Regulators Look to Lessen Treasury Market Reliance on Big Bank Dealers

Regulators are looking to expand trading in the massive $24 trillion market for US Treasury securities, a potential power shift from the small club of big banks that have dominated the market for decades, according to a federal report released Thursday.

Regulators have been on high alert about market stability since March 2020, when Covid-19 disrupted the economy and markets, freezing trading in Treasury securities. Recent volatility in the Treasury market has added to the concerns.

US government bonds are the bedrock of the global financial system. In addition to the size of the market, and its role in financing US budget deficits, many financial institutions use Treasury securities as collateral for loans of other types. Adverse market movements can thus spill over into many other markets and affect the interest rates consumers pay on auto loans or mortgages.

Thursday’s report from key regulators—including the US Treasury, Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission—shows that regulators are interested in supporting the growth of all-in-one trading.

That’s a concept where buyers and sellers trade Treasury securities directly with each other rather than relying on big banks. For example, large mutual funds or insurance companies may trade securities directly, rather than using banks as middlemen. Other markets use similar trading methods; for example, it exists to a lesser extent in corporate bond markets and in many derivatives markets.

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U.S. officials stress that they are still in the early stages of assessing the benefits and costs of a push toward all-to-all trade. A conference hosted by the New York Fed next week will partly focus on the idea. Such trading requires an infrastructure of markets to make it possible, such as common legal agreements or a central clearinghouse where buyers and sellers clear trades, so that any change it may take years to develop.

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“In theory, all-to-all trading can improve market liquidity by increasing the number and diversity of potential counterparties in a trade or altering the competition between them,” the report said. regulation says. “All-to-all trading can also provide more transparency.”

A separate report published last month by the Federal Reserve Bank of New York further highlighted the interest of regulators. All-to-all trade, it said, “can be especially helpful in times of stress, when the capacity of traditional intermediaries can be tested.”

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The primary dealers, a group of about two dozen major global institutions, now play a key role in the US government’s efforts to sell its securities. The dealers—which include the trading operations of Barclays PLC, Citigroup Inc.,

Credit Suisse Group A.G

Goldman Sachs Group Inc.,

JPMorgan Chase & Co. and other major global banks—obliged to bid in government debt auctions and distribute the securities they buy.

“It would be unfair to expect the same liquidity providers to provide the same level of liquidity when the Treasury market has more than doubled in size but has not seen any real change over the past twenty years. ,” said Chris Concannon, president and chief operating officer of MarketAxess Holdings Inc.,

which operates an all-in-one secondary market trading platform for Treasurys that it launched earlier this year.

Treasury debt held by the public has grown from less than $4 trillion in 2002 to $24.4 trillion this week, according to the Treasury. More than $600 billion trades in Treasurys on average each day, according to data collected by the Securities Industry and Financial Markets Association, an industry group. Primary dealers are involved in the majority of transactions, the New York Fed research found.

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“I’m sure sellers will resist,” said Thanos Bardas, global co-head of investment-grade fixed income at Neuberger Berman, an asset-management firm. “You can’t expect them to show up and bid in the auctions and then, in the secondary trade, to reduce their influence.”

Mr. added. Bardas would be surprised if all-in-one trading works better than the current setup during times of market stress. Among other options, he said, he prefers rule changes that make it easier for banks to hold more Treasuries on their balance sheets.

Regulators established an interagency group to monitor the Treasury market in 1992, when investment bank Salomon Brothers was found to have violated auction bidding rules. In recent years, regulators have worried that trading in Treasury markets has become less seamless and more prone to disruption.

Treasury Secretary Janet Yellen leads a group of regulators charged with overseeing US financial stability


Al Drago/Bloomberg News

A case in point is a “flash crash” in October 2014, when Treasury yields collapsed and then recovered in a few minutes of trading without a clear catalyst. In mid-September 2019, repo markets, which rely on Treasury securities as collateral, experienced unusual volatility in a short trading period. Then Treasury markets froze in March 2020, when Covid-19 hit the economy and financial system.

One concern is that the capacity of large banks to hold securities themselves has not grown as much as the Treasury market. Since the 2007-2009 financial crisis, new federal capital and liquidity regulations have curbed the growth of bank balance sheets.

In recent months, officials have noted that Treasury markets have become less liquid and more volatile. One result of these developments is that relatively small trades are causing larger swings in bond prices and yields than ever before.

U.S. securities regulators don’t think they can buffer against catastrophic events like a pandemic, but they say they’re trying to stabilize the underlying market by making it more transparent and making the other actions to ensure more widespread market access.

Big banks have argued that regulators should ease capital requirements related to their Treasury holdings. That would allow them to play a bigger role in the market, the banks argued.

The Fed allowed a temporary, pandemic-related reprieve from the capital requirements in question to expire last year, while promising to propose a broader overhaul. It hasn’t been done yet. Thursday’s report did not address the issue.

Another challenge facing regulators is that the Fed’s own campaign to raise short-term interest rates to fight inflation is a major factor in volatility in Treasury markets. If market volatility becomes excessive, Fed officials may be put in the difficult position of having to decide which problem to prioritize: fighting inflation with rate hikes or reducing volatility that rate hikes can help with. cause.

Something like that happened in September in the UK, when the Bank of England intervened to prevent the fall of a wild sell-off in the bond-market that threatened the financial stability of the UK.

Write to Andrew Ackerman at [email protected] and Jon Hilsenrath at [email protected]

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