Next Fed steps in Treasury markets oversight, info collections outlined

An agreement with the industry-organized regulator of financial markets and a proposed rule are two steps the Federal Reserve is taking to “keep up with the changing nature” of Treasury markets, a member of the agency’s board said Monday.

In a speech at a conference hosted by the Federal Reserve Bank of New York on the U.S. Treasury market (in New York), Gov. Lael Brainard said that the Fed is finalizing an agreement with the Financial Industry Regulatory Agency (FINRA, a private regulatory agency for securities markets) to act as the Fed’s agent in expanding the collection of Treasury securities transactions to key banks that are also active in the market.

Brainard’s remarks were prompted by the Treasury “flash rally” on Oct. 15, 2014, she said, which served “as a wake-up call for regulators and market participants alike that the structure of the Treasury market had changed radically from the conventional view.”

She said that since the “surprising sharp spike” in Treasury prices four years ago,the public sector has devoted significant effort and resources to monitoring the ongoing changes in the Treasury market. However, she indicated more steps are necessary.

“The TRACE (Trade Reporting and Compliance Engine) data are indispensable in the IAWG’s (interagency working group) ability to track and understand this market,” Brainard said. “However, FINRA’s collections are limited only to its members,” she said, explaining the discussions with the other agency to expand the collection.

Brainard also said the Fed has decided to issue a notice of proposed rulemaking on collecting agency mortgage-backed securities (MBS) and debt transactions as well.

“This collection will help round out the IAWG’s view of these markets and ensure continuous coverage in circumstances where trading moves between the bank and the broker-dealer within a firm,” she said. “It is important that reporting thresholds be appropriately tailored to avoid imposing undue burden on smaller firms, and we will be particularly attentive to public comments on this matter.”

Brainard noted that the Treasury Department is also considering the issues related to Treasury markets, and that the Fed wants to “harmonize” its approach with any future decisions by Treasury and the working groups in making Treasury transactions data available to the public.

“Our expectation is also that Federal Reserve policy would be harmonized with FINRA’s practices in making anonymized agency MBS and debt transactions publicly available, taking into account what we learn from the comment process,” she said.

The Structure of the Treasury Market: What Are We Learning?

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