MNI: Treasury Rules Need To Keep Up With Tech, Trades - Liang

Reduced Treasury liquidity since the beginning of the year has served as a daily reminder that regulators need to be vigilant in monitoring market risks and continue to explore ways to enhance Treasury market resilience, Treasury Under Secretary for Domestic Finance Nellie Liang said Thursday.

In a speech to SIFMA providing a progress report on enhancing the resilience of the Treasury market, Liang said regulators are not attempting to eliminate volatility or completely insulate the market from periods of stress but rather increase the market's ability to absorb shocks.

"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," she said in prepared remarks. Liang pointed to various efforts to improving data quality and availability and examining effects of leverage and fund liquidity risk management.

The Treasury market plays a critical role in financing the federal government, supporting the broader financial system, and implementing monetary policy, Liang said, as some Federal Reserve officials have commented on reduced liquidity in the market. Cleveland Fed President Loretta Mester told MNI earlier this month she's more concerned about the potential for quantitative tightening to constrain market liquidity than its effect on financial conditions.

The Treasury Department is currently considering providing additional data to the public on secondary market transactions of Treasury securities, which some investors caution of potential risks to the ability to trade both larger sizes and less liquid issues. "It is important to avoid creating disincentives for intermediaries to provide liquidity," Liang said about the proposal Thursday. The agency will provide an update on its initial findings about reforms at an upcoming Treasury market conference on November 16.

The Office of Financial Research is also working on filling a data gap in the market for non-centrally-cleared bilateral repo transactions, Liang said. (See: MNI INSIGHT: OFR Nears Proposing Rule To Fill Repo Data Gap)

"We have taken important steps forward on enhancing the Treasury market’s resilience and have a strong roadmap for continued improvements," she said. "We will remain flexible. I expect the market will continue to evolve, and public policy will need to evolve alongside it."