The $26 trillion U.S. Treasury market plays a critical role in the global economy. Market participants worldwide depend on it for investing, collateral, and hedging, and as a benchmark for the pricing of other securities. It also serves as the Federal Reserve’s main tool for monetary policy.

By reducing risk and fostering liquidity, the rules the Commission is adopting today strengthen the Treasury market. This built-in resiliency will be useful in times of market stress.

In recent years, the Treasury market has experienced significant disruptions. During the COVID-19 pandemic, a rush towards liquidity, referred to as the “dash-for-cash,” resulted in a steep drop in Treasury prices.

In September 2019, an unusual convergence of corporate tax payments and Treasuries auction settlement triggered events in the markets for repurchase agreements, or repos, that led to an increase in borrowing costs.

In both instances, the Federal Reserve stepped in and injected liquidity into the market.

In October 2014, Treasury bond yields fell dramatically, and prices saw large, unexplained increases. This particular disruption revealed that the market had evolved. Increased participation by non-traditional liquidity providers backed with lower levels of capital made the market more vulnerable to liquidity shocks.

All three disruptions tested the resiliency of the Treasury market’s structure and exposed vulnerabilities, with implications for global financial stability.

These disruptions coincided with a decline in central clearing. Until the mid-2000s, a significant amount of trading in the cash market was centrally cleared. By 2017, however, only 13 percent of the overall dollar volume of Treasury cash transactions was centrally cleared. Another 68 percent was cleared bilaterally, which means the trade involved at least one party that was not a clearing member. Downsides of bilaterally cleared trades include heightened credit, interest, and counterparty risks, and a lack of transparency that creates risks for the clearing agency.

The other 19 percent of the cash market is subject to “hybrid” clearing, where one-leg of a trade is centrally cleared but the other is cleared bilaterally. Because of a lack of uniform risk management and collateral collection practices, hybrid clearing carries its own set of risks, including potential clearing agency contagion risks.

By bringing the benefits of central clearing to more Treasury transactions, both for cash and repos, the rules the Commission is adopting today are designed to reduce these risks and to prevent future market disruptions. Central clearing can increase market liquidity, reduce counterparty risk, and enhance transparency. By reducing the risk of delivery failures, decreased counterparty risk can also increase liquidity during periods of market stress.

The Treasury Market Practices Group, led by market professionals in partnership with the New York Federal Reserve and the U.S. Treasury, concluded last year that any significant disruption in the Treasury market can create systemic risk.

The Commission’s new rules will facilitate a more stable and more transparent Treasury market. This, in turn, will help prevent market disruptions, reduce the need for Federal Reserve interventions, and strengthen market confidence.

I am pleased to support the adoption of today’s rules.