Buttress Treasury Market by Easing Liquidity Rules, Study Says

Every member of the FSOC, including the Securities and Exchange Commission, should be given a mandate by Congress to promote financial stability and should be required to submit proposed regulatory changes to a new agency — the Comptroller for Data and Resilience — for review, the report found.

Right Incentives

"It's about getting incentives right and a regulatory process that can see around corners," Columbia University professor Hubbard said in a press briefing on the report.

He said the task force had spoken to a number of regulators and that they were receptive to the overall thrust of the report that something needed to be done to try to avoid a repeat of the March 2020 market meltdown.

Kohn, who is now with Brookings, said he was encouraged by news that the Fed is considering establishing a standing repo facility. At the April meeting of the central bank's Federal Open Market Committee, a "substantial majority" of policy makers saw potential benefits from such a facility, according to the minutes of the gathering.

Under the task force's proposal, non-banks with a significant presence in the Treasury market, including hedge funds, would be required to participate in the facility and pay an up front fee for the liquidity they'd need in emergencies, though it didn't suggest how much.

In line with another recommendation in the report, the Fed is also considering altering some of its bank liquidity requirements. "We're looking hard at the issue," Fed Chair Jerome Powell told reporters on June 16, while declining to give a timetable for a decision.

The task force said regulators should permanently exclude bank reserves from the Supplementary Leverage Requirement or consider adopting the global leverage standard for big U.S. banks. It also called on regulators to study the costs and benefits of a central clearing requirement for Treasuries and Treasury repurchase agreements.

"The market participants we've talked to are very much on the page that the Treasury repo central clearing could save capital, releasing it for use in market-making," Kohn said.

(Image: Mike Scarcella/ALM Media)

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