Prepared Remarks at U.S. Treasury Market Conference

Thank you for that kind introduction. It’s good to be here for the seventh 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 together this event. As is customary, I’d like to note that I’m not speaking on behalf of my fellow Commissioners or the SEC staff.

This conference first convened in response to the October 2014 “Flash Crash.” During a 12-minute period, the Treasury market, quote, “experienced uncharacteristically shallow market depth.”[1] That was how this group, IAWG, characterized the Flash Crash in a report, published in 2015.  

It is sobering enough to see such flash crashes in the equity markets; we’d seen that in 2010. The Treasury market, though? It’s often considered among the world’s safest, most liquid markets. To see such significant disruptions in Treasuries was especially jarring.

This wasn’t the first or last time, however, we’d have jitters in this important market — nor was it the first or last time we would publish official sector reports on the jitters in this market.

Let’s go back in time about four decades. Between 1982 and 1985, a dozen firms — such as Drysdale Government Securities[2] and E.S.M. Government Securities[3] — failed.

I was working on Wall Street at the time. It seemed like every couple of months, another unregulated government securities firm would collapse.

Thus, in October 1986, Congress reacted, and President Reagan signed the Government Securities Act into law. This bill — for the first time — set up a federal regulatory regime for government securities dealers and brokers.[4] Among other things, these entities had to register with an appropriate regulator. This bill required non-bank dealers of Treasuries to be registered with the SEC. In addition, for the first time it brought government securities clearinghouses within the SEC’s jurisdiction.

A few weeks later, the Government Securities Clearing Corporation (GSCC), the first clearinghouse for government securities, was incorporated.[5] In fact, the 35^th anniversary of this important event is tomorrow.

That’s not the end of the story, though. Another scandal followed in 1991, when Salomon Brothers was found to have illegally bid on Treasury auctions. This led to yet another report in 1992,[6] and then to further Congressional action. The Government Securities Amendments Act of 1993 gave agencies the authority to write sales practice rules, among other changes.

I joined the Department of the Treasury in 1997. One of the first projects I worked on in 1998 was another report on the Treasury market![7] I’m starting to feel a bit of déjà vu. This market was also the subject of one of my first Congressional testimonies,[8] so I’m a bit of a Treasury markets guy.

On top of these market events, some other things started to happen.

First, in the last couple of decades, electronification and the use of algorithmic trading have made transacting in this market faster than ever before. As a result, principal trading firms (PTFs), which some people call high-frequency trading firms, started participating significantly in this market. Today, these PTFs represent 50 to 60 percent of the volume on the interdealer broker (IDB) platforms.[9]

On top of that, this market has grown. Today, it’s worth nearly $23 trillion,[10] growing in comparison to both our gross domestic product and our capital markets. In November 2007, right before the financial crisis, it was about one-third the size of our GDP.

Last week, trading volume was $620 billion a day.[11] In report after report, conference after conference, we’ve seen these trends emerge.

With these trends in mind, many folks in government, across parties, have reached a consensus that we could do more to bring efficiency and resiliency to the Treasury market.

At the first conference in 2015, then-Fed Governor Jay Powell said, “We need investors to have full faith in the structure and functioning of Treasury markets themselves. Treasury markets need to be as safe as the securities that trade on them.”[12] 

At that same conference, one of my predecessors, Mary Jo White, raised the possibility of registering PTFs and trading platforms.[13]

Just last year, my colleague Elad Roisman, the most recent SEC Commissioner to speak at this event, suggested we might consider registering PTF dealers, extending platform registration to request-for-quote (RFQ) venues, and expanding access to central clearing.[14]

A few months later, Nellie Liang, then of the Brookings Institution, and Pat Parkinson of the Bank Policy Institute wrote about the benefits of increased central clearing and price transparency.[15] This summer, the Group of Thirty made a series of 10 recommendations for the Treasury market, including with respect to central clearing, regulation of dealers, and market transparency.[16]

Unfortunately, we’ve had more Treasury market jitters since that 2014 Flash Crash and the first conference. There were tremors in the Treasury repurchase agreement (repo) market in September 2019. There were significant challenges in the Treasury cash market at the beginning of the COVID-19 crisis in 2020. We saw more disruptions this past February, too.

At the same time, in the last few years, working with our partners at the Department of the Treasury and the Financial Industry Regulatory Authority (FINRA), we’ve gotten more insights into this market through the Trade Reporting and Compliance Engine system (TRACE). Starting in 2017, broker-dealers were required to report post-trade transaction data in Treasuries to the official sector.

Last week, the IAWG released a report on Treasury market, which outlined five work streams to strengthen market resilience. Yes — another official sector report.

The SEC plays a critical role in our overall efforts to improve the functioning of the Treasury market. I’ve asked staff to make recommendations for the Commission’s consideration to freshen up our rules to reflect the state of the Treasury market today. The SEC’s projects align with the recommendations proposed by the IAWG in last week’s report, albeit slightly rearranged.[17]

It’s been six years since one of my predecessors discussed this possibility at your first conference, and 35 years since the SEC received this authority from Congress.

 This work is based on cross-cutting principles[18] that apply to all of our market structure projects: efficiency, competition, and transparency; market integrity; and resiliency.

First, I’ve asked staff to make recommendations about how to make sure that PTFs that are in the regular business and buying and selling Treasury securities are appropriately registered as dealers under the Exchange Act.  I believe this gets to the IAWG’s recommendation to improve the “resilience of market intermediation.”

From the analysis of the 2014 Flash Crash and, more recently, from TRACE data, we know that PTFs often account for a large percentage of secondary market trading.

Unlike registered broker-dealers, though, unregistered PTFs don’t report their trades to TRACE.[19] They are not subject to capital rules, record-keeping rules, or periodic examinations. This is in contrast to the equities and corporate bond markets, where the most significant market participants are generally registered.

It’s time for us to close the regulatory gap and ensure we have regulatory oversight over  PTFs and others engaged in the regular business of buying and selling in this market.

I think requiring all firms that significantly trade in this market to register as dealers with the SEC also could help level the playing field in this market.  

Second is the trading platforms themselves. I believe that registering these trading platforms can help promote resiliency and greater access in the Treasury market. This maps to the IAWG’s fourth work stream: “enhancing trading venue transparency and oversight.”

Much of secondary market trading is now facilitated by electronic platforms: IDBs as well as RFQ platforms between dealers and customers. Last year, the Commission put out a request for comment on a proposal[20] to enhance transparency and oversight over alternative trading systems (ATSs) that trade government securities.

I support the core elements of that proposal, including having ATSs with significant volume comply with Regulation Systems Compliance Integrity, an existing rule that protects for the resiliency of technology infrastructure and promoting fair access to platforms in the Treasury market.[21]

I have asked staff to consider going beyond those elements, though. For example, I think we should consider bringing both RFQ and IDB platforms in, as many commenters suggested.

Third relates to expanding central clearing in the Treasury cash and repo markets. This maps to the IAWG’s recommendation to “evaluat[e] expanded central clearing.”

Clearinghouses have lowered risk for the public and fostered competition in the capital markets since the late 19th century.

Simply put, they lower the risk to the system.

A clearinghouse sits in the middle as the buyer to every seller and the seller to every buyer. Thus, rather than having thousands of bilateral relationships amongst market participants, clearinghouses offer a classic hub and spoke model. Further, central clearing reduces risks by facilitating the netting of transactions. As an added benefit, regulators can efficiently apply robust rules to the clearinghouses themselves, including the collection of initial and variation margin.

Congress appreciated these benefits when it gave the SEC authority over clearinghouses in the 1930s, added Treasury clearinghouses to our mandate in the 1980s, and added clearing of swaps and security-based swaps to regulators’ remit after the 2008 financial crisis.

Currently, only 13 percent of Treasury cash transactions are centrally cleared, according to the IAWG report. What’s more, 68 percent are bilaterally cleared, and about 1 in 5 involve a mix of central clearing and bilateral clearing.[22] Further, the IDBs currently are taking on some clearinghouse-like functions, though they are not regulated as clearinghouses.

While central clearing does not eliminate all risk, it does lower it. It levels the playing field across counterparties, allowing for greater competition and resilience by bringing in additional capital during times of stress.

Thus, I’ve asked staff to make recommendations around three areas of central clearing:

First, whether all members of any registered clearing agency in this market should be required to bring in both sides of all of their trades, for both cash and repo. This could be particularly important with respect to the IDBs, which are sitting in the middle but often are bringing just one side of a trade into central clearing.

Second, how we might enhance or strengthen the Commission’s Covered Clearing Agency Rules. I’ve asked staff to learn from other markets, such as swaps, and to evaluate the benefits and tradeoffs of gross and net margining, including whether house and customer positions should be netted against each other.

Third, whether we can enable broader access to clearing, possibly including through responsible use of sponsored and correspondence clearing.

The next project relates the IAWG’s second work stream: “improving data quality.” I’ve asked staff to continue to work with FINRA, the Department of the Treasury, and the Federal Reserve to consider further enhancements to TRACE. I support the Fed’s recently announced new rule requiring large banks to report transactions to TRACE. [23]

Finally, we have ongoing projects with respect to open-end funds, money market funds, and private funds. This maps to IAWG’s final work stream: “examining effects of leverage and fund liquidity risk management practices.” Each sector has a significant role in the Treasury market.[24] I’ve asked staff to consider ways to increase resiliency in response to the challenges that both open-end funds and money market funds faced last year. I’ve also asked staff for recommendations for the Commission’s consideration around enhancing reporting and disclosure through Form PF.

Clearly, there’s a lot of work to be done!

I look forward to working with our colleagues at the Federal Reserve Board, Department of the Treasury, Commodity Futures Trading Commission, and the Federal Reserve Bank of New York on these efforts.

We would put rule proposals out for public comment and would benefit from engaging in this ongoing conversation with market participants.

Throughout these remarks, I’ve mentioned a variety of reports on the Treasury market. Well, I can’t conclude without discussing the first Treasury report!

A couple hundred years before he became a Broadway star, Alexander Hamilton had a star turn as Secretary of the Treasury. In 1790, Hamilton gave the grandparent of all Treasury reports.

He told Congress that “the proper funding of the present debt, will render it a national blessing.”[25]

That’s a significant burden to be shouldered by any one market, but Hamilton’s prophecy has turned out to be prescient. I think that all of us, coming together and building upon the consensus reached in the public sector, private sector, and academia, can continue to make this market the safest, most liquid in the world. 

Now, I’d like to turn it over to Amanda Fischer for questions from the audience. Thank you.