“Capital allocated to market-making by bank-affiliated dealers has not kept pace with the very rapid growth of marketable Treasury debt outstanding,” the group’s report found. That, in turn, is due in part to leverage requirements that discourage banks from allocating capital to market making, the report said.
The group’s recommendations included:
• Creation of a standing repo facility by the Fed, with terms that “discourage use of the facility in normal market conditions without stigmatizing its use under stress”
• All trades of Treasury securities executed on electronic inter-dealer trading platforms that offer anonymous trading should be centrally cleared
• Treasury repos should be centrally cleared
• The Treasury Department should lead a review of the design and operation of the Fixed Income Clearing Corporation, the only central clearinghouse for Treasuries
• Banking regulators should review rules with a view to modifying those that discourage market intermediation
• The TRACE reporting system should be expanded to capture all transactions in Treasury securities and Treasury repos
• The Treasury should lead an inter-agency study to re-examine all exemptions of Treasury securities from U.S. securities laws, and prepare annual reports on Treasury market functioning
“Even in the unlikely event the U.S. were to dramatically change the path of fiscal policy, toward reducing the level of Treasuries outstanding relative to GDP -- which is inconceivable -- but if they were to do that, there would still be a lot of benefits of these reforms,” Geithner told reporters on a call Wednesday.
Former Fed Governor Jeremy Stein said that a standing repo facility would, for the Fed, “reduce the probability of having to step in in a more intrusive way,” as it did last year in its emergency purchases of Treasuries.
Darrell Duffie, a Stanford University finance professor who contributed to the report, said it was “definitely motivated in part by the important role of the U.S. Treasury market in supporting the reserve currency status of the dollar and, in general, financial-stability and market-transparency benefits to the entire globe.”
“All of those benefits spill back to U.S. taxpayers because they lower the cost of financing U.S. deficits. So that’s a key motivation,” Duffie said in a webinar presenting the report Wednesday.
Geithner served as chair of the working group. The project director was Patrick Parkinson, a former Fed official who’s now at the Bank Policy Institute. Parkinson co-wrote a paper last year with Nellie Liang, now the Treasury undersecretary of domestic finance, on enhancing liquidity in Treasuries. Panel members included former heads of the central banks of the U.K., Japan, Germany, Brazil and Mexico along with other ex-senior Fed officials.
This article was provided by Bloomberg News.