The U.S. Treasury market is a bedrock of the global financial system. U.S. Treasuries are debt instruments issued by the U.S. government to finance its activities. Owing to the United States’ creditworthiness and status as the world’s leading economy, the U.S. Treasury market (comprised of the cash market as well as the repurchase agreement (“repo”) and futures markets) has been described as the “biggest, deepest and most essential bond market on the planet.” Investors view Treasuries historically as risk-free or near-cash assets i.e., assets that retain their value and can be easily sold during both normal and stressed market periods. Unsurprisingly then, Treasuries have tended to be viewed as safe havens for investors during market crises. Their stability means U.S. Treasuries also often serve as benchmarks for other fixed-income securities and hedging positions; as a result, U.S. Treasury yields have an impact on the rates that consumers, businesses, and governments across the globe pay to borrow money. In addition, the U.S. Treasury repo market is a key transmission mechanism for U.S. monetary policy, and vital to the liquidity of the cash Treasury market.

The resiliency of the Treasury markets has been called into question by a series of market disruption events in which market price volatility increased dramatically and/or where the depth of the market (i.e., the amount of liquidity available) decreased precipitously. These include the “Flash Rally” in October 2014, stresses in the Treasury-backed repo markets in September 2019, and the “Dash-for-Cash” in March 2020. While these events have differed in their scope and magnitude, collectively they have highlighted a variety of longer-term structural questions in the Treasury markets, particularly the growing mismatch between the volume of Treasury issuance and the capacity of the system to intermediate the trading of those instruments. This has led to calls for reforms.

Categories of Reform

Although by no means exhaustive of the ideas circulating in public debate around Treasury market reform, there are four broad categories of reform. These are:

1. Greater use of centralized clearing and “all-to-all” trading platforms;
2. Expanded access to the Federal Reserve’s standing repo facility (“SRF”);
3. Changes to prudential banking regulation (such as reform of the SLR requirement); and
4. Increased public dissemination of data by market participants.

Twin Goals for Reforms

What is certain is that more study is needed to determine the impact of many of these proposals, both individually and collectively, on the Treasury markets. Moreover, we are likely to see other reform ideas emerge as the FSB, U.S. Treasury, and others continue to study market disruptions and collect data on the markets.

The goals of any reforms in the Treasury market should be to enhance the liquidity resiliency in the market and to increase the market-making capacity of market participants in order to meet the growing demand for, and supply of, Treasury securities. These twin goals must be top-of-mind as policymakers and market participants assess the costs and benefits of any reforms.