Thank you for having me here today.1 The U.S. Treasury market performs several important roles in our financial system: The Federal Reserve implements monetary policy in the Treasury market, the Department of the Treasury issues securities to finance the government, and interest rates on Treasury securities serve as a risk-free benchmark rate for other financial markets. Given the importance of the U.S. Treasury market, it’s always worthwhile to discuss best practices that ensure its efficiency and effectiveness. To that end, conferences like this one are very helpful in bringing together market practitioners and representatives of the official sector.
This forum comes at a critical time of transition, with the U.S. Treasury market preparing for expanded central clearing, potential changes in regulation, and likely growth in Treasury supply.2 In my remarks today, I will highlight the recent work of the Treasury Market Practices Group (TMPG) in developing new best practice recommendations for the Treasury repurchase agreement market, and the role of best practices in promoting market efficiency and resilience.
Before I go any further, let me pause and share the regular disclaimer: the views I share today are my own and do not reflect those of the Federal Reserve Bank of New York or the Federal Reserve System.
The Importance of Best Practices
Safety and soundness are crucial for the Treasury market, and the official sector and private sector must work together to support the market’s integrity. It has been reassuring that market functioning has held up well in recent years. Even during times of market stress, as we saw in April, declines in liquidity have been in line with the increases in interest rate volatility, a testament to the resilience of the Treasury market.3
To maintain and improve this resilience, it is important that market participants, central banks, and regulators collaborate to advance the efficiency and effectiveness of the Treasury market. One avenue for this is through the creation and promotion of best practice recommendations. These are principles for good conduct, set by a group of industry stakeholders, that support market integrity and effectiveness.4 Best practices must be thoughtfully designed, consistently applied, and broadly maintained by market participants.
What Is the Treasury Market Practices Group?
The Treasury Market Practices Group, or TMPG, is a group of market professionals committed to supporting the integrity and efficiency of the Treasury, agency debt, and agency mortgage-backed securities (MBS) markets. It was founded in 2007 and is sponsored by the Federal Reserve Bank of New York.
The TMPG develops and advances best practice recommendations for the covered markets.5 Critical early milestones of the TMPG include the introduction of the recommended Treasury fails charge in 2009 and agency MBS margining in 2012.6
TMPG’s Recent Work on the Treasury Repo Market
In more recent years, the TMPG has turned its attention to clearing and settlement in the Treasury market, including publishing a white paper in 2022 focused on the clearing and settlement of repurchase agreements (repos) and securities lending.7 The white paper studied clearing and settlement in non-centrally cleared bilateral repo, or NCCBR for short, as well as in tri-party and centrally cleared repo. It found that clearing and settlement in secured financing transactions varies significantly across repo market segments, and clearing and settlement arrangements in the non-centrally cleared bilateral repo market are often bespoke and opaque.
As a result of this finding, the TMPG launched a working group to explore risk management practices in the NCCBR segment. The working group included representation from a wide variety of Treasury market participants, including dealers, money funds, hedge funds, and others. As this work evolved, the focus of the working group expanded to look at risk management across the Treasury repo market.
This work led to another white paper, which summarized the current state of risk management practices in the Treasury repo market.8 It evaluated current risk management against the risks that should be managed in a Treasury repo transaction. Even though some view Treasury repos as fairly low risk due to their short maturities and the high quality of securities delivered, these trades are subject to the credit risk of the repo counterparty, as well as the liquidity and market risks of the transaction.
The TMPG outlined a variety of practices that are used to mitigate these risks. For example, in the tri-party repo segment, the negotiation of the haircut is one of the main tools used to manage counterparty credit exposures.9 Meanwhile, in the NCCBR market segment, use of repo haircuts is fairly infrequent, with two pilot data collections in the NCCBR segment by the Office of Financial Research showing the majority of transactions involving Treasury securities had zero haircuts.10
Additionally, because the risk management practices in the NCCBR segment are negotiated bilaterally, it is hard to characterize them uniformly. Discussions with market participants revealed that in some cases, the lack of haircuts is attributed to a practice of portfolio margining, where counterparties manage the risks across a suite of trades of different types, with margin from other trades offsetting the need for haircuts on the non-centrally cleared repo. However, market participants also reported that in some cases haircuts are a commercially negotiated term, where competitive forces drive haircuts down.
In the Treasury repo market, a lack of consistency and transparency in risk management practices could pose risks to market functioning if one or more counterparties were to default. Counterparties can help mitigate these risks by improving risk management around Treasury repo, including through the greater use of haircuts on the value of the securities in a repo transaction.
Given these findings, the TMPG developed new best practice recommendations to strengthen risk management in this market.11 The new best practice recommendations call for all Treasury repos to be prudently risk-managed, including the application of haircuts (or margin) on the values of the securities, in concert with other risk management techniques, as appropriate.12 In addition, the new best practice states that legal documentation “should describe, in all material respects, the margining regime.”
The best practice recommendations support the prudent risk management of Treasury repos using a variety of techniques, including haircuts. This recommendation was directly informed by feedback from market participants and industry groups, who noted that haircuts should be viewed together with other risk management tools, such as position limits, netting agreements, and portfolio margining, when evaluating the risk management of a particular transaction. Further guidance that accompanied the best practice recommendations noted that these agreements should be backed by complete, legally enforceable written agreements and should fully contemplate the market, liquidity, and counterparty credit risks associated with the portfolio of transactions.13
In terms of an implementation timeline, the TMPG is recommending that firms begin applying the repo risk management recommendations on a rolling basis, prioritizing their most material counterparty exposures and completing the process by June 2026. This extended implementation period, which was informed by feedback from market participants, is intended to allow time for market participants to evaluate their current risk management frameworks, legal agreements, policies, and procedures as well as allow time for critical work on the expansion of central clearing in the Treasury repo market to continue.
The adoption of these recommended best practices will contribute to improvements to the risk management of the Treasury repo market as a whole. Given the size of the Treasury repo market—with over $8 trillion in daily average transaction volume—and its interconnectedness with other segments of financial markets, sound risk management is critical.14 In my view, widespread use of haircuts for Treasury repo could enhance financial system stability and support market functioning during periods of stress.
Broad adoption of this best practice will be critical to its success. When a best practice is widely adopted among industry stakeholders, it creates positive externalities that benefit all market participants. I encourage you all to review the TMPG best practice recommendations and consider whether your firms’ practices are aligned.
Another important aspect to best practice adoption is building public awareness. In that vein, I would like to bring your attention to the TMPG’s recommendation around price transparency across trading platforms. Last year, the TMPG clarified that that all interdealer voice brokers with electronic trading screens should publish all voice trades to those screens when the trade is agreed.15 Ahead of this clarification, the TMPG found through its outreach that some early-morning voice-executed funding trades were not being published at the time of agreement. The best practice clarification was meant to underscore that all trades should be flashed to electronic screens when they are executed, whether by voice or electronically.
This best practice may not be widely understood among market participants, so I would like to use this opportunity to build awareness of the recommendation. In addition to reviewing all best practices, I would ask that you discuss this recommendation with the repo desks at your firms to be sure that it is well understood. Of course, you should feel free to reach out to the TMPG secretariat if you have questions.16
Looking ahead, the TMPG best practice recommendations will evolve over time and will be updated as necessary to support the resiliency and efficiency of the covered markets. And Treasury market participants will need to navigate a changing landscape in the months and years ahead. During times of transition like this one, it is imperative that firms remain focused on practices and procedures that ensure the efficiency and effectiveness of this vital market.
Thank you.
