Experts Urge Reforms to Ease Treasury Balance Sheet Constraints

Experts urged regulators to adopt certain structural reforms at a House Financial Services Task Force hearing on the role of primary dealers in Treasury markets and how increasing government debt issuance impacts their capacity to make markets and participate in Treasury auctions.

Witnesses before the Task Force on Monetary Policy, Treasury Market Resilience and Economic Prosperity warned that the rapid growth of the national debt is outpacing the intermediation capacity of primary dealers. The experts urged regulators to adopt structural reforms to ensure market resilience.

At the hearing titled Examining Primary Dealers and Balance Sheet Constraints:

Susan E. McLaughlin, Executive Fellow at the Yale Program on Financial Stability, warned that marketable Treasury debt is growing faster than primary dealers’ capacity to intermediate it. She noted that recent measures—such as the Treasury buyback program and central clearing—will add capacity, but may be insufficient given the pace of debt expansion. Ms. McLaughlin stressed that primary dealer status should remain reserved for true two-way market makers to protect monetary policy operations, suggesting the Treasury consider separate mechanisms for auction support if needed. She also encouraged exploration of market structure reforms like all-to-all trading, while cautioning that the "first-order problem" is the unchecked growth of the national debt itself.

James Tabacchi, Chair of the Independent Dealer and Trader Association, cautioned that the Treasury and repo markets face growing concentration risk as competition declines. He noted that the national debt is projected to exceed $50 trillion even as the number of primary dealers shrank from 41 in 1990 to 25 today, largely dominated by banks constrained by balance sheet limits during stress periods. Mr. Tabacchi emphasized the countercyclical role of independent non-bank dealers, which often supply liquidity when large banks pull back at quarter-end. He urged regulators to broaden access to the Standing Repo Facility and expand the primary dealer program to include more non-bank firms—potentially through an aspiring primary dealer tier—to ensure the market can absorb future issuance.

Laura Klimpel, Managing Director and Head of DTCC’s Fixed Income Clearing Corporation ("FICC"), explained that expanding central clearing is critical to easing balance sheet constraints in the Treasury market. She explained that balance sheet netting and favorable capital treatment under central clearing significantly increase dealers’ capacity and noted that FICC has already implemented the required access model changes ahead of the SEC’s 2026–2027 compliance deadlines. Ms. Klimpel highlighted innovations, such as the Sponsored Service and Agent Clearing Service, and reported recent industry agreement on accounting treatment for "done-away" repo activity. She also pointed to pending proposals that would eliminate double-margining for tri-party funds and described ongoing efforts to expand cross-margining with CME Group to further enhance capital efficiency.

Haoxiang Zhu, Associate Professor at MIT, argued that strengthening primary dealers’ intermediation capacity is essential for sustaining Treasury market liquidity, calling full implementation of central clearing the most powerful policy tool to achieve it. He estimated that while sponsored clearing has already freed roughly $1.2 trillion in balance sheet capacity, clearing all remaining uncleared primary dealer repos could add up to $1.3 trillion more through multilateral netting. Mr. Zhu also urged improvements to market infrastructure, including expanded post-trade transparency for off-the-run Treasuries and removing the regulatory exemption that keeps government securities platforms outside Regulation ATS. Additionally, he recommended more active issuance of floating-rate notes indexed to short-term rates to reduce interest-rate risk, lower borrowing costs, and improve maturity management.