August 26, 2022

Via email to: [email protected]
Brian Smith
Deputy Assistant Secretary for Federal Finance
U.S. Department of the Treasury
1500 Pennsylvania Avenue, NW
Washington, D.C. 20220

RE: Request for Public Comment on Additional Transparency for Secondary Market Transactions of Treasury Securities: Docket No. TREAS-DO-2022-0012

Dear Deputy Assistant Secretary Smith:

The Securities Industry and Financial Markets Association (SIFMA), SIFMA’s Asset Management Group (SIFMA AMG), the American Bankers Association Securities Association (ABASA) and the Institute of International Bankers (IIB, collectively, with SIFMA, SIFMA AMG and ABASA, “the Associations”) appreciate the opportunity to respond to the U.S. Department of the Treasury’s (Treasury) recent request for information (RFI) on additional transparency in the market for Treasury securities. We believe that Treasury’s publication of the RFI is an important step in gathering the information and input necessary to assess the benefits and risks to different segments of the market of additional post-trade transparency. We look forward to continuing to engage with Treasury and other policy makers on potential structural reforms in the market for U.S. Treasury securities that would contribute to increased resiliency and capacity in this important market.

Executive Summary

The Associations support the broad policy objective of enhancing the resiliency and capacity of the Treasury market through carefully calibrated reforms that encourage market participation from a diverse group. Moreover, the Associations are broadly supportive of additional non-public data disclosures to the official sector that would support their market monitoring, policymaking, and supervisory functions. However, the benefits of additional public disclosure are less clear, while the potential downsides of such disclosure—to intermediaries and investors—are significant.

Specifically, additional inappropriately calibrated public disclosures present significant risks to the Treasury’s goal of financing the U.S. debt at the lowest cost to taxpayers over time, the ability of primary dealers to effectively serve their important underwriting and market making function, and the ability of end-users and investors to execute large transactions. As explained below, inappropriately calibrated public disclosure could threaten the ability of primary dealers to hedge their market making positions, and thus their ability to take larger positions in Treasury securities to facilitate customer transactions and provide liquidity to all aspects of the Treasury market.

Correspondingly, larger positions are often transacted by institutional investors. Public disclosure could impede the ability of these end-users to mitigate the adverse pricing impact that would result from such disclosure, which would further dampen liquidity. These consequences could significantly affect broader investment strategies of end-users and other investors, and the way in which investment services are provided to retail investors, as Treasury securities may be used to hedge risk as part of a diversification strategy or as a liquid cash equivalent or relatively liquid asset. If the ability to use Treasury securities in these ways is limited due to the negative consequences of public disclosure (particularly if block sizes or time delays are inappropriately calibrated), then investors may face relatively greater expenses and volatility in their overall investment portfolios.

These risks of public disclosure are most pronounced for off-the-run Treasury securities and other less-liquid segments of the market, where liquidity providers often need to warehouse risk for a significant period of time (ranging from several days to weeks and sometimes even months). Threatening this ability to efficiently carry risk would lead to compromised secondary market making, which would reduce—rather than enhance—overall market liquidity and have detrimental effects on the ability of investors to manage large positions. Moreover, each market segment has a unique set of characteristics, including types of market participants, trading strategies, depth, volumes, execution methods and liquidity. Requiring public disclosure of trade data too quickly and/or at too granular a level in these market segments could hamper the ability of market participants to trade large, concentrated positions, thus reducing market liquidity for all investors.

Therefore, the Associations propose that the following core considerations be taken into account prior to implementing additional public transparency in the Treasury securities market:

Decisions regarding additional public disclosure should be made on a market-segment-by-market-segment basis after weighing the potential negative effects (e.g., reduction in market liquidity) against any clearly articulated benefits of such disclosure for the particular market segment.

Any public disclosure of trade data ought to be subject to block reporting caps to avoid disincentivizing market participation and these caps should be calibrated and balanced with appropriate reporting and dissemination delays. Less liquid segments of the market likely require significant additional study to determine if post-trade transparency is beneficial.

Any additional post-trade transparency should not only be calibrated appropriately to the specific market segment but also phased-in gradually, including through the use of pilot programs, to help ensure that any negative effects are identified and addressed in a timely fashion.

More robust public disclosures will generally be least harmful in more liquid on-the-run market segments than in less liquid segments.

Any public disclosure requirements should not be pursued until there is increased clarity on the broader range of reforms to the Treasury market, such as: the universe of firms that may be required to register as government securities dealers (which also should be subject to transparency requirements); whether and to what extent there is a central clearing requirement; and any new minimum haircuts on repo transactions. It is important to analyze how such reforms will interact with each other.