MNI INTERVIEW: Treasury Market Reform Efforts To Ramp Up-Liang

The U.S. Treasury Department is bolstering its efforts this year to reform the USD23 trillion Treasury market, pushing for more transparency and data and adding that central clearing appears promising for some changes, Treasury Under Secretary for Domestic Finance Nellie Liang told MNI.

"The Treasury market is an urgent area because it is important that it function well even in a stressful time," she said. "The Treasury market is the most liquid, deep market in the world and we want to keep it that way."

Liang suggested reform efforts will not be so strict to solve for previous shocks that could overburden markets in more normal times. "We're not trying to only prevent the last global financial crisis, or only March 2020, but to the extent both of those events told us something about how the system doesn’t work well under stress, you should fix it."

"We are on our own schedule," Liang said, when asked if the Federal Reserve's speedy runoff of assets from its balance sheet urges a faster schedule for reforms. Efforts are being made to push reforms "all at once" even if there is a natural sequence to having rules released for comment or having multiple government agencies working together, she said in an interview earlier this week at an Atlanta Fed conference.

MARGINAL IMPROVEMENTS

As pandemic fears gripped investors in March 2020, Treasury market liquidity rapidly deteriorated to 2008 crisis levels, prompting the Federal Reserve to buy USD1.6 trillion of Treasuries to increase stability.

The Inter-Agency Working Group for Treasury Market Surveillance, led by the Treasury and comprising the Fed and market regulators, has been exploring overhauling the market to improve its resilience in times of stress and have flagged five areas for consideration.

Liang acknowledged the improvements would be incremental considering the rapid increase in the size of the Treasury market and big dealers' constrained ability to intermediate.

"There are a number of places on the margins where improvements can be made, whether it is because trading practices have changed or because of technology, and the regulations have not kept up," said Liang, who was also the first director of the Fed's Division of Financial Stability from 2010 to 2017.

Other proposed changes include tweaking the supplementary leverage ratio, which banks say constrains their ability to hold and deal in Treasuries. That push could gain momentum if President Biden's pick for Fed vice chair for supervision, Michael Barr, is confirmed relatively quickly.

With a focus on off-the-runs, steps to be taken include improving data quality and availability, evaluating expanded central clearing, and enhancing trading venue transparency and oversight, Liang said, not expecting much need for Congress to pass legislation to help the process.

Treasury intends to issue a request for information (RFI) that could come around June, she said, also pointing to efforts by the OFR to fill data gaps for uncleared bilateral repos and SEC proposals to update the definition of a government securities dealer.

(See: MNI: Fed Repo Facility Seen As 1st Step To Address Market Clogs)

MARKET VOLATILITY

Recent lower liquidity has been largely due to elevated volatility as a result of uncertainty, she said. "There's no question that standard measures of liquidity such as bid-asks have been rising, and depth has been falling, but it is in line with the higher volatility," she said. "Not really a lot of concern but something to watch."

Liang said in-house studies show central clearing could be promising, also pointing to an IAWG meeting in November. "That's an area where the authorities lie with the SEC and I think it's promising for some changes," she said. The New York Fed has argued central clearing would have lowered dealers' daily gross settlement obligations by roughly 60% in the weeks around the market disruptions of March 2020.

Acknowledging that central clearing could concentrate risk in a central counterparty, the Treasury official suggested reforms. "Everyone should be concerned about concentrating more risks at individual institutions, but regulations for CCPs can be improved and my guess is there will be a lot of work to do that," she said.