Treasury Working Group Reports Progress on Enhancing US Treasury Market Resilience
Commentary by Steven Lofchie
The Inter-Agency Working Group on Treasury Market Surveillance ("IAWG") reported progress on efforts to improve the resilience of the US Treasury market, stating it continues to serve as "the deepest and most liquid market in the world and a cornerstone of the financial system."
The IAWG is composed of members from the US Treasury, the Federal Reserve Board, the Federal Reserve Bank of New York, the SEC and the CFTC.
In a 2024 Staff Progress Report, the IAWG described its work to increase the resilience of market intermediation, improve data transparency, assess the impact of expanded central clearing, enhance oversight of trading venues and evaluate risks related to leverage and fund liquidity management. (See coverage on the 2023 Report.)
The IAWG detailed efforts undertaken in the past year. The IAWG reported that its member institutions:
- Launched a Treasury buyback program to bolster market liquidity by purchasing less frequently traded off-the-run Treasury securities and Treasury Inflation-Protected Securities;
- Adopted SEC rules requiring entities that engage heavily in proprietary trading of Treasury securities to register as dealers and report their activities to FINRA's TRACE system;
- Approved the release of trade-level data on secondary market transactions in on-the-run Treasury securities through daily reporting, providing market participants with more detailed information on trading activity;
- Enhanced data collection on the repo markets with the Office of Financial Research finalizing a rule requiring daily reporting of non-centrally cleared bilateral repos;
- Amended SEC Form PF to require large hedge fund advisers to provide more detailed reports on their activities in the Treasury markets, particularly regarding their leverage and liquidity risks; and
- Expanded central clearing for Treasury transactions, with SEC rules that are expected to bring an additional $4 trillion of daily activity under central clearing.
Commentary
In its report, the IAWG provides a list of significant regulatory changes that have been made or are in progress as to the US Treasury market. There is little or no empirical data to demonstrate that these changes will improve the market. Changes such as requiring firms to register as dealers or to require the central clearing of US Treasuries seem quite likely to raise costs and reduce liquidity. The financial regulators should, at a minimum, recognize that regulatory changes such as the ones that they have made are, at best, based on theories of how markets work. Even theories that seem obvious--and the positive impact of these theories is not obvious--don't always turn out as hoped.