“Hamilton: Ensuring Treasury Markets Are a Blessing Long Into the Future” Prepared Remarks Before the ISDA/SIFMA Treasury Forum

Thank you, Scott, for that kind introduction and inviting me to speak about the U.S. Treasury markets. As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the staff.

A couple hundred years before he became a Broadway star, Alexander Hamilton had a star turn as Secretary of the Treasury. In 1790, Hamilton told Congress that “the proper funding of the present debt, will render it a national blessing.”[1]

Hamilton’s prophecy has turned out to be prescient. Treasuries are called “risk-free assets,” not just here in the U.S. but around the globe. They are the base upon which our entire capital markets are built. The U.S. Treasury markets play an integral role in the dollar’s dominance. They are how we, as a government and as taxpayers, raise money to fund roads, bridges, and public universities. We are the issuer. They are integral to how the Federal Reserve conducts monetary policy.

Over the years, however, there have been multiple times we’ve seen tremors in these markets. In 2014, we had a “Flash Crash.” For 12 minutes, it was very difficult for investors to even trade in Treasuries.

Then in September 2019, the funding of the market—the Treasury repurchase agreement market or “repo” market—experienced real issues. Again, at the beginning of the COVID-19 crisis in the spring of 2020, there were significant challenges in the Treasury markets. In the aftermath of some regional banks failing in 2023, we saw jitters yet again.

This isn’t a new phenomenon. I witnessed it during my early days on Wall Street when a dozen government securities dealers failed in the 1980s.

Another characteristic of the Treasury markets is the use of leverage often facilitated by prime brokerage relationships between hedge funds and nonbank intermediaries on the one hand and banks and broker-dealers on the other. In a study of non-centrally cleared bilateral repo data collected in June 2022, the Office of Financial Research said that 74 percent of volume covered by the pilot study was transacted at zero haircut.[2]

Given the magnitude, leverage, and importance of the Treasury markets, as policymakers, we can’t ignore these repeated tremors. Further, there have been significant changes in the technology and business models of these markets. Thus, the SEC has been coordinating on reforms with our partners at the U. S. Treasury, Federal Reserve, Federal Reserve Bank of New York, and Commodity Futures Trading Commission.

The goal of these reforms is to promote the efficiency and the resiliency of these markets. The rules promote efficiency through access, transparency, competition, and facilitating all-to-all trading. Doing so lowers costs on behalf of U.S. taxpayers. The reforms promote resiliency by bringing more transactions into central clearing as well as having well-regulated dealers and platforms.

The Treasury markets being so consequential also is bringing together the International Swaps and Derivatives Association (ISDA) and the Securities Industry and Financial Markets Association (SIFMA) for this joint conference. In fact, when I last spoke with each of your organizations, my remarks were on the Treasury markets. I’m glad that you’ve asked me here for a return performance.

Clearance and Settlement

Clearinghouses are vital to our capital markets. They facilitate what one might call the market plumbing, that which happens after you execute a transaction through the time that it settles.

While central clearing does not eliminate all risk, it does lower it. First, clearinghouses do so by sitting in the middle and reducing all the risks amongst and between counterparties. They also provide multilateral netting, which helps lower the overall margin (collateral) needed to be posted in the system. Further, central clearing reduces risks through the robust rules of the clearinghouses themselves, including for the collection of initial and variation margin.

It was after those 1980s tremors in the Treasury markets that Congress first set up a federal regulatory regime for government securities dealers, brokers, and clearinghouses. A few weeks later, the first clearinghouse for government securities, was incorporated. I might note that since the beginning in 1986, Treasury transactions were settled on a T+1 basis.

Speaking of T+1, just last week, much of the rest of the U.S. markets (equities, corporate bonds, municipals, etc.) successfully aligned with the Treasury markets at T+1.[3] I want to thank many of you in this room who worked along with SEC staff to make this transition possible.

Back to Treasury clearing, by 2022, though, only “approximately 20 percent of all repo and 30 percent of reverse repo is centrally cleared via FICC.”[4] Further, inter-dealer brokers (IDBs), which sit in the middle of these markets, often are bringing just one side of the trades on their platforms into central clearing.

Thus, in December 2023, the SEC adopted rules to facilitate additional central clearing for the U.S. Treasury markets.[5] 

First, the final rules make changes to enhance customer clearing.

Foremost, when posting margin to the clearinghouse, members no longer will be able to net their customers’ positions against their own proprietary positions. This will better protect customers as well as the clearinghouse itself. Further, I think it could enhance competition as broker-dealers will no longer be able to use their customer positions to lower the margin they post to the clearinghouse.

The rules also allow for customer margin collected by broker-dealers to be onward posted to the clearinghouse. Allowing such rehypothecation helps both protect customers and free up broker-dealers’ resources.

Market participants have experience with similar rules regarding both gross margining and rehypothecation in the swaps, options, and derivatives markets.

To facilitate access to markets, it’s important that clearinghouses and their clearing members promote the ability for market participants to trade anonymously with the confidence that they will have access to central clearing on both sides of the trade. This helps promote all-to-all trading as well as the efficiency and resiliency of central clearing itself. To achieve this, there has to be provision of clearing services such that it doesn’t matter with whom one does a trade.

In essence, providing clearing for so-called “done-away” transactions can be an important component of promoting access and competition in the markets. Whether trading on an IDB or doing so bilaterally, market participants need access to clearing and the benefits of netting across all their obligations. I’d note this would align Treasury markets with what’s already available in many other sectors of our financial markets, such as in trading cash equities and equity options as well as both futures and swaps.

Second, the final rules broaden the scope of which transactions clearinghouse members must clear. The final rules will require clearinghouses in the Treasury markets to ensure that their members clear all their repo and reverse repo transactions. The final rules also will mandate that clearinghouses require their members clear any cash trades executed on an IDB platform, with registered broker-dealers, or with registered government securities broker-dealers.

In just nine months, in March 2025, the separation of house and customer margin must be completed, ensuring that clearinghouses facilitate indirect participants as well. Starting at the end of 2025, certain cash transactions will have to be cleared. Starting in June 2026, certain repo and reverse repo transactions must be cleared.

It has been reported that there may be new entrants considering offering central clearing in the Treasury markets.[6] We at the SEC stand ready to consider any applications to do so.

Dealer-Trader

As I mentioned, when I was a young associate on Wall Street, a dozen government securities dealers failed leading to President Reagan and Congress giving this agency important authorities over the Treasury markets.

I remember my colleagues and I processing what had happened as well as potential effects on the markets and the economy. Drysdale, which was not registered or regulated as a dealer, had significant involvement in the U.S. Treasury markets. It also was highly leveraged. The firm had only $30 million in capital yet managed a portfolio as large potentially as $4 billion.

Yet, when I arrived at the SEC in 2021, I was told that though numerous firms have registered with the SEC as government securities dealers, some market participants have not. I think that leaves potential regulatory gaps and risk in the system.

The markets also have evolved in other ways, such as electronification, the use of algorithmic trading, and market participants transacting faster than ever before. Some market participants, such as principal-trading firms (PTFs) that use high-frequency trading strategies, started participating significantly in the Treasury cash market. In 2019, for example, PTFs represented around 60 percent of the volume on the IDB platforms in the Treasury markets.

In essence, these PTFs and other firms are acting in a manner consistent with dealers in the securities markets. Nevertheless, despite these firms acting as de facto market makers, and despite their regularity of participation consistent with buying and selling securities or government securities for their own account “as a part of a regular business,” a number of these firms have not registered with the Commission as dealers.

This deprives investors and the markets themselves of important protections—protections that benefit market integrity, resiliency, transparency, and more.

Thus, the Commission earlier this year adopted final rules to further define what it means to be part of a regular business, as the dealer definition provides, in these circumstances.[7] Firms that act as dealers are required to register with the Commission as dealers, thereby protecting investors as well as promoting market integrity, resiliency, and transparency.

Exchanges and Alternative Trading Systems

In response to the dawn of the internet age and changes in trading models, the SEC in 1998, under Chair Arthur Levitt’s leadership, adopted Regulation ATS. At the time, Treasury trading platforms were exempted. A lot, though, has changed in the capital markets in the intervening 26 years. Electronification and new methods of trading have advanced significantly. Much of the secondary markets in Treasuries are now facilitated by IDB and request-for-quote (RFQ) platforms. Further, principal-trading firms have been participating to a greater degree, representing approximately 60 percent of the volume in 2019 on the IDB platforms in the Treasury markets.[8]

The growing importance to investors and the overall market structure of exempted platforms led to the Commission, under Chair Jay Clayton, putting out a proposal with regard to ATSs for government securities and a concept release on fixed-income market structure.[9]

Based upon public input, in 2022, we reproposed rules for ATSs for government securities and proposed to modernize the definition of an exchange.[10] 

Commenters had noted that much of secondary market trading in Treasuries and corporate bonds also were facilitated by RFQ electronic platforms between dealers and customers.

In particular, the Commission in 2022 sought feedback on whether the definition of an exchange should include platforms, such as RFQ platforms, that perform exchange-like functions in the Treasury markets and elsewhere. While they may not have central limit order books, these are venues where multiple buyers can meet multiple sellers, use established, non-discretionary methods to negotiate a trade, and can agree to the terms of a trade.

Ensuring that such exchange-like platforms follow our exchange-specific rules could benefit investors and markets alike.

Transparency

Before I close, I want to discuss a couple of items related to transparency. Earlier this year, we approved a Financial Industry Regulatory Authority (FINRA) rule change to enhance post-trade transparency in the Treasury markets.[11] The FINRA rule, for the first time, will provide the public with post-trade transparency in the Treasury markets on a trade-by-trade basis, rather than on an aggregated basis. The scope of what will be published to the public will include a trade’s time, price, direction, venue, and size.

Further, we approved amendments last year to modernize a rule regarding which broker-dealers must register with FINRA, which will enhance cross-market and off-exchange oversight for some of the most active participants in the capital markets.[12]

Conclusion

While Hamilton no doubt would be pleased with the importance of today’s Treasury markets, he wouldn’t consider the repeated tremors such a blessing.

Given the magnitude, leverage, and importance of the Treasury markets, as policymakers, we can’t ignore these tremors.

Thus, the SEC is working with our partners across the government to promote the efficiency and resiliency of these markets. I think Hamilton would agree that’s how we ensure these markets truly are a national blessing today and long into the future.