Remarks by Assistant Secretary for Financial Markets Joshua Frost on Recent Progress by the Inter-Agency Working Group on Treasury Market Surveillance at the Federal Reserve Bank of New York’s Annual Primary Dealer Meeting, May 3, 2024.

Introduction

"Good afternoon and thank you for having me here at the New York Fed’s annual primary dealer meeting. The U.S. Treasury market is the deepest and most liquid market in the world. I’m glad to be here to speak with you, the primary dealers, because of the critical role you play in making this market that underpins the global financial system so deep and so liquid, both through your role as pro rata bidders in Treasury auctions and your market making capabilities."

"The Treasury market serves as the benchmark risk-free yield curve and as a source of safe and liquid assets for a broad range of investors. But its primary role is its reason for existing in the first place: financing the U.S. government. Because of the criticality of the Treasury market, and in light of disruptions that have occurred in recent years, the official sector has been working together to enhance the resilience of the market. Much of this work has been coordinated through the Inter-Agency Working Group on Treasury Market Surveillance or IAWG, which is made up of staff from Treasury, the New York Fed, the SEC, the CFTC, and the Fed Board of Governors."

The IAWG’s work over the past three years has been structured as five workstreams: improving the resilience of market intermediation, improving data quality and availability, evaluating expanded central clearing, enhancing trading venue transparency and oversight, and examining effects of leverage and fund liquidity risk management. First, I’ll briefly mention a few initiatives led by other agencies where there has been recent important progress, and then, I’ll go a bit deeper into Treasury-led initiatives with a particular focus on the buyback program that we announced just last week.

SEC Central Clearing and Dealer Rule

"One set of initiatives to enhance the resilience of the Treasury market has been the SEC’s recently adopted rules on central clearing and dealer definition."

"First, on central clearing, the SEC adopted a rule last year to improve central counterparty risk management and expand central clearing. The rule requires Treasury securities transactions between clearinghouse members and broker-dealers, as well as those executed on Alternative Trading Systems (ATSs) and Inter-dealer Broker (IDB) platforms operated by clearinghouse members, to be cleared by the end of 2025. Most repo transactions will need to be cleared by June 2026."

"There is work underway to consider a range of models for non-member clearing and develop the necessary documentation to make these changes. Expansion of central clearing could have a range of benefits for the Treasury securities market, including standardized risk management requirements, which can enhance the market’s resilience to shocks. Central clearing also helps to net down gross exposures across participants, reducing firms’ exposures while positions are open as well as reducing the flows required at settlement."

On the dealer rule, the SEC adopted rules to further define the phrase “as a part of a regular business” in order to identify certain activities that would require firms to register as dealers. The rule identifies two qualitative factors related to liquidity provision through market-making as criteria for dealer registration, with the primary effect expected to be registration of additional Principal Trading Firms (PTFs).

"Consistent regulatory oversight in this area will support market resiliency and stability and enhance investor protection across the U.S. Treasury market and other securities markets."

Treasury-Led Initiatives

"Next, I wanted to highlight recent progress led by Treasury’s Office of Financial Research (OFR). Earlier this week, OFR finalized a rule to establish ongoing collection of data on transactions in the non-centrally cleared bilateral repo market."

"This market represents one of the largest remaining data gaps for the official sector on Treasury market activity. Filling this gap will provide data on dealers’ counterparties and the terms of the trades, which should help the official sector to better assess the vulnerabilities in this market."

"On-The-Run Transparency

First, I’ll provide a brief recap of our efforts to-date to improve data and transparency in the secondary market. Almost 10 years ago now, on October 15, 2014, the Treasury market experienced an unusually high level of volatility and a very rapid round-trip in prices. With no apparent catalyst, in the span of 15 minutes, the 10-year yield dropped 16 basis points and then rebounded."

"After analyzing and improving the data, we decided it was appropriate to begin providing public transparency based on this new data source. Our approach here has been careful and measured, taking incremental steps to maximize the benefits of transparency while avoiding any potential harm to the market. And so, in March 2020, FINRA began to release weekly aggregate volume data to the public."

"Treasury Buybacks

I will turn now to a bit more detail on Treasury’s recent announcement on buybacks. The formal launch of Treasury’s buyback program coincided with the May quarterly refunding just last week. In the refunding policy statement, we announced that Treasury would conduct its first regular buyback operation in the four-week to two-year nominal coupon sector on May 29th."

"In the refunding policy statement, we announced that Treasury would conduct its first regular buyback operation in the four-week to two-year nominal coupon sector on May 29th."