2  BIS central bankers’ speeches  A robust counterparty framework, specifically one that provides reliable execution capacity of sufficient scale and is facilitated by a liquid and smoothly functioning secondary market for Treasury securities, aids the Desk in pursuing our objectives with respect to the implementation of monetary policy and the activities we undertake in support of the Treasury. But these benefits must be balanced against the cost of maintaining counterparty relationships. Staff time and resources are required to monitor and manage these relationships to ensure that we are getting good value not only in terms of trade execution, but also in terms of market monitoring, an important function that the Desk provides for the benefit of the Federal Reserve System and the Treasury. A large, diverse set of counterparties can contribute to competitive trade execution and richer sources of market intelligence, as well as the increased operational coverage and resiliency that support adaptation to changes in market structure or operating directives. But diversity also entails complexity and requires initial and ongoing investment in infrastructure to support a wider range of firm types. Evaluating and onboarding firms, setting up transactional systems and account arrangements, and monitoring and evaluating counterparty performance and risk all take time and resources that must be balanced against the potential benefits of a larger list.7 One final consideration that bears mention is the concept of an imprimatur that some market participants associate with status as a New York Fed counterparty.

This expansion is a requirement of our business needs given the current size of our balance sheet, specifically the need to maintain appropriate control of short-term interest rates with abundant excess reserves in the  6  BIS central bankers’ speeches  banking system.13 Primary dealers, and entities of the type that are currently eligible to be primary dealers, which typically exhibit structural demand for cash financing to support inventories, are unlikely to satisfy this requirement. To the extent that the ongoing evolution of the structure of the Treasury market, including technological advancements and changing investor behavior, affects the role of primary dealers as market makers, it is important to analyze the implications for the Fed’s ability to meet its objectives. The primary dealer system has proven to be very effective for both the conduct of monetary policy and the issuance of Treasury debt. I am very confident that the existing counterparty framework – continuing to utilize primary dealers for traditional domestic policy open market operations, expanding to new counterparty types, as appropriate, for targeted operations to increase the effectiveness of domestic policy implementation, and maintaining relationships with a sufficient number of large market participants in the relevant foreign exchange markets for possible foreign exchange policy and investment operations – provides enormous capacity to implement a wide range of monetary policies. Moreover, we have demonstrated a commitment throughout our history to make any adjustments necessary to ensure a robust and effective operational framework.