On May 24, 3016 at the SIFMA Fixed Income Market Structure Seminar, Daleep Singh, the Department of the Treasury's Acting Assistant Secretary for Financial Markets, provided an overview of the findings from the Treasury’s January 2016 request for information from industry on the future of the Treasury markets (RFI). The RFI sought input on changes in the treasury market structure, implications for changes in market fiction, and risk management policies and practices.  Mr. Singh used his keynote address at the SIFMA event to summarize some of the comments received and findings from the RFI.

According to Mr. Singh, the RFI was the most comprehensive review of the Treasury market since the 1998 Joint Study of the Regulatory System for Government Securities, and sought public comment in four areas: (1) the evolution of the U.S. Treasury market and implications for market structure and liquidity provision, (2) trading and risk management practices and market conduct, (3) official sector access to Treasury cash market data, and (4) public reporting of Treasury cash market transaction data. The RFI drew fifty-two comments from from banks, broker-dealers, principal trading firms, industry groups, and individuals.  Mr. Singh reported a synthesis of the comments and the most important results of the RFI in four areas. 

1. Treasury Market Data in the Official Sector

Mr. Singh reported that respondents to the RFI were nearly unanimous in their support of the collection of transaction data by the official sector. Consistent with this feedback, Treasury and the SEC jointly announced a request for FINRA to develop a proposal requiring member broker-dealers to report Treasury cash market transactions to a centralized repository.  In addition, Treasury and the SEC also announced that they will continue to work with other agencies and authorities to develop a plan for collecting cash transaction data from institutions that actively trade U.S. Treasury securities but are not FINRA members.  Treasury intends to have a comprehensive plan to collect cash market data in place by year-end.

2. Increasing Transparency to the Public

Support among those responding to the RFI for public dissemination of Treasury market trading data was far more mixed. SIFMA and other primary dealers argued that rapid and highly specific public post-trade reporting would impair liquidity in the Treasury market.  Others argued the opposite. Consequently, Treasury is weighing any potential benefits of additional post-trade transparency in Treasuries against the potential effects on redistribution of risk, price formation, or the ability of market-makers to satisfy client obligations. Singh promised that no proposals on the matter would be made without industry input and a full understanding on the part of regulators of the consequences of additional post-trade reporting. 

3. Regulatory Oversight

The RFI identified some dissatisfaction amongst big participants in the Treasury markets regarding differences in the way regulations treat some firms versus the way banks and broker-dealers are treated.  

“Principal trading firms (PTFs) have become significant participants in the secondary markets for Treasuries, particularly for on-the-run securities.  PTFs now account for the majority of trading and standing quotes in the order book in both the Treasury futures and the interdealer cash market.  By contrast, while banks and broker-dealers still account for a majority of secondary cash market trading overall, they comprise well under half of the trading and quoting activity in the interdealer cash market.  Yet, as some RFI commenters pointed out, many PTFs are not subject to SEC oversight because they are not registered as broker-dealers.  This, some commenters noted, has the potential to create an “uneven playing field,” so to speak, and perhaps even opportunities for regulatory arbitrage.” 

Mr. Singh said that the Treasury Department will continue their work with the Inter-Agency Working Group and other members of the official sector to appropriately address these regulatory issues.

4. Central Clearing 

Commenters were generally supportive of central clearing, said Mr. Singh.  He indicated that, while central clearing has significant plusses, there are some potential negatives as well.

"Increased participation in centralized clearing for cash Treasuries could have the beneficial effect of reducing the aggregate amount of counterparty and credit risk in the system.  On the other hand, as some note, if the increased costs of central clearing drive certain liquidity providers out of the market, such as the high-volume, low-margin market making activities conducted by PTFs, it could reduce efficiency and resilience in the market."

"Ultimately, in order to make central clearing of Treasury trades viable to a diverse and resilient base of market participants, pragmatic compromise will be needed for the benefit of the system as a whole.  Some parties may have to accept increased fees for clearing and settlement, and other parties may have to accept that margining and collateralization practices need to be updated to reflect the fact that trading occurs at much higher speeds now than it did in the past."

Looking Forward

In addition to summarizing the findings of the RFI, Mr. Singh also indicated that the the Treasury Department remains committed to continuing dialogue with industry and is actively engaged on a number of fronts to execute the post-RFI roadmap:

1. Focus on developing a comprehensive plan to collect data on cash Treasury market activity from all major market participants.
2. Consult with market participants to define an appropriate set of principles that would guide any decision on whether to make this data publicly available.  Singh emphasized that Treasury does not anticipate developing any policy proposal on the public availability of data until the official sector has access to cash market transaction data.
3. As both the official sector and the market develop a better understanding of clearing and settlement in the Treasury market, the Treasury Department will closely monitor the progress that is made toward broadening the use of centralized clearing and settlement services.
4. Continue Treasury's ongoing dialogue with the SEC and other members of the official sector through the Interagency Working Group for Treasury Market Surveillance so that we continue to appropriately oversee and monitor all major Treasury market participants and platforms in the Treasury market.