Week InReview
Friday | Nov 19, 2021
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Cutting to the chase.
(Nov 17) — Financial regulators [met] on Wednesday to address recent wild price swings in the U.S. Treasury market, presumably to find out why markets all of a sudden aren’t working properly. But traders say that, once again, rules created in Washington are having unforeseen consequences.
The Volcker rule which limited banks from taking large proprietary positions limits the amount of risk and, therefore, the amount of inventory banks can keep on their books. In times of QE, that’s no problem, the more supply the better. Bonds just kept going up as the Fed kept the cash coming.
But now, partly because of rising inflation expectations and partly because of the start of tapering, bonds have been falling and traders can’t hold and trade them the way they used to. Frankly, given the biggest buyer of bonds since the financial crisis is slowing purchases, why would anyone else want them? The Fed not buying bonds is defacto selling.
This is the regulatory agencies’ own doing and creating more rules to fix broken rules is not likely to help. Prices are volatile as traders try to trade the timing of the next rate hike. And if a central bank is eventually going to be trimming their balance sheet and removing liquidity it probably isn’t too smart to take them on. I tried it with the BOJ once in the 80’s, it did not end well.
Vincent Cignarella
— Bloomberg
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The market for U.S. Treasury securities was thrown into disarray at the start of the pandemic last year. Photo: Associated Press |
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U.S. policymakers and other financial experts have escalated calls for reforms to the $22tn market for U.S. Treasury securities to protect it from future shocks after recent episodes of chaotic trading. Speakers at an annual Treasury market conference on Wednesday said recent policy improvements did not go far enough to guard against future trouble. (Financial Times | Nov 18)
God help whoever on Wall Street botches the inflation call. After a three-decade hiatus, anxiety about rising consumer prices is testing the analytical skills of money managers and professional traders like nothing since the short-lived pandemic panic. The stakes couldn’t be higher: The long regime of mild inflation and low interest rates has helped to drive up stock and bond valuations. (Bloomberg Businessweek Nov 18)
Securities and Exchange Commission Chair Gary Gensler is calling for much tougher regulation of the high-frequency trading firms that are responsible for a major chunk of transactions in U.S. Treasuries. Gensler said Wednesday that many of the firms haven't registered with the agency and aren’t reporting their Treasury trades to regulators. Additional scrutiny of the firms would make the market more resilient, he said. (Bloomberg Markets | Nov 17)
The erosion of liquidity in the U.S. Treasury market is causing headaches in the futures market, where the quarterly process of swapping expiring contracts for new ones is under way and set to ramp up. What is normally a pedestrian event, the “calendar roll” – in this case the switch out of December-expiring futures for Treasury notes and bonds into March-expiring ones – has potential to cause casualties because of volatility in the underlying securities. Price swings in Treasuries, particularly short-maturity issues, have been violent in recent weeks as surging consumer prices put pressure on Federal Reserve policy makers to raise interest rates. Wall Street is advising customers to take heed. (BNN Bloomberg - Canada | Nov 15)
Over-the-counter derivatives notional amounts soared over the first six months of 2021 to their highest level since 2019. Data from the Bank for International Settlements (BIS) show notionals jumped 5% to $610 trillion over the first half of the year. In contrast, the fair values of outstanding contracts fell over the period to $12.6 trillion – a drop of 20% – the first decline since mid-2019. (Risk | Nov 15)
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SEC proposes more disclosure rules for securities lending market |
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(Nov 18) — The U.S. Securities and Exchange Commission is considering new regulations to bring more transparency to the stock lending market.
- The agency on Thursday announced a proposal that would require firms lending stock for themselves or someone else to report certain information about the securities to organizations including the Financial Industry Regulatory Authority
- Information such as the issuer of the securities, the amount on loan and the date and time of the transaction would be made public; other details including the party to the loan would not be made public
- Under the plan, information about stock on loan or available to be lent at the end of each day would be reported
- The regulator also proposed changes to the electronic record-keeping requirements for security-based swaps dealers.
- In statements, SEC Chair Gary Gensler said both votes were unanimous
Source: Ben Bain/Bloomberg Government
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Supplementary leverage ratio is constraining Treasury market |
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(Nov 17) — Changes in financial regulation around the supplementary leverage ratio would help improve dealer intermediation, especially in times of stress, according to panelists at an annual Treasury market conference Wednesday.
- “Relationships matter in our space, especially in times of stress,” said Casey Spezzano, head of U.S. customer sales and trading at NatWest Markets. “The dealer community steps up for those relationships and move large blocks of risk. If those relationships weren’t there, it would be hard to do that” NOTE: Spezzano is also vice chair of the NY Fed’s Treasury Market Practices Group
- NOTE: The Fed exempted Treasuries and reserve balances from the SLR at the onset of the market turmoil in 2020 and let that exemption expire in March 2021
- “In simple terms, banks are disincentivized to offer that intermediation in liquidity because of SLR constraints,” said Susan O’Flynn, global head of CCP strategy governance and optimization. She suggested the Fed permanently exclude Treasuries from the SLR or a recalibrate the ratio
- O’Flynn noted that central clearing has allowed dealers to take Treasury repo financing off balance sheet if they have both sides of the transaction, as an example as to how participants can work around regulatory constraints. “There are tools in the marketplace where you can remove that stress but it’s not available for everyone,” she said
- For central clearing, “the focus is now to getting a model that works for everyone,” said Adam Nunes, head of business development at Hudson River Trading. “If you get a mandate without a functional clearing model for the vast community, it is going to be more problematic than it will be helpful.”
Source: Alexandra Harris/Bloomberg Government
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FSOC meets on stablecoins and Treasury market surveillance |
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(Nov 15) — The Financial Stability Oversight Council on Monday reviewed a set of recommendations to strengthen oversight of stablecoins, which the Federal Reserve has likened to bank deposits and money market mutual funds, which are subject to substantial regulation.
Treasury staff briefed the council on a report on stablecoins issued by the President’s Working Group on Financial Markets. The council discussed the report’s recommendations — including congressional action and interim measures that could be taken by federal regulatory agencies.
Treasury staff made a presentation to executive session of FSOC on work being done by the Inter-Agency Working Group on Treasury Market Surveillance.
The Council also received an update from Treasury staff on the development of the Council’s 2021 annual report and voted to approve the minutes of its previous meeting on October 21, 2021.
The meeting was closed to the public.
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U.S. banks must report hacks within 36 hours, new rule says
Banks must report major cyberattacks to regulators within 36 hours if the incident is likely to disrupt their business, according to a new rule from U.S. regulators. Any “computer security incident” that threatens a lender’s operations, services to customers or the stability of the financial system has to be disclosed to the bank’s primary government watchdog, according to a rule issued on Thursday that is set to go live on May 1.
G7 runs cybersecurity exercise as financial threats climb
Treasury Secretary Janet Yellen and counterparts from other leading economic powers conducted a “cyber exercise” Tuesday to showcase the importance of international cooperation amid escalating threats to the financial system. The exercise included finance ministers and central bank chiefs from the Group of Seven nations. It “covered how G7 members will seek to cooperate in the hypothetical event of a significant, cross-border incident affecting the financial sector,” the Treasury said in a statement Tuesday.
U.S., Israel join forces to combat ransomware attacks
The U.S. and Israel established a joint cybersecurity initiative to fight the use of ransomware in hacking incidents and threats to the global financial system. Less than two weeks after the U.S. blacklisted NSO Group – the maker of Pegasus spyware – and another Israeli company for developing spyware, the agreement signals an opportunity for the two allies to join forces. Deputy Treasury Secretary Wally Adeyemo said ransomware and other forms of illicit finance are a shared challenge. The initiative is part of a crackdown on ransomware after a series of high-profile attacks and follows last week’s arrest of several people associated with a Russia-linked ransomware group.
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What a weekend in P-Town can tell us about our future with Covid
A Covid outbreak that infected more than 1,000 fully vaccinated revelers celebrating the July Fourth holiday has given scientists a new insight into the immunity-bolstering effects of natural infection after vaccination — and is offering clues as to how the pandemic may end.
The best early Black Friday deals on laptops, TVs, and more
With this year's unprecedented shipping delays, holiday shoppers need all the help they can get. Early Black Friday deals are nothing new – it feels like retailers advertise “Black Friday sales” all year long – but now that we're actually approaching the official day, the name has some merit. Several stores are holding early Black Friday sales, with prices that truly compare to the lowest we've tracked. We've curated the best deals we've found below. We'll regularly update this story and have plenty more Black Friday coverage in the coming days. Our Deals newsletter is a great way to stay up-to-date. Check our Black Friday tips guide for advice on shopping wisely.
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