Treasury Under Secretary Highlights Efforts to Strengthen Market Liquidity  

Treasury Under Secretary for Domestic Finance Nellie Liang outlined the Treasury Department's ongoing efforts to bolster liquidity in the US Treasury market.

In remarks at a "Future of Financial Markets: Innovation and Uncertainty" conference, Ms. Liang emphasized the importance of ensuring that the Treasury market remains the deepest and most liquid financial market globally while preparing for periods of volatility. She focused on the following key areas of reform:

• Market Liquidity and Intermediation. Ms. Liang highlighted the evolving structure of the Treasury market, where technological changes and shifts in market participants have impacted liquidity. She asserted that increased electronic trading and the growing role of Principal Trading Firms have altered how liquidity is provided, citing events like the October 2014 "flash rally." She said that to address market liquidity concerns, the Treasury launched a buyback program to help dealers manage their balance sheets more effectively by creating predictable opportunities to offload less-liquid securities.
• Data Transparency. Ms. Liang emphasized the importance of providing real-time data on market transactions. She pointed to a collaboration with FINRA, which now offers daily transaction-level data on on-the-run Treasury securities, a step up from the weekly data previously available. The Treasury is also working to close data gaps in the bilateral repo market, where new transaction-level reporting will start in December 2024. She said that these efforts aim to help both regulators and market participants assess vulnerabilities and improve liquidity management.
• Regulatory Reforms. Ms. Liang emphasized that new regulatory measures are being implemented to enhance the resilience of the Treasury market. She cited new SEC rules requiring central clearing of Treasury securities and repo transactions which are expected to boost market stability. She said the central clearing mandate will be phased in by 2025 for cash securities and 2026 for repo. She also mentioned the need to reconsider the Supplementary Leverage Ratio, proposing adjustments that would improve the elasticity of liquidity supply during market stress without compromising overall capital requirements for banks.
• Addressing Leverage in Hedge Funds. Ms. Liang raised concerns over the excessive leverage employed by some hedge funds, especially in relation to the cash-futures basis trade, which contributed to liquidity stresses in March 2020. She discussed ongoing efforts to monitor hedge fund leverage more closely, including enhanced data collection through Form PF and new rules requiring more transparency in repo transactions. These reforms, she said, aim to prevent destabilizing market conditions in the future, while still allowing hedge funds to provide essential liquidity in normal times.