FRB Vice Chair Jefferson Poses Policy Questions on Central Clearing of Treasuries
Commentary by Steven Lofchie
Federal Reserve Board ("FRB") Vice Chair Philip N. Jefferson outlined current policy questions on central clearing in the Treasury market.
In remarks before the 18th Central Bank Conference on the Microstructure of Financial Markets, Mr. Jefferson focused on the market for Treasury securities, which "remains the largest and deepest government securities market in the world." Mr. Jefferson reported that an interagency working group, composed of staff from Treasury, the SEC, the CFTC, the New York Fed and the FRB "has been studying a broad range of ideas to enhance the resilience of the market."
Mr. Jefferson said that the dramatic evolution of the market has the FRB considering:
- whether current intermediation capacity of broker-dealers is sufficient given the size of the market or if an increase in the share of transactions that are centrally cleared is necessary;
- whether a decentralized broker-dealer-intermediated market or an all-to-all market for Treasury securities would be more resilient under stress;
- how the roles of banks and nonbanks in the market should be defined; and
- if market participant incentives facilitate Treasury market resiliency or if "carefully crafted intervention" would be helpful.
Commentary
Any study by the FRB should be conducted in conjunction with the SEC's proposal to mandate central clearing of U.S. government securities trades and repos. The FRB should publish the results of such a study and allow public comment before the SEC moves forward with any rule proposal.