“The Beatles and the Treasury Market”: Remarks Before the U.S. Treasury Market Conference
Nov. 16, 2022
Thank you. It’s good to be here for the eighth annual U.S. Treasury Market Conference. Thank you to the conference organizers and my colleagues across the Inter-Agency Working Group on Treasury Market Surveillance (IAWG) for putting it together and issuing the latest IAWG report.
As is customary, I’d like to note that I’m not speaking on behalf of my fellow Commissioners or the SEC staff.
In March 1998, when I was an Assistant Secretary in the Department of the Treasury, I gave my first speech in public service. What was it about? The Treasury market.
I was fortunate to work with excellent colleagues on that speech, including a career public servant named Dave Monroe, then Director of Cash and Debt Management, who used to wear a different Beatles tie every day.
We had a few “hard day’s night[s]” working on that speech, but with “a little help from [our] friends,” we described Treasury’s three principal goals regarding debt management: “sound cash management,” “lowest cost financing for the taxpayers,” and “efficient capital markets.”
When you maximize the competitiveness, liquidity, and resiliency of the $24 trillion Treasury market, that lowers the cost of financing and helps American taxpayers save money. It helps the central bank administer monetary policy. It also helps the fluid functioning of our financial system, as Treasuries are the foundation of the capital markets.
Much has changed in our Treasury market since 25 years ago, “when I was younger, so much younger than today.” Now, a significant portion of this market is transacted and intermediated outside of commercial banks: by principal trading firms (PTFs) and hedge funds, on electronic trading platforms. Nevertheless, the three key principles we described in 1998 remain every bit as important.
We’ve also seen jitters in this market over the last decade: in 2014, 2019, and 2020.
That’s why, since the start of this Administration, the Treasury, Federal Reserve Board, Federal Reserve Bank of New York, and the Securities and Exchange Commission have worked on a series of projects to enhance the competitiveness and resiliency of the Treasury market.
To enhance competition, the official sector can use tools such as promoting transparency, access, and fair playing fields.
To enhance resiliency, we can address system-wide risks by closing regulatory gaps and promoting greater central clearing. Competition itself also improves resiliency because it broadens out the market.
Though no one policy could have prevented the “dash for cash” in March 2020, our goal was, and remains, to improve the smooth functioning of this market—so that, whether in good times or stress times, it can “carry that weight.”
Today, I will review five important projects in the Treasury market.
The first two projects center on the intermediaries that provide liquidity or perform exchange-like functions in this market. These projects focus on the tools of a fair playing field, greater access, and transparency.
The second two projects deal with the central clearing and customer clearing processes. These projects rely upon the tools of access, a fair playing field, and shock absorbers to close regulatory gaps and lower interconnectedness in our market plumbing.
Finally, the fifth project focuses on post-trade transparency, an area that Under Secretary of the Treasury Nellie Liang just discussed.
Taken together, I believe that these projects would promote greater resiliency and competition, allowing more market participants to interact directly with one another, whether through anonymized all-to-all trading or otherwise.
First, I’ll turn to our project on dealers.
The Commission proposed rules intended to ensure that market participants who are in the business of providing liquidity in Treasuries or other securities—or engaging in other similar activities—are appropriately registered with the SEC, become members of a self-regulatory organization, and comply with federal securities laws and regulatory obligations.
This project is rooted in some hard lessons of the 1980s—a “sad song” that we can “make better.” Between 1982 and 1985, a dozen government securities firms failed. Thus, in 1986, Congress enacted the Government Securities Act, which, for the first time, set up a federal regulatory regime specific to government securities dealers, brokers, and clearing. Congress addressed this regulatory gap. I think it’s time we make sure this gap is sealed.
Registration of government securities brokers and dealers means that market participants must, among other requirements, keep important books and records, meet minimum capital requirements, and report certain data to regulators. Not registering, in turn, leaves the system more opaque and vulnerable than it should be.
In recent decades, certain market participants, including PTFs, started participating significantly in the Treasury cash market. In general, these firms play an increasingly significant liquidity-providing role in overall trading and market activity—a role traditionally performed by entities registered with the Commission.
Some of these firms are registered, but not all.
Thus, in March, we proposed to further define a “dealer” and “government securities dealer” so that PTFs and firms performing dealer-like roles register with the SEC and comply with federal securities laws and regulatory obligations. I believe this lowers risk and creates a fairer playing field by supporting transparency and market integrity.
Further, the Commission unanimously voted to re-propose amendments to Rule 15b9-1 to require broker-dealer participants in our fixed-income (and equity) markets to register with the Financial Industry Regulatory Authority (FINRA).
The second policy project concerns the main platforms on which Treasuries are traded.
Specifically, the Commission proposed to require platforms that provide marketplaces for Treasuries to register as broker-dealers and comply with Regulation ATS.
Reflecting the electronification of and other significant changes to platforms in recent decades, the proposal also would modernize the rules regarding the definition of an exchange. It would subject to exchange regulatory framework certain interdealer brokers (IDBs) that, for example, provide request-for-quote protocols. This update would close a regulatory gap among platforms that act like exchanges but are not being regulated like exchanges.
It also would require Treasury platforms with significant volume to comply with the Fair Access Rule. This would prohibit platforms from unreasonably prohibiting or limiting access or applying their rules for access in an unfair or discriminatory manner.
Additionally, the proposal would bring Treasury platforms with significant volume under Regulation Systems Compliance and Integrity, a rule that protects the resiliency of technology infrastructure.
All told, the proposal would provide greater resiliency and competition for activities on these platforms.
Third, the Commission recently proposed rules that would widen the scope of transactions brought into central clearing in the Treasury markets.
Clearinghouses help lower risk in the system and promote competition in the market by sitting in the middle: as the buyer to every seller and the seller to every buyer. Otherwise, the clearing process can be a “long and winding road.”
I think Congress understood the importance of clearinghouses when, in 1986, they added Treasury securities to our clearing authorities.
Initially, in the 1990s, we saw a rise in the amount of Treasury securities clearing. By 2017, though, given various changes in the marketplace, only 13 percent of trades were fully centrally cleared.
Reduced clearing increases system-wide risk. Currently, IDBs often are bringing just one side of the trade into central clearing if the counterparty is not also a member of the clearinghouse. Broadly speaking, our proposal would require clearinghouses to ensure that their members bring in all of their repurchase agreement (repo) transactions, both legs of the transactions for IDB trades, and certain additional cash transactions.
Repos, the funding instrument for much of the debt markets, were at the center of the jitters in the Treasury market in 2019. Moreover, in the last few years, many hedge funds are receiving the vast majority of their repo financing in the non-centrally cleared bilateral market, where haircuts or initial margin requirements are not necessarily applied. For repo transactions, the scope of the proposal is broader than proposed in the cash market and would cover any repo transactions entered into by a clearinghouse member.
On the cash transactions, the proposal applies to specific categories of transactions. The proposal would bring in transactions entered into by an IDB that I just mentioned. It also would scope in trades between clearinghouse members, on the one hand, and hedge funds, levered accounts, or registered brokers-dealers on the other hand. This would help address the potential contagion risk that could flow through to the markets if a hedge fund or levered fund were unable to deliver on a transaction.
Additionally, clearinghouses need robust governance and risk management practices in order to play that shock absorbing role. That’s why the Commission voted to propose rules to strengthen the governance of registered clearinghouses, particularly with respect to conflicts of interest.
That’s also why, going forward, I’ve asked staff to make recommendations for the Commission’s consideration around clearinghouse recovery and wind down processes.
Finally, we also have proposed three key reforms to better facilitate customer clearing in Treasuries and increase access to this market.
The first reform would strengthen the Commission’s rules for clearinghouses transacting trades in Treasuries, particularly with regard to gross and net margining. Under such rules, members of a clearinghouse would no longer be able to net their customers’ activity against house activity when determining margin.
As the Beatles put it, “money can’t buy me love,” but it can help you post margin. (Let’s just say it was a missed opportunity in their lyrics.)
The second reform would change the broker-dealer customer protection rules to allow the customer margin that they collect to be onward posted to the clearinghouse, subject to requirements designed to protect the customer margin from the broker-dealer’s default while it is held at the clearinghouse. This process sometimes is referred to as rehypothecation. These rules would enhance customer protection, free up broker-dealers’ resources, and improve liquidity in the Treasury markets.
The third reform would require clearinghouses to have policies and procedures designed to facilitate access to clearing services, such as through the use of customer clearing models.
Finally, the Treasury, Fed, SEC, and FINRA have taken up efforts to strengthen post-trade transparency in the Treasury market.
In September, the Fed implemented a new rule requiring large banks to report transactions to the Trade Reporting and Compliance Engine (TRACE).
The Commission’s re-proposed amendments to Rule 15b9-1, along with the rulemaking ensuring that PTFs are appropriately registered, also would enhance transparency, as these firms would report transaction data to TRACE.
Treasury put out a request for information on enhancements to post-trade transparency in Treasuries.
Lastly, FINRA has amended its rules to enhance the transparency and timeliness of reporting in Treasuries and other sovereign debt markets.
In sum, nearly 25 years after my first speech on the Treasury market, I still believe those three principles I discussed are every bit as important for our collective work: sound cash management, lowest cost to taxpayers, and efficient capital markets.
I am privileged to continue to partner with my colleagues throughout the government on these efforts. I “still need [them], when I’m 64.” (Actually, I turned 65 last month.)
I opened this speech talking about Dave Monroe’s love of the Beatles, one of the United Kingdom’s greatest cultural exports.
Well, that reminds me: Across the government, we had embarked on these efforts long before the recent hiccups in the U.K. bond market. Though I’m glad Beatlemania came to our shores six decades ago, we don’t want to import those types of market jitters to our shores, too.
Yes, the Treasury market is larger than the gilt market. Yes, the facts of that situation are specific to the U.K.
Still, there’s a lesson here. The tremors in the U.K.’s sovereign debt market speak to the importance of building resiliency and competitiveness in the U.S. sovereign debt markets.
Fortunately, the troubles in the gilt market still “[seem] so far away.” Let’s do what we can to keep it that way.
 See Gary Gensler, “Assistant Secretary for Financial Markets Gary Gensler Addresses the Annual Meeting of the Bond Market Association” (March 6, 1998), available at https://home.treasury.gov/news/press-releases/rr2280.
 See Gary Gensler, “Prepared Remarks at U.S. Treasury Market Conference” (Nov. 17, 2021), available at https://www.sec.gov/news/speech/gensler-us-treasury-market-conference-20211117.
 See “Remarks by Secretary of the Treasury Janet L. Yellen at the Securities Industry and Financial Markets Association’s Annual Meeting” (Oct. 24, 2022), available at https://home.treasury.gov/news/press-releases/jy1045.
 See Gary Gensler, “Competition and the Two SECs” (Oct. 24, 2022), available at https://www.sec.gov/news/speech/gensler-sifma-speech-102422.
 See, e.g., “How Drysdale affair almost stymied US securities market” (May 27, 1982), available at https://www.csmonitor.com/1982/0527/052737.html, and “E.S.M. Collapse: A Lesson in Safety” (March 8, 1995), available at https://www.nytimes.com/1985/03/08/business/esm-collapse-a-lesson-in-safety.html.
 See Government Securities Act of 1986, available at https://www.congress.gov/bill/99th-congress/house-bill/2032.
 “…by 2014, [PTFs] represented the majority of trading activity in the futures and electronically brokered interdealer cash markets.” See “Recent Disruptions and Potential Reforms in the U.S. Treasury Market:
A Staff Progress Report” (Nov. 8, 2021), prepared by staff of the IAWG, available at https://home.treasury.gov/system/files/136/IAWG-Treasury-Report.pdf.
 See Gary Gensler, “Statement on the Further Definition of a Dealer-Trader” (March 28, 2022), available at https://www.sec.gov/news/statement/gensler-statement-further-definition-dealer-trader-032822.
 See Gary Gensler, “Statement on Re-Proposed Amendments Regarding Exemption from National Securities Association Membership” (July 29, 2022), available at https://www.sec.gov/news/statement/gensler-proposed-amendments-exemptions-national-securities-association-072922.
 See Gary Gensler, “Statement on Government Securities Alternative Trading Systems” (Jan. 26, 2022), available at https://www.sec.gov/news/statement/gensler-ats-20220126.
 See Gary Gensler, “Statement on Proposed Rules Regarding Treasury Clearing” (Sept. 14, 2022), available at https://www.sec.gov/news/statement/gensler-statement-treasury-clearing-0914222.
 See 2021 IAWG report: “… the expansion of PTFs’ role in the interdealer market beginning in the mid-2000s resulted in a decreasing fraction of interdealer trades being centrally cleared. In recent years, approximately one-half of interdealer cash trades (representing about one-quarter of the total cash market) have been centrally cleared, compared with central clearing of virtually all interdealer trades (representing about one-half of the total cash market) before the entry of PTFs in the interdealer market.” In addition: “Overall, the Treasury Market Practices Group has estimated that 13 percent of cash transactions are centrally cleared; 68 percent are bilaterally cleared; and 19 percent involve hybrid clearing, in which one leg of a transaction on an IDB platform is centrally cleared and the other leg is bilaterally cleared.”
 As a recent G30 report put it, “In principle, if all repos were centrally cleared, the minimum margin requirements established by FICC would apply marketwide, which would stop competitive pressures from driving haircuts down (sometimes to zero), which reportedly has been the case in recent years.” See Group of 30 Working Group on Treasury Market Liquidity, “U.S. Treasury Markets: Steps Toward Increased Resilience” (2021), available at https://group30.org/publications/detail/4950. In addition, as a 2021 Federal Reserve Board report said, “Most of hedge fund repo is transacted bilaterally, with only 13.7% of the repo centrally cleared.” See Federal Reserve Board Division of Research & Statistics and Monetary Affairs, “Hedge Fund Treasury Trading and Funding Fragility: Evidence from the COVID-19 Crisis” (April 2021), available at https://www.federalreserve.gov/econres/feds/files/2021038pap.pdf.
 See Gary Gensler, “Statement on Proposal to Enhance Clearing Agency Governance” (Aug. 8, 2022), available at https://www.sec.gov/news/statement/gensler-statement-proposal-enhance-clearing-agency-governance-080822.
 See “Notice Seeking Public Comment on Additional Transparency for Secondary Market Transactions of Treasury Securities,” available at https://home.treasury.gov/system/files/136/RFI-on-Treasury-Transparency-6.23.2022.pdf.