As I noted at the time of the proposal,[1] it is hard to overstate the importance of the U.S. Treasury market. U.S. Treasury securities are direct obligations of the U.S. Government issued by the Department of the Treasury. The U.S. Treasury market is truly one of the most important financial markets in the world, since Treasury rates are a fundamental benchmark for pricing practically all other financial assets.[2] In both the U.S. and global economies, U.S. Treasury securities serve as a significant investment instrument and hedging vehicle for investors, a benchmark of the “risk free” rate for other financial instruments, a source of liquid assets for funds and brokers, and an important mechanism for the Federal Reserve’s implementation of monetary policy.[3] In fact, U.S. Treasury securities are often used as substitutes for cash.

Given that investors rely on the ability to move between cash and U.S. Treasury securities seamlessly, the fact that the Treasury market has experienced several significant disruptions in recent years has been concerning. These disruptions include the flash rally in October of 2014, the sudden spike in repo rates in September of 2019, and the Covid-related market disruption in March of 2020—all of which triggered extensive interventions by the Federal Reserve and prompted regulators and others to consider ways to improve the resilience of the market in times of stress. As I stated at the time of the proposal, increasing the level of central clearing in the Treasury market has been identified in numerous papers, reports, and speeches as one way to do so.[4]

In view of the importance of central clearing to market resilience, it is notable that there has been a decline in the proportion of transactions that are centrally cleared in recent decades. For example, until the mid-2000s, most inter-dealer trading occurred between primary dealers who were members of the Fixed Income Clearing Corporation (or “FICC”), which meant that this trading was centrally cleared.[5] But in recent years, the market began to deviate from this historical practice. One recent analysis by the Treasury Market Practice Group estimates that only 13 percent of the overall volume in U.S. dollars of U.S. Treasury cash transactions were centrally cleared as of the first half of 2017, and that an additional 19 percent were subject to hybrid clearing, in which one leg of a transaction facilitated by an interdealer platform is centrally cleared, and the other leg of the transaction is cleared bilaterally. Such hybrid clearing introduces risk into the market because it involves varying risk management practices that are less uniform and less transparent to the broader market. In addition, hybrid clearing may also be less efficient with regard to netting exposures and use of collateral as compared to central clearing.

Today we are considering rule amendments that would bring the benefits of central clearing to more repo and cash transactions involving U.S. Treasury securities, which should lower overall risk in the market.[6] Specifically, the anticipated range of benefits includes decreasing the overall amount of counterparty risk, reducing contagion risk to FICC,[7] helping to avoid disorderly member defaults, and increasing multilateral netting of transactions, which should in turn reduce operational and liquidity risks.[8] Because the benefits of central clearing are proportional to the number of participants, the higher the number of market participants that are clearing their transactions in U.S. Treasury securities, the greater the benefits of central clearing to the market.

As I noted during the proposing stage, the rule amendments should also improve transparency in several ways. First, expanded central clearing should increase regulators’ visibility into these markets, in particular the often opaque repo market.[9] It should also increase price transparency and improve transparency of settlement risk to regulators and market participants.[10] Specifically, increased transparency into settlement risk would allow a covered clearing agency such as FICC to identify concentrated positions and crowded trades, and adjust margin requirements accordingly, which should help reduce contagion risk to both the covered clearing agency and the system as a whole.^[11] As a result of this improved transparency, I expect the market for U.S. Treasury securities to be more orderly and efficient, which is especially important given the vital role these assets play in the overall capital markets.

I’d like to thank the staff of the Division of Trading and Markets, the Division of Economic and Risk Analysis, and the Office of the General Counsel for all of their hard work on this release. I’m pleased to support its adoption. Thank you.