I am pleased to welcome back the members of the Global Markets Advisory Committee. I want to recognize Commissioner Pham for her sponsorship of the Committee, and thank the staff for organizing today’s meeting. It’s exciting that GMAC could meet at the New York Stock Exchange. I wish I could be there with you in New York. However, I sponsor the Technology Advisory Committee that meets in Washington tomorrow.
As GMAC starts examining U.S. Treasury market reforms, it’s important to recognize that U.S. Treasury futures markets have performed very well, are transparent, and subject to central clearing. This is particularly true of the 10 year Treasury futures contract, which has been very liquid. I am glad that the presentation today recognizes these positive features of the Treasury futures markets, which may provide some insights into Treasury cash market potential reforms.
Reforms that have been proposed, or are being considered, by other federal regulators relate to the cash market, and often more specifically, the repo market. I can understand why regulators are considering reforms to the U.S. Treasury market as it is the deepest and most liquid market in the world, and plays a central role in the global financial system. The cash U.S. Treasuries market has grown rapidly, and has suffered certain market stresses, raising concerns about adequate liquidity, including concerns raised last Fall by Treasury Secretary Yellen.[1]
At the last GMAC meeting in February, Treasury Assistant Secretary for Financial Markets Joshua Frost said that the Treasury market continues to operate well despite geopolitical and macroeconomic uncertainty. This was welcomed news given the volatility experienced in recent years, and the potential for the cash market to impact the futures market. Assistant Secretary Frost outlined steps that the Department is considering to increase the U.S. Treasury cash markets’ resilience to adverse shocks.
The foundational issue for reform under consideration is whether to expand central clearing to more Treasury cash transactions, primarily repo markets. Currently the cash market is bifurcated between cleared and uncleared transactions, which can result in risk and contagion. Additional central clearing may give more transparency and certainty during times of market stress, and has the potential to reduce systemic risk. Additional central clearing would also provide an opportunity to give the CFTC more transparency into positions held over both the cash and futures Treasury markets.
The critical issue is what, and who, would fall into the expanded clearing. This is a complex issue that is subject to current debate. For example, there are transactions that may look like repo transactions, but are other types of transactions for other purposes. Broker customer protection rules remain important. In the end, U.S. Treasury market reform presents opportunities. But there are a number of important issues and considerations. I look forward to GMAC members’ views and insights.
I also look forward to presentations on block transactions and tokenization of assets. I thank Commissioner Pham for working with me to prevent any duplication of efforts with the work of the Technology Advisory Committee.
I want to finish by saying that I understand that GMAC is now the largest advisory committee ever. I am grateful that so many of you wish to serve. I thank the members for their service.
[1] See Bloomberg, Yellen Worries Over Loss of “Adequate Liquidity” in Treasuries, (Oct. 12, 2022) Yellen Worries Over Loss of ‘Adequate Liquidity’ in Treasuries - Bloomberg.
