William C Dudley: The evolving structure of the US Treasury Market
Conference - welcoming remarks
Welcoming remarks by Mr William C Dudley, President and Chief Executive Officer of the
Federal Reserve Bank of New York, at the evolving structure of the US treasury
market conference, Federal Reserve Bank of New York, New York City, 20 November 2015.
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Frank Keane, Michael McMorrow, Joseph Tracy and Nate Wuerffel assisted in preparing these remarks.
It is my pleasure to welcome you to this conference on the evolving structure of the U.S.
Treasury market. As you all know, the Treasury market plays a unique and crucial role in our
economy, and in global financial markets more broadly. Treasury securities serve as a liquid
investment and hedging vehicle for global investors, a ready source of collateral for many
financial transactions and serve as a risk-free benchmark for other financial instruments. The
Treasury market is important for the Federal Reserve's implementation of monetary policy and
also is a focus here at the Federal Reserve Bank of New York in our statutory role as the
Treasury's fiscal agent. The Treasury market also helps to underpin the U.S. dollar's status as
the global reserve currency. And, of course, it is the primary means for borrowing to finance
the U.S. federal government.1
In recent years, the structure of the Treasury market has changed significantly. Trading has
become increasingly electronic, and, in many cases, highly automated. Less traditional firms,
often with a primary focus on automated, low-latency trading strategies, have entered the
arena and helped to transform the landscape. In addition to adapting to these changes,
traditional broker-dealers are complying with a more rigorous regulatory framework and are
also expanding their use of automated trading technologies.
These developments raise a number of important questions. They include: Who are these new
entrants and what are their motivations? Has the changing composition of firms affected the
nature of market making and liquidity provision? How have traditional liquidity providers
responded to the expanded use of new technology? Has the changing structure introduced
operational risks in the clearing and settlement infrastructure? How has the evolution of the
repo market affected the secondary market for Treasury securities? Are the regulatory
requirements imposed upon the Treasury market sufficient in today's world? And finally, are
there any changes - regulatory or otherwise - that could improve the functioning, efficiency
and/or integrity of the Treasury market?
As I noted in my recent remarks on market liquidity, many open questions remain on the
subject of Treasury market liquidity.2 At the same time, the agenda for this conference makes
it clear that there are many other important questions beyond market liquidity worthy of
consideration and debate. The breadth and expertise of the attendees at this conference make
this forum an excellent opportunity to advance our collective thinking on this range of important
subjects.
While the recent joint staff report on the events of October 15 certainly revealed that much has
changed, it is also important to recognize that both private and official sector efforts to ensure
a healthy and efficient Treasury market have been ongoing for some time.3 One obvious
example is the Treasury Market Practices Group, or the TMPG. Set up in February 2007, the
TMPG is a group of market professionals committed to supporting the integrity and efficiency
of the Treasury market.4 A core purpose of the TMPG is to develop and update a set of best
practices related to trading, settlement and risk management, thereby establishing a set of
behavioral norms to which market participants are expected to adhere. Most recently, the
TMPG updated its best practice guidance to address automated trading, and published a
companion white paper on the subject. And no discussion of the TMPG can go without mention
of the "fails charge." Instituted in May 2009, this practice provides a standard procedure for
market participants to assess - or pay - a fee for settlement failures, and this has proven to
be a highly effective remedy for curbing the volume of fails in the Treasury market.5 I want to
thank the entire TMPG for their leadership in supporting the efficiency and integrity of the
Treasury market. I'd like to single out Tom Wipf with a personal thank you. Tom has served
with distinction as the TMPG's chair since its inception, providing credible, balanced and
independent leadership to the Group.
I would be remiss if I did not also mention the ongoing work of the Inter-Agency Working Group
on Treasury Market Surveillance, or the IAWG. After the Salomon auction bidding scandal in
January 1992, the official sector established the IAWG. Since that time, it has been a useful
forum for the official sector to coordinate and communicate on the various issues that have
arisen in the Treasury market. Indeed, over the years there have been numerous examples of
questionable behavior that has come to the attention of the IAWG, and these have been
channeled onwards to the appropriate authorities. The IAWG continues to meet biweekly, as
it has since its inception.
As you all know, the Joint Staff Report concluded that further work is necessary in light of the
evolving structure of the Treasury market, and it also highlighted a series of additional steps
that the official sector will take to evaluate its approach to this market. I remain very supportive
of these efforts. In fact, this conference is among the first of those next steps, and presents a
perfect opportunity to have a rich debate on the market's evolving structure and the actions
that may be appropriate in response.
Thank you once again for coming here today. I look forward to our engagement and discussion.