As the deepest and most liquid securities market worldwide, the U.S. Treasury market plays a critical role in the global economy. With this in mind, every year, the Federal Reserve Bank of New York, the U.S. Department of the Treasury, the Board of Governors of the Federal Reserve System, the U.S. Securities and Exchange Commission (SEC), and the U.S. Commodity Futures Trading Commission (CFTC) convene the official sector, public sector, and academia to discuss this important market. The U.S. Treasury Market Conference, held in September, marked the 10th of these annual forums.
As Federal Reserve Chair Jerome H. Powell explained while opening the event, “the Treasury market is part of the bedrock of our economy and indeed of the world economy.” He harkened back to a key point he made at the first conference nearly a decade ago, noting, “These markets need to keep functioning at a high level, and we all have a stake in making sure that they do.”
As Chair Powell noted, this sentiment remains true today, and the 2024 conference included several official sector speeches and panels that all reflected this priority.
In today’s post, we highlight key points raised during the conference’s three panels, which covered asset managers’ use of Treasury futures, expanded central clearing, and the history and future of Treasury market structure. Together, these discussions highlighted three main themes:
- The ever-evolving nature of the Treasury market;
- The official sector’s progress in improving the market’s resilience; and
- That challenges still lie ahead.
Asset Manager Use of Treasury Futures
To provide context for the first panel, a member of the Treasury Borrowing Advisory Committee (TBAC) detailed findings from the Committee’s 2024 examination of why certain types of asset managers have recently increased their net long positions in Treasury futures and of the factors influencing the portfolio mix of derivatives, repo, and cash investments in Treasury securities. CFTC data shows that asset managers are a significant source of demand for Treasury market futures, creating the long futures demand that hedge funds then supply through the basis trade. The TBAC found that many asset managers have invested in higher-yielding, shorter-duration corporate bonds or agency MBS and then used Treasury futures to increase the portfolio duration to match a reference bond index. The panelists discussed factors driving asset managers’ preference for Treasury futures, including regulatory and accounting considerations, liquidity, and operational simplicity.
Panelists noted the importance of managing risks in asset management and taking the best course of action as a fiduciary. A panelist from the insurance industry highlighted that insurers may prefer interest rate swaps or other longer-maturity derivatives over Treasury futures because the industry’s products often feature long-duration liabilities and industry-specific accounting objectives. To hedge short-dated or more dynamic positions, they often use futures. Another panelist highlighted that pension funds, which can face few accounting and regulatory impediments to using Treasury repo over Treasury futures, often get long interest rate exposure using derivatives including futures, but can use repo markets to avoid the drag of elevated cash-futures basis at points on the curve. Others noted areas where accounting, regulatory, or reporting rules may incentivize use of Treasury futures over repo, even when the positions would be economically similar. Panelists also mentioned the significant liquidity of Treasury futures contracts and ease and anonymity of trading.
The panel also covered topics including the increasing U.S. Treasury supply and changes in margining. On the former, some panelists said that both the Treasury weighting in fixed-income benchmarks and basis trading between cash and futures will likely continue to rise. On the latter, the panelists saw important ongoing roles for cross-collateralization and cross-margining. One panelist cited hedge funds’ capacity for intermediation as an important factor, given higher Treasury issuance and an environment where asset managers continue to seek long futures positions.
Expanded Central Clearing in Treasury Markets: Perspectives on Access Models
To kick off the second panel, a SEC representative described the agency’s central clearing rule to “enhance and improve CCP (Central Counterparty) risk management in the Treasury market.” The rule mandates the centralized clearing of Treasury transactions between large groups of Treasury market participants, and it requires that house and customer margin be separated. The SEC panelist highlighted where the market still needs to develop solutions to satisfy the rule, including how CCPs provide the required “appropriate access” to clearing services.
With the access mandate in mind, panelists discussed client access models needed to meet it. Currently, the standard practice in the Treasury market is “done with” clearing, where trading counterparties clear trades in a bundled fashion. To provide the access required by the new rule, the Treasury market may need to adopt “done away” clearing, which is common in most other financial markets. In this model, market participants can execute trades with one firm and clear them with another.
The dealer panelist highlighted that “done with” clearing creates several challenges for firms’ ability to access clearing services. First, modifying or supplementing technological systems to handle these new types of transactions as a sponsoring firm can be time- and capital-intensive. Second, many market participants can only set up access to a small number of clearing firms or sponsors, which could lead to concentration, since market participants with limited capacity may prefer larger firm sponsors.
The panelists from clearing firms then discussed their current and planned offerings. The Fixed Income Clearing Corporation (FICC) representative noted that market participants have the option to set up direct access to FICC, which would make “done away” clearing a moot point. She also said that there are two indirect access models that should conform to the SEC rule by allowing margin segregation and access for “done away” clearing. The CME Group panelist discussed the firm’s work to enhance cross-margin efficiencies and its recent application to become a securities clearing agency. CME aims to build on its knowledge base from futures and swaps to offer clients access models that support balance sheet efficiency and “done away” clearing. Similarly, the Intercontinental Exchange representative said the firm hopes to apply lessons learned from recently implementing changes related to the CFTC’s swaps clearing rule to their preparation for the SEC’s clearing rule, including allowing customers to unbundle trading and clearing and creating a dynamic marketplace where customers can shop around for the best price.
The discussion then turned to the potential benefits and downsides of increasing the number of firms providing clearing services. While the panelists acknowledged that new entrants would face short-term frictions in setting up and onboarding clients, they also highlighted potential benefits, such as differentiation, lower costs from increased competition, and innovation.
The dealer and principal trading firm (PTF) panelists discussed their priorities for the transition in the clearing space. The dealer panelist underscored the importance of a “done away” model for mid-sized dealers who might have trouble providing sponsored repo to clients but noted that considerations around the accounting rules, legal liability, and potential partnerships between firms in the market needed to be addressed. The PTF panelist indicated that most PTFs use a third-party clearing firm for their transactions.
The discussion concluded with all panelists agreeing that, while work remains to be done, central clearing is a positive development in the Treasury market.
Treasury Market Structure: Past, Present, and Future
Taking a retrospective approach, the final panel reflected on the October 2014 flash rally and the investigation that followed. That analysis found that electronification had arrived in the Treasury market, that intermediation had changed, and that the market had become more interconnected globally. Panelists highlighted significant developments since that event, including the increased quantity of Treasurys outstanding and its relation to dealer balance sheets, increased electronification, and further intermediation changes.
The panelists agreed that the greatly increased quantity of Treasurys issued and outstanding, without a commensurate shift in dealer balance sheet capacity, is an area of concern. They also pointed out that dealers have not been able or willing to quickly expand their balance sheets to facilitate intermediation, creating a bottleneck for transactions. Panelists said that exempting Treasurys from the Supplemental Leverage Ratio, which measures a bank’s Tier 1 capital relative to its total leverage, could potentially alleviate some of these balance sheet pressures and aid market resilience. A few panelists also noted that all-to-all trading and increased transparency measures could help.
Regarding electronification, the dealer panelist discussed how it is changing dealer-customer relationships and increasing the speed at which markets move and react to events. Another panelist said that he believes the official sector has been focusing on regulations to promote safety and stability of the Treasury market, but that further progress on liquidity regulations is still needed.
On related topics, panelists said that central clearing and data transparency will be most beneficial to the market. They noted that central clearing can help reduce counterparty risk and likely support market-making by dealers while also making a future move to all-to-all trading smoother. As to increased data transparency, panelists pointed to its use in quickly and correctly identifying problems and determining solutions in times of stress. This is potentially most necessary in the off-the-run market, where transparency is currently low.
The panel concluded with a brief discussion on how the Treasury market and regulation of it will evolve. Panelists cited central clearing, the flexibility of dealer balance sheets, efforts to better support indexing, and the pace of transparency reforms as areas to watch.
Looking Ahead
Looking ahead, this conference remains an important forum for assessing the Treasury market’s evolution, understanding the state of market functioning, and enhancing resilience. This aligns with Treasury Secretary Janet Yellen’s reminder to conference participants, noting that, “Work to build and maintain a resilient financial system is never over. We’ll never be able to just declare victory.” And as New York Fed President John C. Williams emphasized, the Treasury market plays a foundational role in that work, underscoring that, “In an era of heightened uncertainty and volatility, it is essential that the U.S. Treasury market remain liquid and resilient, so that all financial markets can operate effectively.”
A replay of the 2024 U.S. Treasury Market Conference is available on the event page.
Ellen Correia Golay is a capital markets trading advisor in the Markets Group.
Trevor Graney is a capital markets trading associate in the Markets Group.
Brian Greene is a capital markets trading associate director in the Markets Group.
Erica Gutman is a market operations and analysis associate in the Markets Group.
Sara Kaddoura is a capital markets trading associate in the Markets Group.
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.
