U.S. Treasury Markets Steps Toward Increased Resilience DISCLAIMER This report is the product of the Group of Thirty’s Working Group on Treasury Market Liquidity and reflects broad agreement among its participants. This does not imply agreement with every specific observation or nuance. Members participated in their personal capacity, and their participation does not imply the support or agreement of their respective public or private institutions. The report does not represent the views of the membership of the Group of Thirty as a whole. ISBN 1-56708-184-3 How to cite this report: Group of Thirty Working Group on Treasury Market Liquidity. (2021). U.S. Treasury Markets: Steps Toward Increased Resilience. Group of Thirty. https://group30.org/publications/detail/4950. Copies of this paper are available for US$25 from: The Group of Thirty 1701 K Street, N.W., Suite 950 Washington, D.C. 20006 Telephone: (202) 331-2472 E-mail: [email protected] Website: www.group30.org Twitter: @GroupofThirty U.S. Treasury Markets Steps Toward Increased Resilience Published by Group of Thirty Washington, D.C. July 2021 G30 Working Group on Treasury Market Liquidity CHAIR Timothy F. Geithner President, Warburg Pincus Former Secretary of the Treasury, United States PROJECT DIRECTOR Patrick Parkinson Senior Fellow, Bank Policy Institute PROJECT ADVISORS Darrell Duffie Jeremy Stein Adams Distinguished Professor of Management and Moise Y. Safra Professor of Economics, Professor of Finance, Stanford Graduate School of Harvard University Business WORKING GROUP MEMBERS William C. Dudley Masaaki Shirakawa Senior Research Scholar, Griswold Center for Economic Distinguished Guest Professor, Aoyama-Gakuin University Policy Studies at Princeton University Former Governor, Bank of Japan Former President, Federal Reserve Bank of New York Lawrence H. Summers Arminio Fraga Charles W. Eliot University Professor, Harvard University Founding Partner, Gávea Investimentos Former Secretary of the Treasury, United States Former Governor, Banco Central do Brasil Kevin Warsh Mervyn King Distinguished Visiting Fellow, Hoover Institution, Member of the House of Lords, United Kingdom Stanford University Former Governor, Bank of England Former Member of the Board of Governors, Federal Reserve System Guillermo Ortiz Partner, BTG Pactual Axel A. Weber Former Governor, Banco de México Chairman, UBS Chairman, Institute of International Finance GROUP OF THIRTY iii Table of Contents Foreword ...........................................................................................................................vii Acknowledgments ................................................................................................... viii Abbreviations .................................................................................................................. ix Introduction ..................................................................................................................... 1 Key Issues and Recommendations ................................................................. 7 References ...................................................................................................................... 19 Group of Thirty Members 2021 ...................................................................... 21 Group of Thirty Publications since 2010 ................................................ 25 Foreword he Group of Thirty (G30) presents its latest publica- under strain. This report identifies and analyzes the weak- tion, U.S. Treasury Markets: Steps Toward Increased nesses in the market, and makes recommendations that TResilience. Prepared by the G30 Working Group on should meaningfully strengthen its resilience. The recom- Treasury Market Liquidity, the report diagnoses the weak- mendations are feasible, and should add a greater degree of nesses in the U.S. Treasury market that became apparent predictability to the market. during the period of market stress in March 2020, and On behalf of the G30, we extend our thanks to Timothy lays out steps that can strengthen its resilience in future Geithner for his astute leadership of the Working Group stress episodes. behind this important report, and to the members of the The U.S. Treasury market plays a central role in the Group for their dedication and efforts. We are also grate- global system, with Treasury rates providing the funda- ful to the Project Advisors, Darrell Duffie and Jeremy mental benchmark for pricing of most financial assets. Stein, for their commitment and considered advice, and Continued confidence in the market, and in its ability to to the Project Director, Patrick Parkinson, for bringing function efficiently in times of stress, is critical to the stabil- his decades of expertise to the task of framing actionable ity of the global financial system. reforms. We also thank Arminio Fraga for extensively The emergence of the COVID-19 pandemic shook the sharing his time and insights. global economy, and also brought the U.S. Treasury market Jacob A. Frenkel Tharman Shanmugaratnam Chairman, Board of Trustees Chairman Group of Thirty Group of Thirty GROUP OF THIRTY vii Acknowledgments n behalf of the Group of Thirty (G30), I would forward. Furthermore, we would like to thank the various like to express great appreciation to those central banks that provided useful data to help us under- Owhose time, talent, and energy have driven this stand how central bank policies may be affecting the project to a successful completion. I would like to thank resilience of market liquidity. the members of the Working Group on Treasury Market The G30 extends our deep appreciation to the Project Liquidity, who guided our collective work at every stage, Director, Patrick Parkinson, for his steadfast support and with special acknowledgement to Arminio Fraga for his careful drafting of the report, and to the Project Advisors, support. The intellect and experience of this diverse and Darrell Duffie and Jeremy Stein, for their tireless work and deeply knowledgeable team was essential as we sought to contributions to the analysis and formulation of the report. craft the report’s findings and recommendations to increase The coordination of this project and many aspects of the resilience of the bond market and reduce the frequency project management, Working Group logistics, and report and scale of extraordinary central bank interventions. production were centered at the G30 offices in Washington, The Working Group must thank the many leaders in the D.C. This project could not have been completed without financial community who supported this study and agreed the work of the Executive Director, Stuart Mackintosh, and to be interviewed, highlighting how their institutions are his team, including Desiree Maruca and Emma Prall. We leading the economic and fiscal response to the COVID-19 are grateful to them all. pandemic, and what policy responses are needed moving Timothy F. Geithner Chair Working Group on Treasury Market Liquidity viii U.S. Treasury Markets: Steps Toward Increased Resilience Abbreviations ATS Alternative Trading System CCLF Capped Contingency Liquidity Facility CCP Central Counterparty CFTC Commodity Futures Trading Commission COVID-19 Coronavirus Disease 2019 DTCC Depository Trust & Clearing Corporation DVP Delivery Versus Payment ECB European Central Bank FICC Fixed Income Clearing Corporation FIMA Foreign and International Monetary Authority FINRA Financial Industry Regulatory Authority GCF General Collateral Financing GSCC Government Securities Clearing Corporation GSIBS Global Systemically Important Banks IAWG Interagency Working Group on Treasury Market Surveillance IDB Interdealer Broker MBS Mortgage-backed Securities NSCC National Securities Clearing Corporation PTFS Principal Trading Firms SCI Systems Compliance and Integrity SEC Securities and Exchange Commission SIFMU Systemically Important Financial Market Utility SLR Supplementary Leverage Ratio SRF Standing Repo Facility TRACE Trade Reporting and Compliance Engine GROUP OF THIRTY ix Introduction he U.S. Treasury market is the single most impor- On those platforms, trades between dealers typically are tant financial market in the world, as Treasury rates centrally cleared, but trades involving PTFs typically are Tare a fundamental benchmark for pricing virtually not centrally cleared but instead are settled bilaterally with all other financial assets. Consequently, confidence in the the IDB. Trading in the dealer-to-customer segment is in U.S. Treasury market, and in its ability to function effi- over-the-counter markets intermediated by dealers (pre- ciently even in times of stress, is critical to the stability of the dominantly broker-dealer units of the largest global banks). global financial system. In normal market conditions the While there has been increasing use of multidealer trading market has functioned and continues to function extremely platforms, trades executed using those platforms are still well. Even under stress, until recently the market had been settled bilaterally between the dealer and the client. There highly resilient. However, a series of episodes, including is essentially no central clearing of dealer-to-client trades the “flash rally” of 2014, the Treasury repo market stress of of Treasuries. Finally, the U.S. Treasury and Treasury repo September 2019, and the COVID-19 shock of March 2020, markets are highly interconnected by arbitrage with the have created doubts about its continued capacity to absorb highly liquid