Darrell Duffie, a professor at Stanford University's Graduate School of Business, highlights the critical need for reforms in the US Treasury market, emphasizing that its current structure is ill-equipped to handle surges in volume, as demonstrated during the March 2020 COVID-19 pandemic crisis. He notes that the intermediation capacity of the Treasury market has been significantly constrained since the Global Financial Crisis (GFC) due to increased US Treasury debt and post-GFC regulatory capital constraints on primary dealers. For instance, since 2007, the ratio of public Treasury debt to primary dealer balance sheets has quadrupled, and projections indicate that federal debt could rise from approximately $29 trillion today to about $52 trillion by 2035, further exacerbating this imbalance.
The professor suggests several solutions to expand the Treasury market's intermediation capacity and resilience. These include fixing the Supplementary Leverage Ratio (SLR) for banks, encouraging all-to-all trading, further utilizing the Treasury Department’s Buyback program, and ensuring the Federal Reserve's clear policy on last-resort purchases of Treasuries to maintain market functionality. He also proposes a new type of Treasury note to enhance systemic resilience and reduce US borrowing costs, while reconsidering proposed rules on capital lock-ups.
A key reform advocated by Duffie is the implementation of a broad centralized clearing system for Treasury securities trades. He explains that this system, similar to those used for US listed equities, options, futures contracts, and standard financial derivatives, would reduce the capital required by dealers by allowing them to offset contracts. This would enable more direct trading among institutions like pension funds and hedge funds, moving away from reliance on intermediaries. Such a system would increase the resilience and stability of the Treasury market, which is crucial for both the US and global economies.
