(Bloomberg) -- A sweeping regulatory change that’s set to rewire the way US Treasury trades clear will likely stunt advancements in sovereign bond electronic trading strategies, according to Barclays Plc.

The Securities and Exchange Commission’s overhaul is intended to strengthen the resilience of the $26 trillion US Treasuries market after a series of liquidity breakdowns in recent years. But there’s a likelihood that the move, which is set to culminate in mid-2026, will increase friction by forcing the majority of Treasuries transactions to be cleared centrally, according to Barclays head of research Jeff Meli. 

Electronic systematic trading typically requires “reduced friction and high liquidity to ease implementation costs,” Meli said. “The risk for the government bond market is that it might go in the other direction because of this.” 

While the impact is likely to be most acute in the US, the regulatory overhaul will have a knock-on impact for cross-regional bond trading strategies because varying clearing requirements have different capital implications, Meli added. Systematic approaches, which use algorithms to take lots of small positions in different financial instruments to exploit patterns, will be particularly challenged, he said.

“It’s going to create regional constraints and nuances where seemingly identical assets are no longer perfect substitutes for each other,” he said, using the example of German Bunds and US Treasuries, often being placed into the same zero-risk bracket. “We’re going in the opposite direction in credit, where it’s becoming much easier to trade across different assets.”

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