Policymakers warn US Treasury market needs reform after shock

U.S. policymakers and other financial experts have escalated calls for $22 million in market reform for US Treasury securities to protect it from future shocks after the recent tumultuous trading.

The world’s most important government bond market fell into turmoil last March as investors feared the start pandemic caused by corona virus tried to sell off their Treasury holdings.

Speakers at an annual treasury market conference on Wednesday said recently policy improvement didn’t go far enough to prevent future trouble.

John Williams, president of the Federal Reserve Bank of New York, joined senior Biden administration officials in saying that changes are needed to the way the Treasury is traded and managed.

“Severe disruptions to key financial markets like we saw last spring must be rare. But just as a town ravaged by floods will find a way to rebuild in a way that will help it weather the next big storm, so too must we think about how to strengthen the Treasury market so that it can better withstand the next big shock,” Williams told the New York Fed-led conference.

America Federal Reserve took steps to bolster the way the Treasury market bounced back in times of stress, launching two perpetual programs in July allowing qualified market participants to swap securities for cash with fixed rate.

But conference participants stressed that much more needs to be done.

Gary Gensler, chairman of the US Securities and Exchange Commission, suggests that proprietary trading firms register with his agency, which could shed more light on their operations.

These groups include high-frequency trading firms that have become major players in the Treasury market, but are not necessarily subject to the same level of scrutiny as the group of 24 so-called primary dealers.

Banks have long been the main liquidity providers for the Treasury market, but they stepped back after regulations passed in the wake of the 2008 financial crisis limited the amount of debt they could hold. on its balance sheet. This has created an opportunity for commercial companies to step in.

Gensler also spoke strongly about the need for central clearance. Clearance is a utility that stands between buyers and sellers to ensure transaction conditions. Central clearing limits the risk of default and can therefore allow for a smoother operation in the market.

Nellie Liang, an economist who holds the position of secretary of domestic finance at the US Treasury Department, acknowledged that central clearing is “promising”, but she also told the conference about the limitations. its possible mode.

“The potential higher cost of entering the market and the potential risk of expanding centralized clearing has to be weighed against the concentration of risk in a central counterparty,” she said.

Sandie O’Connor, a former managing director at JPMorgan Chase who serves on the Expert Task Force on Financial Stability, has proposed changes to the rules that guide the amount of capital that financial institutions hold. The biggest key to hold.

Large banks must have capital at least 3% of their assets, or 5% for the largest institutions. Lenders were allowed to temporarily exclude holdings of Treasurys and cash in reserve at the Fed from their assets when they calculate rates after March 2020, but the requirement was reinstated this year .

“Brokerage agents cannot adjust their balance sheets to deal with deviations as they occur. And that’s exactly when we want our principal dealers to flex their balance sheets,” said O’Connor.

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