NY Fed President Identifies Priorities for U.S. Treasury Market

In remarks at the Federal Reserve Board of New York (“NY Fed”) Third Annual Conference on the Evolving Structure of the U.S. Treasury Market, NY Fed President and CEO William C. Dudley shared regulatory progress and identified focus areas for the U.S. Treasury Market. Mr. Dudley framed his remarks around the priorities identified in the Joint Staff Report on the extreme market volatility issued by the Treasury, the Board of Governors of the Federal Reserve System, the SEC and the CFTC on October 15, 2014.

With regard to the treasury market, Mr. Dudley expressed 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, Mr. Dudley stated, efforts will include an FRB plan to collect transaction data from depository institutions, and a focus on improving data transparency for market participants without negatively affecting market liquidity and integrity.

Mr. Dudley also identified market infrastructure as an area of focus for the Treasury market. He pointed to the clearing and settlement practices of the cash market as a particular issue that has plagued the Treasury market. Mr. Dudley said that Treasury transactions are often bilaterally cleared, which includes the involvement of several market participants and contributes to “opaque” practices. He highlighted 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.

Finally, Mr. Dudley 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.

Lofchie Comment: The regulators have recently pushed the FICC to substantially increase liquidity requirements with respect to cleared swaps. This will (i) materially raise costs to firms that centrally clear swaps, 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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