of the largest market makers in Treasuries.