The Future of Market Liquidity and Functioning Workshop, which the New York Fed co-hosted in July with The Clark Center for Global Markets at the University of Chicago Booth School of Business, focused on forthcoming changes in securities clearing, potential innovations in payments processing, and how both could impact the underlying structure of markets, market functioning, and monetary policy implementation.
A running theme was how to achieve efficiency gains from market structure changes and new technologies while ensuring a resilient financial system. “Implemented thoughtfully, new technologies can increase market liquidity, reduce risk and ultimately improve the flow of capital and credit and help the economy grow,” said Lorie Logan, president of the Dallas Fed. “But if they are not implemented well, new technologies can also increase risk and undermine market functioning.”
Another recurring topic was how monetary policy implementation should adapt to evolving conditions and shifts in the demand for reserves. Julie Remache, deputy manager of the Federal Reserve’s System Open Market Account (SOMA), remarked on the timeliness of the workshop, as questions about how central banks supply reserves in effective and efficient ways garner greater focus.
The Fed’s Framework is Flexible
New York Fed President John C. Williams said that the Federal Reserve’s ample reserves monetary policy implementation framework remains well-suited to handle changes in demand for reserves, whether from shifts in bank regulations or technological innovations.
SOMA Manager Roberto Perli echoed these comments as he discussed market conditions that could spur different types of shifts in reserve demand—including unexpected shocks in reserve supply—and the flexibility of the ample reserves framework, which can handle evolving market conditions and market structure. Perli also highlighted the evolution of policy implementation, noting that the Open Market Trading Desk at the New York Fed adapted its operations in response to past changes in market structure (including, for example, the adoption of tri-party repo), and that policy implementation may again evolve in the future alongside markets.
Evolving Repo Market Structure
The shift underway toward central clearing of eligible U.S. Treasury repo trades is one of the most important changes to market structure since the financial crisis, speakers said. The key benefits include opportunities for multilateral netting (or consolidating offsetting risk exposures, which helps free up balance sheet capacity), reduced settlement risk, and more consistent risk management practices, speakers said. Panelists said they expected the launch of two new covered U.S. Treasury clearing agencies would change the competitive landscape of repo markets and add to market resilience.
Still, panelists noted a few questions pertaining to regulatory scope and clearing access models remain under discussion in consultation with the Securities and Exchange Commission (SEC).
SOMA Manager Perli said the industry is making significant progress in migrating eligible uncleared repo activity to the cleared space ahead of the mid-2027 central clearing implementation deadline set by the SEC. He noted that Fed staff continue to evaluate the potential benefits and challenges of centrally clearing the Fed’s Standing Repo Operations (SRPs). SRPs help limit upward pressures on money market rates, making them an integral part of the monetary policy implementation toolkit.
Innovations in Payments
Innovations across the payments landscape could affect market structure and liquidity, speakers said. Morten Bech, head of the BIS Innovation Hub in Switzerland, distinguished between three types of interdependent liquidity: market, funding, and settlement. A key focus across payments innovations is likely to be enhancing settlement liquidity, that is, the ease and finality with which transactions can be completed at an agreed-upon time or subject to market conventions.
More efficient settlements could come from increased adoption of blockchain technology in trading to replace—or augment—traditional finance. To drive adoption, tokenization must demonstrate value beyond what traditional finance already offers, speakers said. Panelists highlighted key benefits of tokenization, such as the programmability and customization of smart contracts; bolstering intraday provision of liquidity; and improved collateral management.
Significant infrastructure gaps will need to be addressed to see broader adoption, speakers said. These include a regulated tokenized settlement asset and clarity around the governance, privacy, and data transparency of on-chain transactions. Speakers said they expect the Depository Trust and Clearing Corporation’s trial of tokenized trading to reveal information about the types of blockchains—for example, permission-less or permissioned, public or private—that investors and issuers prefer.
Darrell Duffie, professor of management and finance at Stanford University, discussed the benefits and efficiencies that come from faster processing of nettable intraday liquidity needs in a potential liquidity savings mechanism embedded in Fedwire. Sam Schulhofer-Wohl, senior vice president and senior advisor at the Dallas Fed, discussed the importance of striking a balance between the efficiencies and considerations of public externalities as they relate to the structure of the U.S. banking system, which might ultimately limit such a mechanism’s efficiency and resiliency.
New Technologies May Bring New Vulnerabilities
As new technologies and processes emerge, so too might new vulnerabilities, speakers said. Jay Kahn, principal economist at the Board of Governors of the Federal Reserve System, highlighted current features of repo markets that create operational vulnerabilities, such as concentrated trading activity in the morning. But the rise of faster payments processing and shared infrastructure could themselves raise new vulnerabilities, which will make process redundancies especially critical.
Antoine Martin, vice chairman of the Governing Board at the Swiss National Bank, said decentralized market structure can improve the market’s resilience, though concentration risks remain, highlighting observations from the temporary shutdown of exchanges that were critical for price discovery in the decentralized FX market.
Conclusion
Anil Kashyap, the Stevens Distinguished Professor of Economics and Finance at the University of Chicago Booth School of Business, said in closing remarks that much of the day’s conversation centered on how to design market structures for greater efficiencies while maintaining a well-functioning financial system. That summarized well the points made by many participants, including President Williams, President Logan, and SOMA Manager Perli.
For the full agenda and links to presentations, read the event page.
Maneesha Shrivastava is a policy and market analysis principal at the New York Fed.
The views expressed in this article are those of the contributing authors and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.
