United States: CFTC Chair Promotes Policies For Encouraging Liquidity In Treasury Futures

Last Updated: November 30 2017
Article by Nihal S. Patel

Most Read Contributor in United States, November 2018

CFTC Chair J. Christopher Giancarlo questioned whether current policies affecting the Treasury futures markets provide an effective balance between risk reduction and liquidity to encourage economic growth and prosperity.

In remarks at the Federal Reserve Board of New York Third Annual Conference on the Evolving Structure of the U.S. Treasury Market, Chair Giancarlo argued that large trade size is an important area of policy focus. He cited significant complaints about liquidity conditions and the difficulty in trading large-trade positions in fixed-income markets. He also noted that primary dealers typically participate in Treasury markets through large-size transactions. Chair Giancarlo said that the influence of dealers has tapered off through post-crisis regulatory reforms, and opined that sophisticated markets traditionally allow for dealers to efficiently execute large-size transactions.

Chair Giancarlo criticized the "one-size-fits-all" policy approach to complex trading markets, arguing that policymakers have often implemented prescriptive measures that promote retail participation to the detriment of institutional participation. This approach, he said, endangers the ability of the markets to reflect a diverse range of trading interests, market positions and trading sophistication. In turn, market depth and liquidity can be inhibited. He emphasized the importance of allowing institutional participants to trade large-size orders without increased cost and volatility.

Chair Giancarlo reported the following indicators of the current state of empirical findings as to liquidity: (i) bid-ask spreads, trading volume and issuance do not indicate significant deterioration, (ii) market depth and turnover indicate some level of deterioration, (iii) anecdotal evidence indicates the increasing difficulty of executing large trades, and (iv) dealer-reported declines in corporate and foreign bond inventories and a reduced share of the single-name credit default swap market indicates less supply for large trades.

Chair Giancarlo asserted that academic studies often fail to address the execution of large trades, but shared the results of a CFTC study that better represents how the quality of large-trade liquidity has progressed over time. These results, he said, indicate that large-trade liquidity is not as abundant as traditional measures might suggest. Chair Giancarlo noted that the CFTC plans to continue analyzing data to draw inferences about large-scale liquidity trends, and encouraged market participants to conduct studies that focus on large-trade liquidity.

Commentary / Nihal Patel

A few months ago, SEC Chairman Jay Clayton stated that SEC analysis "starts and ends with the long-term interests of the Main Street investor." In contrast, Mr. Giancarlo speaks of the importance of looking at whether markets are serving the broad range of trading interests.

Mr. Giancarlo deserves credit for making clear that he doesn't want to debate how markets today compare to markets before the 2008 financial crisis, but says "the debate should be about whether trading liquidity is optimal for today's markets." Too often, voices in financial regulation are more interested in fighting and re-fighting yesterday's issues.

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