Anyone who has been following the financial markets news over the last few months would have seen the recent articles highlighting the concern about the liquidity in US Treasury markets, which is sized at $23 Trillion in terms of outstanding debt. Here are some recent articles, in case you missed.?
Why should this be a big deal???
- Given the leadership status United States in the geo-political, economic spheres in the free world, the US treasury market (the combination of cash, repo and futures) is seen as the safest, deepest, most liquid and important market in the world. It is has been the safe-haven for investors across the world during periods of market stress and normalcy.??
- Given the stability and risk-free nature of the market, US Treasury market is the benchmark for credit risk free yield curve, having a knock-on effect on the rates that consumers, businesses, and governments across the globe pay to borrow money.?
- The U.S. Treasury repo market is used as an instrument of U.S. monetary policy, through transactions in the treasury market, which in turn has an effect on other markets across the world.?
However, the past years have seen tremors in the market that are raising the question – “Is well with the US Treasury market?”?
These events have led the USDOT, FED and the regulatory agencies to analyze the causes and evaluate measures that could improve the resilience of the market. Potential reasons being investigated include:?
- Is the U.S. government debt is growing at a faster pace (due to the government stimulus measures, increase in supply of the Treasury securities) than the capacity of the Financial institutions to intermediate??
- Given the stringent regulatory requirements in place post the Global Financial Crisis, are the broker-dealers constrained in their ability to make markets due to the Supplementary Leverage Ratio (“SLR”) related capital requirements??
- Does the increase in activity of Principal Trading Firms (PTFs) and the lack of parity in regulatory compliance with Broker Dealers, have a detrimental effect on the market structure, impacting liquidity???
The preliminary results of their efforts and considerations are summarized in the staff progress report that was published on November 10, 2022.?
Improve resilience of market intermediation?
- Changing regulation to mandate SEC registration of Principal Trading Firms (PTFs)?
- Changes to market structure to enable All-to-All trading?
- Bring congruency in margin regulation to avoid regulatory arbitrage?
Improving data quality and availability?
- Enhancements to data collection to include large HFs in reporting mandates through changes to Form PF?
- Improve data collection via TRACE to have reports more timely, granular and comprehensive??
- Improve data collection across non-centrally cleared bilateral repos?
- Enhance counterparty identification with broader use of standard identifiers (LEI)?
Enhancement to public data availability?
Expansion of central clearing to all market?
Enhancing trading venue transparency and oversight?
If these were to evolve into recommendations and later rules, this could mean significant changes to technology as well. Areas one could anticipate changes are?
- Changes to trading venues to allow direct access to Pension funds, Insurance Companies, hedge funds, etc.?
- Pension funds, Insurance Companies, hedge funds, etc. having to develop trading capabilities?
- Clearing and Settlement function to include PTFs and currently non-cleared repos into its scope???
- Changes to collateral management function to bring parity in margin calculation across centrally cleared and bilaterally cleared instruments?
- Regulatory reporting for hedge funds, or dealers extending their IT for reporting services to hedge funds?
- Improvements in TRACE reporting implementation which required additional data sourcing, translations and reporting?
- Changes in reference data to ensure LEI availability and inclusion in processing?
Hence it would be interesting to see the industry view point being discussed during this week on November 16, 2022 at The 2022 U.S. Treasury Market Conference - FEDERAL RESERVE BANK of NEW YORK (newyorkfed.org). The event will also be available virtually, via a webcast. (Amazing how these discussions are accessible to us all, isn’t it?)?