Staff of the Inter-Agency Working Group on Market Surveillance proposed six guiding principles to reform Treasury market policy to increase market resiliency.
In a report titled "Recent Disruptions and Potential Reforms in the US Treasury Market," staff of the working group considered occurrences of recent market volatility, including the extreme liquidity "challenges" experienced in March 2020 due to the COVID-19 pandemic. Staff also considered the risks associated with the exponential growth of electronic trading and the volume of Treasury securities currently outstanding in the market.
As outlined in the report, the following key components were identified as disruptions to the Treasury markets: (i) more frequent market surges requiring intermediation, (ii) global public health and perceptions, (iii) foreign official and private investors, (iv) investors rebalancing their own portfolios, (v) leveraged investors, (vi) interdealer broker platforms and dealer activity limits, (vii) the procyclicality of margin requirements, and (viii) operational difficulties in shifting to work-from-home arrangements.
Staff recommended policy reforms to increase market resiliency through six guiding principles:
- "Resilient and elastic liquidity."
- "Transparency that fosters public confidence, fair trading, and a liquid market."
- "Prices that reflect prevailing and expected economic and financial conditions."
- "Economic integration across cash, funding, and derivatives markets."
- "Financing that does not pose a significant threat to financial stability."
- "Infrastructure that operates effectively and efficiently."
The Working Group consists of members from Treasury, the Federal Reserve Board, New York Fed, the SEC and the CFTC.
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