☷Remarks by Under Secretary for Domestic Finance Nellie Liang at the Securities Industry and Financial Markets Association s Prudential and Capital Board Subcommittee
U.S. Department of the Treasury ( By Press Release office)
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As Prepared for Delivery Let me begin by thanking SIFMA for inviting me to speak at today’s meeting . In my remarks , I will focus on the progress made by the official sector towards enhancing the resilience of the Treasury market . [i]The Treasury market plays a critical role in financing the federal government , supporting the broader financial system , and implementing monetary policy . To ensure the Treasury market continues to fulfill these vital purposes , the official sector needs to seek continual improvements that strengthen the Treasury market in order to keep pace with changing technology and trading patterns . In addition , amid the increase in economic and market volatility since the beginning of the year , reduced market liquidity has served as a daily reminder that we need to be vigilant in monitoring market risks . While the Treasury market continues to operate through today’s macro uncertainties , episodes of market stress , for example in March 2020 , September 2019 , and October 2014 , underline the importance of understanding market vulnerabilities and exploring ways to enhance Treasury market resilience . Last November , Treasury , in conjunction with the Inter - Agency Working Group on Treasury Market Surveillance ( or the IAWG ) , released a staff progress report to update the public on its work . [ii] Although each agency has distinct roles and authorities with regard to the Treasury market , the agencies are collaborating to better understand the issues and work together toward shared goals . In the ten months since the publication of the staff progress report , we have already made significant progress . Before highlighting the key elements of progress , I want to be clear about our objectives . These actions , or any official sector actions for that matter , are not meant to eliminate volatility or completely insulate the market from periods of stress . Instead , the aim is to increase the ability of the Treasury market to absorb , rather than amplify , potential adverse shocks and disruptions . At the same time , we recognize that some shocks can be extreme and unpredictable , such as the COVID pandemic , and official interventions may still be necessary even with substantive reforms . The report highlighted five workstreams the IAWG has prioritized . [iii] Today , I plan to focus on progress made on the workstreams related to data transparency and changes in Treasury market liquidity demand , areas where Treasury can and has played a more active role . I will conclude by mentioning some other important accomplishments from across the IAWG . Improving Data Quality and AvailabilityAccess to accurate and timely data is vital . For the official sector , data enable analysis of the effects of current and potential policies , as well as prompt and effective responses if stresses emerge . For market participants , data provide confidence in the market’s fairness and efficiency and inform trading decisions . The official sector already collects substantial data on the Treasury market , including data on most cash market transactions through TRACE as well as most centrally cleared or triparty repo transactions . These data have proven invaluable in policymaking and have been incrementally improved over the years . Just this month , TRACE began to include data on transactions by certain depository institutions , closing an important data gap . One of the largest remaining data gaps is in the market for non - centrally - cleared bilateral repo transactions . The Treasury Department’s Office of Financial Research recently met with various industry participants to better understand current practices in this market and conducted a pilot data collection . The pilot collection was designed to prepare for rulemaking to establish a permanent data collection covering the broader market . Treasury is also considering providing additional data to the public on secondary market transactions of Treasury securities . Previous incremental increases in transparency appear to have benefited markets , and there may be room to do more , though it is important to avoid creating disincentives for intermediaries to provide liquidity . In June , Treasury published a request for information to solicit public feedback on additional transparency for secondary market transactions of Treasury securities . The comment period recently closed , and we received 28 comments from a broad range of market participants . The comments include diverse opinions on the potential benefits and costs of additional transparency , but were overall supportive of the official sector’s objective to enhance Treasury market resilience . Differences focused on the pace and ultimate extent of transparency that should be provided . We plan to provide an update on our initial findings at the upcoming Treasury market conference on November 16 . Also , the SEC recently approved two proposed amendments from the Financial Industry Regulatory Authority regarding TRACE for Treasuries . First , an amendment to shorten the reporting timeframe to 60 minutes and increase the granularity of transaction details reported . And , second , an amendment to publish the aggregated Treasury security transaction statistics on a more frequent basis , such as moving from weekly to daily publication . Examining Effects of Leverage and Fund Liquidity Risk Management PracticesLet me turn next to the growing size and influence of certain investor positions and trading flows on Treasury market liquidity . Since the global financial crisis , open - end corporate bond funds have grown substantially as a share of corporate bonds and as a share of Treasury securities . However , the daily liquidity offered to shareholders does not reflect that the funds’ underlying assets can be significantly less liquid , creating a first - mover advantage . This first - mover advantage can create a surge in demand for bond market liquidity in stress periods when investors want to flee to cash - like assets . While Treasury securities are an important liquidity risk management tool , they can be the first securities sold in a stress period – given their higher liquidity relative to other bonds – possibly amplifying stresses in markets . In such periods , highly - leveraged hedge funds may also need to liquidate assets , including Treasury securities . These scenarios played out in the “dash for cash” in March 2020 , when hedge funds and open - ended bond mutual funds were two of the largest participants in the broad selling of Treasury securities . In 2021 , the Financial Stability Oversight Council made it a priority to evaluate and address the risks to U . S . financial stability posed by these funds and established working groups to bring together the agencies to share information and expertise . SEC Chair Gensler has asked the SEC staff to consider changes to rules for open - end funds , including related to fund liquidity , pricing , and resilience in stress periods . On the international front , the Financial Stability Board will make a set of recommendations to mitigate issues of structural liquidity mismatch in some open - end funds . For hedge funds , the SEC and CFTC jointly proposed additional amendments to enhance reporting by large hedge funds , including refining the reporting of investment exposures and leverage as well as better differentiating between positions in the cash versus derivatives markets for Treasury securities , which should improve the ability to monitor systemic risk . Other WorkstreamsAs you know , the IAWG highlighted three other workstreams – improving resilience of market intermediation; evaluating expanded central clearing; and enhancing trading venue transparency and oversight – and there has also been progress made by the agencies . The Federal Open Market Committee announced the establishment of a domestic standing repo facility and a repo facility for foreign and international monetary authorities . The SEC re - proposed regulations for oversight of and public disclosures by Treasury trading platforms , including removing the prior government securities exemption and expanding the definition of exchange to include a broader set of trading venues , such as request - for - quote platforms . In March , the SEC proposed rules outlining specific qualitative and quantitative criteria for determining whether a market participant must register as a dealer or government securities dealer and comply with the associated rules . And , just last week , the SEC proposed rule changes that would enhance risk management practices for central counterparties in the Treasury market and facilitate additional clearing of Treasury securities transactions . We have compiled a list of all the progress the IAWG has made , which we will be posting , and plan to discuss more at the November conference . To conclude , we have taken important steps forward on enhancing the Treasury market’s resilience and have a strong roadmap for continued improvements . In addition , we will remain flexible . I expect the market will continue to evolve , and public policy will need to evolve alongside it . [i] See the accompanied fact sheet released today on the official sector’s progress in enhancing the resilience of Treasury markets . [ii] The Inter - Agency Working Group on Treasury Market Surveillance ( IAWG ) is comprised of staff from the U . S . Department of Treasury , the Board of Governors of the Federal Reserve System , the Federal Reserve Bank of New York , the U . S . Securities and Exchange Commission , and the U . S . Commodity Futures Trading Commission . [iii] The five workstreams are: improving resilience of market intermediation; improving data quality and availability; evaluating expanded central clearing; enhancing trading venue transparency and oversight; and examining effects of leverage and fund liquidity risk management practices .
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