The Aerial View: Future-Proofing the U.S. Treasury Market

BNY
By November 18, 2021 10:21

The Aerial View: Future-Proofing the U.S. Treasury Market

Recent stresses in U.S. Treasury trading have been incongruous with a market that holds itself out as the deepest and most liquid in the world. For those trading in March 2020, it was surprising how the pandemic-induced panic threatened the integrity of even safe-haven government securities and how challenging it was to sell them. That was just the latest episode exposing fault lines in the $22 trillion Treasury market. Over the years, cracks have emerged as sophisticated technology platforms and high-frequency traders have contributed to faster flows. The size of the market has expanded, overwhelming the capacity of broker dealers to facilitate Treasury trading. And the Federal Reserve has increased its footprint by buying trillions of dollars of Treasuries and shoring up the market for repurchase agreements or “repos” backed by Treasury securities. The prevailing view of academics, regulators and others tasked with understanding the latest liquidity shortages is that the Treasury market’s infrastructure, and the Federal Reserve’s role in it, needs to be reevaluated—as do regulations affecting the market. One idea is to broaden access to a new Fed backstop beyond primary dealers and banks. Another is to boost membership of an industry clearinghouse and increase the Fed’s oversight of that utility. A third idea is to revisit leverage rules targeting banks to try to prevent them from gumming up markets and a fourth is to increase transparency

BNY
By November 18, 2021 10:21

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