Regulators Highlight Progress in Treasury Market Structure

In 2015, staff members from the U.S. Treasury Department (“Treasury”), the Board of Governors of the Federal Reserve System (“FRB”), the Federal Reserve Bank of New York, the SEC and the CFTC (collectively, “Joint Member Agencies”) issued a Joint Staff Report on the U.S. Treasury Market. The report detailed the “significant volatility” that took place in the Treasury markets on October 15, 2014 and involved record trading volumes, an unusually rapid round trip in prices, and a deterioration in liquidity in a short amount of time.

On August 2, 2016, the Joint Member Agencies issued a statement highlighting actions and accomplishments over the past year that “further enhance the public and private sectors’ understanding of changes to the structure of the U.S. Treasury market and their implications.” The Joint Member Agencies reaffirmed the findings in the Joint Staff Report and voiced their commitment to following the steps that it contained.

The Joint Member Agencies highlighted the following actions, among others:

  • The Treasury published a request for information about the evolution of the U.S. Treasury market structure as part of a comprehensive official sector review of the U.S. Treasury market.
  • The Treasury, the CFTC, the SEC and the FRB signed a memorandum of understanding (“MOU”) in order to permit the sharing of information about U.S. Treasury cash and related derivative markets among the agencies. The MOU will facilitate the analysis of major market events.
  • On July 19, 2016, the SEC published a proposed FINRA rule that would require member brokers and dealers to report U.S. Treasury cash market transactions to a centralized repository. The SEC also requested comments on the proposal.
  • The SEC published proposed amendments that would enhance the transparency and oversight of alternative trading systems, and solicited public comment on whether such rules should be applied to systems that trade only U.S. Treasury securities.
  • The CFTC published and requested comments on a proposed rule concerning specific aspects of automated trading in futures markets, including U.S. Treasury futures. The proposal covers pre-trade risk controls and requirements (i.e., registration with the CFTC, and development, testing and monitoring standards) for market participants using algorithmic trading systems on U.S. futures exchanges.

Lofchie Comment: The Joint Member Agencies’ statement makes no mention of two significant issues in the government securities markets. First, only one major clearing bank for government securities is expected to exist in the near future. Second, the new leverage limitations are reported to damage the repo market in government securities significantly. These negative developments are probably the result of new regulations.

The disappointing thing about the Joint Member Agencies’ statement is not the potential of the rules it mandates for creating negative or unintended consequences, since new rules are merely experiments that may succeed or fail, and failed experiments are sometimes necessary. What disappoints is that the agencies seem unwilling to acknowledge those failures, which is like refusing to analyze the results of unsuccessful scientific experiments. It would be better for the agencies to acknowledge and address failure openly, since examining past mistakes is the best way to learn from them.