The nearly $30 trillion U.S. Treasury securities market is considered one of the most important financial markets in the world. The market offers a low-risk (backed by the full faith and credit of the U.S. government) and liquid asset for domestic and global investors while financing U.S. federal spending. Any event that significantly disrupts Treasury market functions, such as sudden increases in price volatility or reductions in liquidity, could cause distress in the global financial system. Some recent market disruptions (e.g., in 2019 and 2020) that required federal government backstops indicate that the Treasury market is not immune to financial stability concerns. In light of the increased frequency of notable Treasury market events, Congress has engaged with stakeholders to understand market conditions and explore policy options. During the 119th Congress, the House Committee on Financial Services created a new task force dedicated to Treasury market resilience, and Treasury market issues were a key focus at multiple hearings. Members of Congress expressed strong support for maintaining a liquid and resilient Treasury market and for continuing to explore relevant policy solutions to enhance Treasury market resilience. Policy discussions associated with Treasury market disruptions tend to gravitate toward several key topics, including (1) the size and growth of the Treasury market, which may have outstripped Treasury market intermediaries’ market-making capacity; (2) the unwinding of hedge fund basis trades; (3) sudden changes in institutional investor influence; and (4) the changes in conditions that could affect investors’ perception of the creditworthiness of Treasury securities. Multiple authorities are responsible for regulating or operating various components of the Treasury market. The Department of the Treasury is responsible for securities issuance. The Securities and Exchange Commission (SEC) is the primary regulator overseeing the trading of U.S. Treasury securities, including the oversight of brokers and dealers facilitating the trading. The Trade Reporting and Compliance Engine is the main system for consolidating Treasury securities transaction data and reporting. The Financial Industry Regulatory Authority operates this reporting system with the involvement of the SEC, Treasury, the Federal Reserve, and banking regulators. The process for clearing and settling transactions in Treasury securities is facilitated by entities operated by or under the oversight of the SEC and the Federal Reserve. The Commodity Futures Trading Commission oversees Treasury derivatives markets, including instruments such as Treasury futures, options, swaps, and futures on indexes related to Treasuries. Various government agencies, industry practitioners, academics, and interest groups have made a number of recommendations regarding Treasury market resilience. Critics of some of these recommendations assert that they would entail undue government intervention and impose additional costs on market participants. Proposed policy options for Congress to consider—either legislative actions or agency oversight—include the following: Expand Treasury market capacity by (1) reducing intermediaries’ disincentives to offer dealer capacity and (2) exploring new trading venues. Mandate central clearing that could enhance Treasury market risk management (not including concentration risk), reduce settlement flow, and increase risk transparency. Reduce hedge fund basis trade leverage through potential over-collateralization requirements (e.g., haircuts) that would curtail certain borrowing activities. Evaluate the existing and new options for federal government backstops while maintaining awareness of moral hazards. Utilize the Treasury Department’s buyback program to offer liquidity support for Treasury securities. Increase data transparency and reporting for risk monitoring and risk mitigation. Increase coordination across different financial organizations and through industry engagements.
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