In a newly issued report on COVID-19 related shocks to the U.S. Treasury market, the G30 offered recommendations to increase market resilience.
The G30 recommended that:
- the Federal Reserve Board create a "Standing Repo Facility" that would be broadly available in times of stress;
- cash market and repos trades in governments be centrally cleared;
- market participants and regulators study how to centrally clear dealer-to-client cash trades of Treasuries;
- Treasury take a lead role in supervising the Fixed Income Clearing Corporation ("FICC");
- U.S. banking regulators identify how to avoid disincentivizing market intermediation;
- the SEC review the robustness of prudential safeguards at independent broker-dealers in Treasury securities and repos;
- the Trade Reporting and Compliance Engine system be expanded to capture all transactions in Treasury securities and repos;
- SEC Regulations ATS (or "Alternative Trading Systems") and SCI (or "Systems Compliance and Integrity") apply to all trading platforms for Treasury securities; and
- Treasury identify all exemptions of Treasury securities from U.S. securities laws, and make recommendations for which exemptions should be removed.
Commentary by Steven Lofchie
There are a number of interesting observations and recommendations contained in the report, including that certain of the post-Dodd-Frank "reforms" created "dysfunction," by discouraging "bank-affiliated dealers from allocating capital to relatively low-risk activities like market making [in Treasury securities]."
Given that the G-30 is largely a bank-regulatory-centric group, the report seems to suggest providing the bank regulators with greater authority over securities markets intermediaries, such as the FICC, which would presumably diminish the authority of the SEC. The report also suggests that "prudential" regulation of broker-dealers that are not affiliated with banks is somehow insufficient (though it does not indicate how).
Further, the report urges greater transparency of trading prices in the Treasury market, but it is not so clear why this would be helpful in a time of genuine market stress where the problem may not be so much the opacity of pricing as it is that everyone wants to sell.
A more significant suggestion is that broker-dealers be afforded access (along with banks) to liquidity facilities provided by the Federal Reserve.
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