Status Update – U.S. Treasury Markets
Steps Toward Increased Resilience
In July 2021, the Group of Thirty (G30) published a report entitled U.S. Treasury Markets: Steps Toward Increased Resilience. To enhance the liquidity of the Treasury markets under stress, the report made ten recommendations, a central goal of which was to increase, diversify, and stabilize market-making capacity in the Treasury markets. The G30’s ten recommendations addressed five sets of key issues: (1) central bank liquidity support for Treasury market functioning, (2) central clearing of trades of Treasury securities and Treasury repos, (3) prudential regulation of dealers, (4) market transparency, and (5) market regulation.
This follow-up report, which has been prepared by the individuals who served as the leadership team for the Working Group that produced the original report, assesses the degree to which actions by U.S. authorities since the original report have been consistent with the ten recom- mendations. Our review of developments in the Treasury market, including research and analysis conducted since, and recent discussions with market participants and officials in the relevant U.S. agencies, suggests the foundational case for those recommendations remains strong.
Although notable progress has been made on some issues, much more remains to be done. This is not surprising given the complexity of the issues, the formal requirements for agency rulemaking in the United States, and the range of other challenges facing the key agencies with authority over the Treasury market. Nonetheless, as Treasury debt continues to grow rapidly and market-making capacity remains limited and concentrated, the Treasury market almost surely remains highly susceptible to dysfunction under stress, and potential sources of stress are forbidding.
The first section of this report summarizes what has been accomplished and what remains undone with respect to the five sets of issues addressed by the G30 recommen- dations. The second section offers some suggestions for prioritizing and sequencing reform efforts going forward. An Appendix sets out each of the ten recommendations, reiterates the rationales for the recommendations that were set out in the G30 report, and offers some additional details on progress to date.
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Banking regulators should adjust leverage and risk-based capital requirements to ensure that leverage requirements are backstops to risk-based requirements rather than binding constraints on bank behavior. There are various alternatives for accomplishing this, as is well understood by Federal Reserve staff. It does not seem to be technical questions that are holding up implementation. Rather, it is a view by some that any loosening of leverage restrictions necessarily would weaken the resilience of these banks and of the banking system as a whole.
The full report is available at https://group30.org/images/uploads/publications/G30_Treasury-Mkts-UPDATE_Final_Report.pdf