US Treasury market reforms should possibly include more central clearing, Fed’s Brainard says

US authorities should consider Treasury market reform that includes expanding use of central clearing in Treasury cash markets and increasing access to trading platforms that provide more direct Treasury trading among market participants, Federal Reserve Governor Lael Brainard said.

“The March turmoil highlights the importance of exploring reforms in the critically important Treasury market,” she said in a statement attached to the Fed’s financial stability report this week.

Brainard, the sole Democrat at the central bank and named by several news outlets as a leading contender for Treasury secretary in the Biden administration, said another option that should be considered is buttressing the Fed’s temporary repurchase agreement facility for foreign and international monetary authorities.

Randal Quarles, the Fed’s top regulator, said at a Senate hearing yesterday that an inter-agency group set up years before the pandemic and the current downturn is looking at alternatives.

He said there were 29 primary dealers that handle much of the trading with clients, with other dealers, and with principal trading firms. The primary dealers include Goldman Sachs, JPMorgan, Citigroup and Morgan Stanley.

Senator John Kennedy, a Louisiana Republican, said, “Why go through primary dealers? They’re part of the problem.”

He added: “Why are you not able to trade with each other?”

In the wake of the pandemic, an unprecedented stampede for cash among investors in Treasury securities led to massive, broad-based selling in March. Dealers tried to step up but couldn’t keep pace, and the Fed intervened by buying $1.6 trillion of Treasuries to unfreeze the market.

— NY Fed official’s speech —

Brainard’s statement cited a speech last month by a Federal Reserve Bank of New York official, which said increased central clearing of Treasuries can help market participants manage settlement risk and enable balance sheet efficiencies.

More central clearing can “pave the way for more direct trading among Treasury market participants,” said NY Fed executive vice president Lorie Logan.

The Securities and Exchange Commission recently proposed enhanced oversight of alternative trading systems that “could facilitate participation on such platforms by a broader set of market participants,” she said.

Logan also cited a report by Stanford finance professor Darrel Duffie that proposes a study of the costs and benefits of mandating the central clearing of Treasury transactions of all firms active in the market.