US regulators move closer to treasury market reforms
U.S. regulators have moved closer to the proposal for further reforms to the Treasury securities market as they continue to study the March 2020 disruptions triggered by the onset of the Covid-19 pandemic.
A progress report released on Monday by a group of employees from the Treasury Department, the Federal Reserve and other key regulators identified five areas for study. He has shown continued interest in expanding central clearing, improving transparency of trading activities, and improving oversight of trading venues, among other topics. The report was prepared by the Interagency Treasury Market Surveillance Working Group, which gave no time frame for any recommendations.
In July, the Fed implemented the most significant response since the March 2020 collapse when it made its permanent buyback facility permanent – a mechanism to provide short-term funding to financial institutions through financial institutions. ‘pension agreements. The IAWG report continued to reflect on expanding eligibility for the national version of this program, following some adjustments made by the New York Fed in August.
The report focuses largely, but not exclusively, on the dramatic withdrawal of investors from the longer-term Treasury securities market amid the global rush to cash dollars last year at the start of the Covid crisis. -19.
Increased central clearing, which has been proposed by some outside observers, including a group of former policymakers known as the Group of 30, has become a goal, but the report paused before making clear recommendations. .
Some commentators believe that an increased role for central clearing can reduce the risk of disruption by limiting the market’s current heavy reliance on brokerage balance sheets and their limited ability to handle stressful market events. This is something that has been the subject of debate in the industry for years and that offers benefits, but also costs and potential implications for the financial system. Monday.
Stanford University finance professor Darrell Duffie, a proponent of central clearing, proposed last year that regulators delve into a cost-benefit analysis on the matter.
Read more: Duffie sees T-bills status at risk without central clearing
As participants in the public debt market have changed over the years, the share of centrally cleared transactions has declined. The Treasury Market Practices Group estimated that 13% of cash transactions are cleared centrally, 68% are cleared bilaterally and 19% involve a hybrid clearing scheme, according to Monday’s report.
The report identified several sources of the dramatic demand for liquidity in March 2020 – including foreign investors, open-ended bond mutual funds, hedge funds, pension funds and leveraged investors, who have all shied away from longer-term Treasuries.
To stop this March 2020 collapse – which threatened to cripple the world’s largest and most liquid financial market – the Fed intervened with massive purchases of Treasuries.
Hedge funds, according to Monday’s report, were among the biggest sellers of Treasuries amid the havoc of March 2020. The Financial Stability Oversight Council, or FSOC – a separate group of regulators tasked with monitoring threats to stability global – established two more interagency working groups to study the role of open-ended mutual funds and hedge funds in the episode.
Examining the 2020 episode and other more minor disruptions in the treasury market, the report called it a “recurring theme” that in times of stress, intermediary institutions have only capacity and capacity. limited willingness to provide liquidity for normal market operations. This has also happened against a backdrop of an increase in the supply of public debt.
One potential change to come is a more detailed report on transaction volumes between dealers and dealers and treasury bill customers, broken down by category, including maturity. The introduction of aggregate weekly reports went well, Monday’s report suggested. Given “the absence of negative market feedback, it is consistent with previous principles to further explore increasing transparency,” he said.
Besides the Treasury Department, other members of the IAWG are the Fed Board of Governors, the New York Fed, the Securities and Exchange Commission, and the Commodity Futures Trading Commission.