, uses repo to finance its holdings of treasury securities or agency mortgage - backed securities, assets that generally have only modest risk weights when held as trading positions. the second is when the dealer acts as an intermediary and has a matched repo book. in both cases, the sfts blow up the firm ’ s balance sheet and, hence, the denominator of the leverage ratio, even while having little impact on risk - based capital or lcr calculations. the crucial issue here, however, is whether the leverage ratio does, in fact, bind. a traditional view among regulators has been that the leverage ratio should be calibrated so as to serve as a meaningful “ backstop ” for risk - based capital requirements, but that under ordinary circumstances it should not actually be the binding constraint on firms. for if it were to bind, this would put us in a regime of completely un - risk - weighted capital requirements, where the effective capital charge for holding short - term treasury securities would be the same as that for holding, say, risky corporate debt securities or loans. recently, u. s. regulators have issued a proposed rulemaking that seeks to raise the basel iii supplementary leverage ratio requirement to 5 percent for the largest u. s. bank holding companies, and to 6 percent for their affiliated depository institutions. while this increase might be considered a parallel shift that preserves the backstop philosophy in light of the fact that risk - based requirements have also gone up significantly, it does increase the likelihood that the leverage ratio may bind for some of these firms at some times – particularly for those firms with a broker - dealer - intensive business model in which the ratio of total assets to risk - a similar comment applies to the net stable funding ratio ( nsfr ), which requires regulated firms to fund illiquid exposures with some amount of long - term debt or other form of stable funding. like the lcr, the nsfr effectively treats matched - book repo as creating no net liquidity exposure, and hence imposes no requirement on it. even from a microprudential perspective, the lcr can be said to have a flaw in that it is blind to maturity mismatches within the 30 - day window. for example, if a dealer borrows on an overnight basis from a money fund, and then makes a 29 - day loan to a hedge fund, the lcr deems it to be fully matched, and to have no incremental liquidity

dobrislav dobrev and ernst schaumburg ( 2015 ), “ the liquidity mirage, ” federal reserve bank of new york, liberty street economics ( blog ), october 9, https : / / libertystreeteconomics. newyorkfed. org / 2015 / 10 / the - liquidity - mirage -. html. see bank for international settlements, markets committee ( 2018 ), monitoring of fast - paced electronic markets ( basel, switzerland : bis, september ), https : / / www. bis. org / publ / mktc10. pdf. - 12 federal reserve staff analysis reveals that the 3 p. m. spike in trading volumes tends to be fairly evenly divided between the dtc and idb market segments, suggesting that both dealers and proprietary trading firms play an important role during this narrow window of activity. in the dtc market, the increase around 3 p. m. would be consistent with trading related to mutual fund daily and end - of - month portfolio rebalancing. in the electronic idb market, the increase around 3 p. m. would be consistent with the increased role of proprietary trading firms in intraday intermediation and the possible closeout of positions toward the end of the main part of the trading day. from a market resilience perspective, it would be valuable to analyze these systematic intraday spikes in trading volumes, particularly as they may influence price formation and liquidity provision in the treasury market. the large spike in flows toward the end of the trading day points to a financial stability consideration that is worth flagging. the treasury market practices group ( tmpg ) has done valuable work in mapping out clearing and settlement patterns in the treasury market. one issue that this analysis highlights is the currently limited potential for same day, or t + 0, settlement on transactions conducted near the end of the day. the flash events we have seen in the treasury market so far have occurred early enough in the day to allow time for prices to recover before market close, and they have not been accompanied by any participant ’ s failure to perform, let alone a major participant, platform, or exchange. as the tmpg ’ s work shows, most transactions in the treasury market settle the next day, or t + 1. as can be seen in figure 8, federal reserve staff analysis based on the transactions recorded in trace shows that same - day settlement volumes, on average, - 13 represent only about 4 percent