Collaboration Toward Increased Resilience of the Treasury Market

September 21, 2023
Michelle Neal, Head of the Markets Group
Remarks at ISDA/SIFMA AMG Derivatives Trading Forum New York: The Path to Resilient Treasury Markets, New York City As prepared for delivery

Thank you to the International Swaps and Derivatives Association for inviting me to this event. It is an honor to join you today to discuss Treasury market resiliency.1 In my role as head of the Markets Group at the Federal Reserve Bank of New York, ensuring resiliency in the Treasury market is a key priority. The New York Fed supports continued study and improvement in related areas such as advancing the resilience of market intermediation, improving data quality and availability, and evaluating expanded central clearing. In my remarks, I will talk about the significance of a strong Treasury market, the role of the Inter-Agency Working Group for Treasury Market Surveillance (IAWG) and the Treasury Market Practices Group (TMPG) in bolstering Treasury market resilience, and key current focus areas. As always, the views I express today are my own, and do not necessarily reflect those of the New York Fed or the Federal Reserve System.

The Role of the Treasury Market

The U.S. Treasury market is the deepest and most liquid securities market in the world and is critical to the functioning of both the domestic and global financial system. It is a key market where the U.S. Department of the Treasury finances the federal government and where monetary policy is implemented. Additionally, the Treasury market serves as a domestic benchmark for housing and corporate finance and as a global benchmark for a range of international markets. As of August 2023, there is a total of $25.5 trillion of Treasury securities outstanding, with year-to-date daily average volumes in the cash market of roughly $700 billion and an average of over $4 trillion outstanding in the Treasury repo market. In the three years since the onset of the pandemic, the Open Market Trading Desk in the New York Fed’s Markets Group has executed $3.2 trillion in outright purchases in the Treasury market, and has seen roughly $1.2 trillion in average daily repo transactions and $5.1 trillion in rollovers at Treasury auctions in its work to implement monetary policy.

The Role of the IAWG and TMPG

Given the importance of the Treasury market, the New York Fed has a long-standing investment in working with industry and government partners to ensure the market’s efficiency and integrity. The New York Fed contributes to the work of the IAWG, which is led by the Treasury Department with staff participation from the New York Fed, Federal Reserve Board, Securities and Exchange Commission (SEC), and Commodity Futures Trading Commission. Initially formed in 1992 in the wake of the Salomon Brothers auction bidding scandal, the IAWG has tackled many key topics in the Treasury market over the years, ranging from auction design and the primary dealer system in the early 1990s to the current focus on ways to improve market resiliency.2 As part of our work with the IAWG, since 2015, the New York Fed has hosted an annual flagship conference on the U.S. Treasury market, co-sponsored by the other IAWG entities. That conference brings together market practitioners, academics, and members of the official sector to discuss emerging issues in the Treasury market and to advance initiatives to promote its robustness.

In addition to the IAWG, another important body that focuses on the Treasury market is the TMPG, which is a representative group of market participants committed to supporting the integrity and efficiency of the Treasury, agency debt, and agency MBS markets. Sponsored by the New York Fed, the TMPG includes members from a range of institutions, including securities dealers, banks, buy-side firms, and market utilities. Formed in 2007, this group’s initial focus was a compilation of voluntary best practice recommendations designed to promote efficient market making, market liquidity, a robust control environment, recognition of obligations associated with managing large positions, and efficient market clearing.3 Like the IAWG, the TMPG’s work has evolved over the years, and most recently has focused on clearing and settlement as well as data availability and transparency. Several events over the past decade have reinforced the need for ongoing collaboration by all market stakeholders to safeguard the Treasury market, including the “flash rally” in October 2014, stresses to repo markets in September 2019, and the “dash for cash” in March 2020 in the early stages of the COVID pandemic.

Key Focus Areas to Enhance Treasury Market Resiliency

In its 2022 Staff Progress Report, the IAWG identified five workstreams for improving the resiliency of the Treasury market: 1) Improving resilience of market intermediation; 2) Improving data quality and availability; 3) Evaluating expanded central clearing; 4) Enhancing trading venue transparency and oversight; and 5) Examining the effects of leverage and fund liquidity risk management practices.4 In the rest of my remarks, I will focus on the first three workstreams, touching on the contributions of the IAWG, TMPG, and work the New York Fed is leading.

Improving Resilience of Market Intermediation

First, with regard to market intermediation, recent and ongoing research on market structure highlights how new methods of trading could increase Treasury market resiliency. The New York Fed has long been a trusted expert on Treasury market structure. One notable contribution to this body of research was our critical role in producing a 2015 Joint Staff Report on the “flash rally” that occurred in October 2014.5

More recently, in October 2022, staff from the New York Fed, Federal Reserve Board, and Treasury Department released a New York Fed Staff Report about all-to-all trading in the Treasury market.6 In theory, all-to-all trading—whereby any market participant would be able to trade with any other market participant—would effectively merge the now separate dealer-to-customer and dealer-to-dealer market segments. Such a trading model could improve liquidity and price transparency. The paper noted that an organic move to all-to-all trading could be more likely to occur in conjunction with increased central clearing and greater price transparency. The authors noted that the evolution of all-to-all would likely occur gradually and only if market participants found it valuable. Amidst this potential shift, active engagement by dealer intermediators would be required. Of course, shifts in trading conventions could occur through financial innovation. While fintech has fostered ongoing innovation in the broader market landscape over recent decades, the potential exists for new or existing Treasury market participants to introduce trading innovations that increase the adoption of all-to-all and expand the reach of such trading to less-liquid sections of the Treasury market.

Looking ahead, the IAWG’s market structure workgroup—a subgroup that studies potential resiliency-improving aspects of Treasury market structure—has turned its attention this year to a deeper investigation of the off-the-run market. In this work, IAWG staff are conducting empirical research to describe off-the-run trading as it occurs today, looking at both trading dynamics in the off-the-run market and the resulting liquidity, leveraging official sector Treasury TRACE data. This work will be a key complement to existing research and will support ongoing improvements in market functioning.

Improving Data Quality and Availability

Second, regarding improving data quality and availability, I believe that both the official sector and the public should have access to high-quality data on the Treasury market, given the role of the Treasury market as a global benchmark. In its 2022 Staff Progress Report, the IAWG highlighted official sector proposals to enhance data collection, in support of the IAWG staff’s principle of “transparency that fosters public confidence, fair trading and a liquid market.”

In March 2023, the TMPG released a white paper on data availability and transparency in the Treasury market. The paper highlights the importance of data transparency, suggests principles for assessing transparency, and identifies current gaps in the market.7 It reiterates the importance of data transparency in supporting official sector market monitoring and surveillance as well as broader price discovery and market efficiency. In light of these principles, the paper highlights the relative strength of data availability and transparency in the futures markets and identifies gaps in the dealer-to-client cash market and the repo market. As I will now discuss, ongoing initiatives will drive progress toward increased data availability and transparency.

There have been helpful steps toward increased data and transparency in this market: the Financial Industry Regulatory Authority (FINRA) has begun releasing aggregate TRACE transaction data daily, the Treasury Department has announced plans to release transaction data for on-the-run nominal coupons, and the OFR has conducted pilot data collection on non-centrally-cleared bilateral repo transactions and has proposed ongoing collection of this data. However, the gaps in data availability and transparency identified by the TMPG indicate the need for continued and concerted official sector action to drive progress. As an example, the OFR’s bilateral repo pilot data collection showed that the uncleared bilateral repo market is an area where both the official sector and market participants have little visibility and where margining and settlement practices are bespoke and opaque. This is an area where further understanding is needed, and the TMPG is studying risk management in this market as one of its current priorities.

Evaluating Expanded Central Clearing

The third workstream identified by the IAWG is the evaluation of expanded central clearing. From a regulatory standpoint, in September 2022, the SEC released a proposed rulemaking that would expand central clearing in the Treasury market.8 The release of any further proposed or final rules is an important watchpoint and is something that we are closely following.

Over many years, the TMPG has studied the fragmented clearing and settlement framework for the cash and secured financing segments of the Treasury market. Most recently, a 2022 white paper summarized the fragmented nature of settlement and associated risks in repo and securities lending markets, following up on TMPG work related to the cash market.9,10 While noting that under normal market conditions, the credit, liquidity, and counterparty risks may be small, gaps in risk management may present themselves in times of market stress, testing risk management frameworks. As noted in the white paper, this could be an exceptionally acute issue for non-centrally-cleared bilateral trades, where opaque risk management practices may create uncertainty about the levels of exposure across market participants. This contrasts to centrally cleared repo, where the clearing and settlement process is transparent, thereby making it easier for market participants to evaluate and manage risks.

Moving beyond the conceptual, a 2021 New York Fed Staff Report looked to quantify the potential impact of central clearing by considering what would have happened if all outright trades in the first four months of 2020, as collected via TRACE, were centrally cleared.11 The authors found that if they assumed that all trades, both interdealer and dealer-to-customer, are netted and settled via a centralized counterparty, gross settlement obligations would fall dramatically, with an outsized impact in times of market stress, when the decline would have been near 70 percent.12 The authors also found that central clearing would have led to a notable decline in settlement fails. It is possible that a move to greater central clearing could increase intermediation overall, particularly during stressful periods.

Building on these conclusions, a recent New York Fed Staff Report shows a significant loss in U.S. Treasury market functionality results when intensive use of dealer balance sheets is needed to intermediate bond markets, as in March 2020.13 Although yield volatility explains most of the variation in Treasury market liquidity over time, when dealer balance sheet utilization reaches sufficiently high levels, liquidity is much worse than predicted by yield volatility alone. This aligns with prior research and suggests that increased central clearing could have a positive impact on market liquidity. It indicates that, as more trades are centrally cleared, strains related to spikes in settlement fails could be avoided or reduced, easing a constraint on dealer intermediation capacity.

While this workstream is independent of the other IAWG workstreams, achievements in relation to central clearing would likely impact other areas of work. As I noted earlier, increased central clearing could impact the speed with which trading models evolve, as market participants are increasingly connected by central clearing. Increased central clearing could also lead organically to greater data availability and transparency. As noted in the TMPG white paper on data availability, data tends to be more reliable and accessible in markets that rely largely on a single exchange for trading, such as Treasury futures, compared to markets where trading occurs in a wider range of venues.


As the deepest and most liquid securities market in the world, the U.S. Treasury market is a central component of the global financial system. Together with both official sector and industry partners, the New York Fed is focused on ensuring that the market remains resilient and continues to evolve appropriately with the broader financial system. While there will certainly be unexpected challenges in the years to come, continued collaboration between public and private sector stakeholders to advance the enhancements I touched on today will ensure that the Treasury market retains its status as the global risk-free benchmark.

1 I would like to thank Lisa Stowe for her assistance in preparing these remarks.

2 For more detail on the formation of the IAWG, see U. S. Department of the Treasury, U. S. Securities and Exchange Commission, and Board of Governors of the Federal Reserve System, Joint Report on the Government Securities Market, January 1992.

3 For more detail on the formation and early work of the TMPG, see Kenneth D. Garbade and Frank M Keane, The Treasury Market Practices Group: Creation and Early Initiatives, Staff Report No. 822, August 2017.

4 U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission, Enhancing the Resilience of the U.S. Treasury Market: 2022 Staff Progress Report, November 10, 2022.

5 U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, U.S. Securities and Exchange Commission, U.S. Commodity Futures Trading Commission, Joint Staff Report: The U.S. Treasury Market on October 15, 2014, July 15, 2015.

6 Alain Chaboud, Ellen Correia Golay, Caren Cox, Michael Fleming, Yesol Huh, Frank Kean, Kyle Lee, Krista Schwarz, Clara Vega, and Carolyn Windover, All-to-All Trading in the U. S. Treasury Market, Staff Report No. 1036, October 2022.

7 Treasury Market Practices Group, White Paper on Data Availability and Transparency in the U. S. Treasury Securities Market, March 2023.

8 U. S. Securities and Exchange Commission, SEC Proposes Rules to Improve Risk Management in Clearance and Settlement and to Facilitate Additional Central Clearing for the U. S. Treasury Market, September 14, 2022.

9 Treasury Market Practices Group, White Paper on Clearing and Settlement in the Market for U. S. Treasury Secured Financing Transactions, November 9, 2022.  

10 Treasury Market Practices Group, White Paper on Clearing and Settlement in the Secondary Market for U. S. Treasury Securities, July 11, 2019.  

11 Michael Fleming and Frank Keane, The Netting Efficiencies of Marketwide Central Clearing, Staff Report No. 964, April 2021.  

12 The study focused on solely on settlement netting and did not consider whether such netting would impact the Supplemental Leverage Ratio.

13 Darrell Duffie, Michael Fleming, Frank Keane, Claire Nelson, Or Shachar, Peter Van Tassel, Dealer Capacity and U. S. Treasury Market Functionality, Staff Report No. 1070, August 2023.

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