Federal Reserve Bank of New York ("NY Fed") President and CEO William C. Dudley described policy changes in the Treasury markets caused by "increased electronification of trading, the changing nature of intermediation and liquidity, and the entry of new market participants." In an address at the NY Fed Third Annual Conference on the Evolving Structure of the U.S. Treasury Market, Mr. Dudley framed his remarks around the priorities identified in the Joint Staff Report issued by the Treasury, the Board of Governors of the Federal Reserve System, the SEC and the CFTC on October 15, 2014.
Mr. Dudley stated that improved transaction data reporting has helped to "clos[e] the data gap," but acknowledged that there is significant work to be done to make sure that data collection is sufficient in light of expanding intermediaries and market participants. Going forward, additional efforts will require the collection of transaction data from depository institutions and a focus on improving data transparency for market participants without negatively affecting market liquidity and integrity.
Mr. Dudley highlighted clearing and settlement practices of the cash market as a particular issue that plagues the Treasury market. Mr. Dudley explained that Treasury transactions are often bilaterally cleared, which includes the involvement of several market participants and contributes to "opaque" practices. He noted the Treasury Markets Practice Group's efforts in this area, suggesting that its market research can help to increase market integrity by facilitating a greater understanding of risk throughout the clearing and settlement process. Mr. Dudley further identified efforts to improve the resiliency of the repo market infrastructure, and urged a continued focus on moving towards a safer centrally cleared repo market.
Mr. Dudley also reflected on the necessity of collaborative regulatory efforts to monitor the Treasury market. He asserted that the constantly evolving nature of the market demands cooperation between regulators and the public to ensure that it is appropriately and effectively regulated.
Commentary / Steven Lofchie
The regulators have recently pushed the FICC to substantially increase liquidity requirements with respect to cleared repos. This will (i) materially raise costs to firms that centrally clear repos, and (ii) encourage firms to move back to bilateral clearing. Order Approving a Proposed Rule Change To Implement the Capped Contingency Liquidity Facility in the Government Securities Division Rulebook. In the case of the clearing of government securities, there is a flight to quality during a time of financial crisis. Consequently, there would seem to be no need for increased regulation (that is, in a crisis, liquidity will flow into governments and out of other products). So isn't this a case where rules intended to make the markets safer by requiring firms to maintain liquidity that they won't need, in fact, make the markets more dangerous by needlessly increasing the costs of central clearing?
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