1 00:00:10,840 --> 00:00:14,440 Speaker 1: Hello, and welcome to another episode of the All Thoughts Podcast. 2 00:00:14,560 --> 00:00:18,439 Speaker 1: I'm Tracy Allawatt and I'm Joe. Wi isn't thal Joe? 3 00:00:18,520 --> 00:00:22,320 Speaker 1: Do you ever think about US treasuries? Yeah? Every day, 4 00:00:22,400 --> 00:00:26,280 Speaker 1: that's like on ironically, first thing get up in the morning, 5 00:00:26,440 --> 00:00:31,120 Speaker 1: think about treasuries. Absolutely. Yeah, I mean treasuries are sort 6 00:00:31,120 --> 00:00:34,839 Speaker 1: of the thing that the entire market is revolving around 7 00:00:34,880 --> 00:00:36,760 Speaker 1: at the moment, Like, there's so many things that are 8 00:00:36,800 --> 00:00:40,280 Speaker 1: correlated with yields. But I guess let me frame that 9 00:00:40,400 --> 00:00:42,239 Speaker 1: question a bit differently. Do you ever think about what 10 00:00:42,240 --> 00:00:46,479 Speaker 1: a treasury actually is? Yeah? I mean I don't have 11 00:00:46,640 --> 00:00:50,080 Speaker 1: a strong like intuitions about it, but I kind of 12 00:00:50,120 --> 00:00:53,840 Speaker 1: feel that, Yeah I do, But you know, I'm always 13 00:00:53,920 --> 00:00:57,319 Speaker 1: up for learning more. Yeah. Um, well, that's what we're 14 00:00:57,320 --> 00:01:00,120 Speaker 1: going to be doing in this episode. And I think 15 00:01:00,160 --> 00:01:04,000 Speaker 1: it's an important topic. I mean, it's obviously an important topic. 16 00:01:04,080 --> 00:01:07,240 Speaker 1: But one of the reasons it's worth looking into is 17 00:01:07,319 --> 00:01:10,399 Speaker 1: because I think most people tend to think of a 18 00:01:10,520 --> 00:01:12,759 Speaker 1: U S treasury as you know, it's a bond issued 19 00:01:12,760 --> 00:01:17,000 Speaker 1: by the US government, it's unlikely to default, it acts 20 00:01:17,040 --> 00:01:20,800 Speaker 1: as a sort of safe asset in the financial system. 21 00:01:20,840 --> 00:01:23,720 Speaker 1: There's one other aspect of US treasuries that doesn't get 22 00:01:23,760 --> 00:01:27,800 Speaker 1: as much attention. And that's the fact that it's supposed 23 00:01:27,800 --> 00:01:32,119 Speaker 1: to be this huge and liquid market that's really easy 24 00:01:32,200 --> 00:01:36,240 Speaker 1: to trade. Yeah, I mean, so you ask, like, what 25 00:01:36,240 --> 00:01:37,960 Speaker 1: what is a treasure? And how I think about it? 26 00:01:38,000 --> 00:01:40,319 Speaker 1: And at some level I really do think it's almost 27 00:01:40,400 --> 00:01:43,280 Speaker 1: like it's like the fundamental building block of the entire 28 00:01:43,319 --> 00:01:47,720 Speaker 1: global financial system is the deepest market. It is the 29 00:01:47,760 --> 00:01:51,880 Speaker 1: most liquid market. It has no credit risk, um, you 30 00:01:51,880 --> 00:01:54,200 Speaker 1: know for the most part, and so the price there's 31 00:01:54,240 --> 00:01:58,160 Speaker 1: like a purity to the price. But as as liquid 32 00:01:58,160 --> 00:02:01,080 Speaker 1: as it is, everyone's in a law all and despite 33 00:02:01,080 --> 00:02:03,000 Speaker 1: the fact that it should be like the simplest thing 34 00:02:03,080 --> 00:02:06,000 Speaker 1: to trade, every once in a while it kind of 35 00:02:06,040 --> 00:02:08,200 Speaker 1: breaks in this weird way and nothing of her good 36 00:02:08,240 --> 00:02:12,880 Speaker 1: happened if the treasury market is breaking. Yeah, that's right. 37 00:02:12,960 --> 00:02:17,000 Speaker 1: So we've had these big moments of disruption in the 38 00:02:17,040 --> 00:02:20,480 Speaker 1: treasury market. Recently, we had, um, well, the big one 39 00:02:20,800 --> 00:02:24,480 Speaker 1: was the March mayhem in the market when a bunch 40 00:02:24,480 --> 00:02:27,919 Speaker 1: of lever trades blew up. But most recently we had 41 00:02:27,960 --> 00:02:32,000 Speaker 1: the yield spike in February, and you know, way before that, 42 00:02:32,040 --> 00:02:35,360 Speaker 1: we had the repo madness in September I think it 43 00:02:35,440 --> 00:02:38,840 Speaker 1: was twenty nineteen, and then we had the the flash 44 00:02:38,880 --> 00:02:47,360 Speaker 1: crash in US treasuries back in although maybe something around 45 00:02:47,360 --> 00:02:50,560 Speaker 1: there I should say up crash because yields went down. Yeah, okay, 46 00:02:50,639 --> 00:02:55,520 Speaker 1: But the point is that these sort of disruptions keep happening, 47 00:02:55,639 --> 00:02:58,520 Speaker 1: and they're happening in a really important market, as you said, 48 00:02:58,600 --> 00:03:00,800 Speaker 1: and in a market that's supposed us to be liquid 49 00:03:00,880 --> 00:03:03,000 Speaker 1: and easy to trade, and yet it seems to be 50 00:03:03,040 --> 00:03:05,640 Speaker 1: seizing up every once in a while. So that's what 51 00:03:05,680 --> 00:03:07,880 Speaker 1: we're going to talk about today. Great, I can't wait. No, 52 00:03:07,960 --> 00:03:11,760 Speaker 1: it's a it's a fascinating question because why the safest 53 00:03:11,840 --> 00:03:15,040 Speaker 1: most liquid asset in the world, which in theory the 54 00:03:15,080 --> 00:03:19,040 Speaker 1: Federal Reserve, could you know, stands ready to buy you know, 55 00:03:19,080 --> 00:03:21,480 Speaker 1: in theory at any moment, why it should ever sees 56 00:03:21,600 --> 00:03:23,800 Speaker 1: up is sort of this like mystery to me, like 57 00:03:23,800 --> 00:03:25,880 Speaker 1: I don't quite get why it should ever happen, but 58 00:03:25,919 --> 00:03:29,760 Speaker 1: it clearly happens enough that something's going on. A twenty 59 00:03:29,760 --> 00:03:33,560 Speaker 1: one trillion dollar mystery. Yes, all right, well we have 60 00:03:33,680 --> 00:03:36,200 Speaker 1: the that's the size of the U. S Treasury market. 61 00:03:36,240 --> 00:03:39,560 Speaker 1: By the way, we have the perfect person to discuss 62 00:03:39,600 --> 00:03:42,960 Speaker 1: all of this. Our guest for this episode is Yeesha 63 00:03:43,080 --> 00:03:46,400 Speaker 1: yead If. She's a professor of law over at Vanderbilt 64 00:03:46,560 --> 00:03:49,440 Speaker 1: Law School, and she's done a ton of research on 65 00:03:49,680 --> 00:03:54,160 Speaker 1: exactly this topic. So Yesha, welcome to the show. Tracy 66 00:03:54,200 --> 00:03:55,760 Speaker 1: and Joe, thank you so very much for having me 67 00:03:55,840 --> 00:03:58,200 Speaker 1: such a pleasure to be here, UM, and particularly to 68 00:03:58,240 --> 00:04:00,800 Speaker 1: get to talk to you about US Asian markets. What 69 00:04:00,840 --> 00:04:07,720 Speaker 1: can be more exciting than that? Nothing? I agree, alright, 70 00:04:07,760 --> 00:04:10,360 Speaker 1: So maybe just to begin with, I mean, I just 71 00:04:10,480 --> 00:04:14,080 Speaker 1: listed some recent um, let's say, conniptions in the U. S. 72 00:04:14,120 --> 00:04:17,880 Speaker 1: Treasury market. It feels to me like these are happening 73 00:04:18,240 --> 00:04:21,480 Speaker 1: more often. But you know, I haven't gone back and 74 00:04:21,640 --> 00:04:26,280 Speaker 1: looked throughout all of the market's history, Is that right? Like, 75 00:04:26,440 --> 00:04:30,760 Speaker 1: do you think this sort of random bouts of volatility 76 00:04:30,839 --> 00:04:34,799 Speaker 1: is happening more often? It certainly feels that way, Tracy, 77 00:04:34,839 --> 00:04:36,760 Speaker 1: it really does. UM. I think one of the things 78 00:04:36,839 --> 00:04:39,520 Speaker 1: that has been happening in the U. S. Treasury market, UM, 79 00:04:39,600 --> 00:04:43,880 Speaker 1: is that this market structure has changed really profoundly over 80 00:04:43,920 --> 00:04:46,520 Speaker 1: the last decade or so. UM. So this used to 81 00:04:46,560 --> 00:04:50,039 Speaker 1: be known. I think UM across the market is being 82 00:04:50,160 --> 00:04:54,200 Speaker 1: a really super boring space. This was really the market 83 00:04:54,320 --> 00:04:58,480 Speaker 1: in which UM the trading would happen over the counter 84 00:04:58,720 --> 00:05:02,919 Speaker 1: by telephone, using screens, requests for quotes and so on 85 00:05:02,960 --> 00:05:05,960 Speaker 1: and so forth. It was slow UM. It was just 86 00:05:06,080 --> 00:05:09,320 Speaker 1: very steady market where nothing would be seem like it 87 00:05:09,360 --> 00:05:12,479 Speaker 1: could go wrong. And it was essentially dominated by the 88 00:05:12,520 --> 00:05:15,680 Speaker 1: primary dealers UM that were the keen to mejories in 89 00:05:15,720 --> 00:05:17,640 Speaker 1: the space, both in the primary as well as in 90 00:05:17,640 --> 00:05:20,520 Speaker 1: the secondary market. UM. And what we've seen over the 91 00:05:20,600 --> 00:05:23,279 Speaker 1: last decade or so, and you and your colleagues at 92 00:05:23,279 --> 00:05:27,480 Speaker 1: Bloomberg have reported extensively on this UM, it's really this 93 00:05:27,600 --> 00:05:30,320 Speaker 1: change in market structure that has affected how this market 94 00:05:30,400 --> 00:05:33,880 Speaker 1: is working UM, that has affected UM, the risks that 95 00:05:33,920 --> 00:05:38,320 Speaker 1: are impacting this market, as well as also the quality 96 00:05:38,360 --> 00:05:40,880 Speaker 1: of the liquidity provision that is coming into this market 97 00:05:40,880 --> 00:05:44,320 Speaker 1: and how resilient this liquidity provision is UM. And that 98 00:05:44,480 --> 00:05:48,360 Speaker 1: change really has been UM. This emergence as it has 99 00:05:48,360 --> 00:05:52,440 Speaker 1: been across the entire UH marketplace pretty much the emergence 100 00:05:52,560 --> 00:05:55,760 Speaker 1: of high frequency trading in the inter dealer space in 101 00:05:55,800 --> 00:05:59,080 Speaker 1: the secondary market, which has really become the dominant form 102 00:05:59,200 --> 00:06:02,800 Speaker 1: of liquidity vision UM. And what has happened here obviously 103 00:06:03,240 --> 00:06:06,320 Speaker 1: means that primary dealers in hf T traders now are 104 00:06:06,360 --> 00:06:10,080 Speaker 1: competing a lot more fiercely. There's a great deal more 105 00:06:10,080 --> 00:06:13,240 Speaker 1: technology that is coming to bear in the U S 106 00:06:13,279 --> 00:06:16,440 Speaker 1: treasury market is no longer the sleepy space full of telephones. 107 00:06:17,040 --> 00:06:20,200 Speaker 1: This is a marketplace that is in motion all the time. 108 00:06:20,520 --> 00:06:23,560 Speaker 1: And as a result of that, we have new risks, 109 00:06:24,120 --> 00:06:28,160 Speaker 1: we have a new dynamics that are impacting the space. 110 00:06:28,760 --> 00:06:32,039 Speaker 1: But the essential point here is that none of this 111 00:06:32,279 --> 00:06:35,120 Speaker 1: is really that new, because it's been happening in the 112 00:06:35,120 --> 00:06:37,359 Speaker 1: equities and gervities markets for a whole hell of a 113 00:06:37,400 --> 00:06:41,680 Speaker 1: long time, similar um disappearances of liquidity, flash crashes, many 114 00:06:41,720 --> 00:06:44,200 Speaker 1: flash crashes, and so on and so forth. But now 115 00:06:44,279 --> 00:06:47,440 Speaker 1: these are happening in the US treasury markets exactly as 116 00:06:47,440 --> 00:06:50,200 Speaker 1: we would expect because we've seen it in equity in gervitives, 117 00:06:50,240 --> 00:06:53,640 Speaker 1: but unfortunately in the US treasuries we just haven't been 118 00:06:53,680 --> 00:06:56,680 Speaker 1: focusing on it, and so it's really taken us by surprise. 119 00:06:57,240 --> 00:06:59,640 Speaker 1: And so really it feels like this is happening more often. 120 00:07:00,040 --> 00:07:01,400 Speaker 1: So I want to get in, you know, we want 121 00:07:01,400 --> 00:07:04,080 Speaker 1: to get into obviously, like what this new structure looks 122 00:07:04,120 --> 00:07:07,240 Speaker 1: like and why it's not as a resilient or robust 123 00:07:07,320 --> 00:07:10,480 Speaker 1: as the old sleepier structure. But before we do that, 124 00:07:10,560 --> 00:07:12,880 Speaker 1: what do we just zoom out for a second, and 125 00:07:12,920 --> 00:07:15,520 Speaker 1: what don't you tell us about your work and the 126 00:07:15,640 --> 00:07:18,320 Speaker 1: sort of you know, trade to mention you're at the 127 00:07:18,400 --> 00:07:21,880 Speaker 1: law school. What is the lens with which you come 128 00:07:21,920 --> 00:07:25,640 Speaker 1: to this problem from? And uh seek to sort of 129 00:07:25,760 --> 00:07:29,880 Speaker 1: understand problems and solutions. You know, thanks to that question, Joe, 130 00:07:29,920 --> 00:07:32,040 Speaker 1: because you know I wonder that myself sometimes, because you 131 00:07:32,080 --> 00:07:35,600 Speaker 1: know this is this is I'm a law professor. I remember, 132 00:07:35,600 --> 00:07:38,520 Speaker 1: really boring law professor A strudy market structure and the 133 00:07:38,520 --> 00:07:43,000 Speaker 1: regulation of market structure. And for the longest time folks 134 00:07:43,320 --> 00:07:47,040 Speaker 1: have been very pollyanish about us treasure market structure, in 135 00:07:47,080 --> 00:07:49,920 Speaker 1: other words, that it will always work. M This will 136 00:07:49,920 --> 00:07:54,720 Speaker 1: be the most resilient, most robust market structure anywhere in 137 00:07:54,800 --> 00:07:58,320 Speaker 1: the world. As you said, Tracy, that and Joe that 138 00:07:58,400 --> 00:08:01,200 Speaker 1: this is the deepest most quid market in the world. 139 00:08:01,200 --> 00:08:04,320 Speaker 1: That is a standard spiel that we see every single 140 00:08:04,360 --> 00:08:07,520 Speaker 1: time we have a report from the regulators. This is 141 00:08:07,560 --> 00:08:10,160 Speaker 1: the deepest, most liquid market in the world. And so 142 00:08:10,200 --> 00:08:12,760 Speaker 1: you might wonder why it is A law professor really 143 00:08:12,880 --> 00:08:15,120 Speaker 1: would want to look at this because what we do 144 00:08:15,200 --> 00:08:18,640 Speaker 1: is look for problems, right, That's our job. The U 145 00:08:18,720 --> 00:08:21,240 Speaker 1: S Truasure market structure. When I started studying it, you know, 146 00:08:21,280 --> 00:08:23,840 Speaker 1: I was bowled over. Um. I was coming at it 147 00:08:23,840 --> 00:08:26,200 Speaker 1: from the regulatory stide. I wanted to understand how this 148 00:08:26,240 --> 00:08:28,600 Speaker 1: market is regulated. I wanted to see if that regulation 149 00:08:29,160 --> 00:08:31,000 Speaker 1: is fit for the job that is doing today, which 150 00:08:31,040 --> 00:08:35,760 Speaker 1: is regulating this extremely important as well as technologically advancing market. 151 00:08:36,200 --> 00:08:39,360 Speaker 1: And what I discovered there was a complete shock. The 152 00:08:39,400 --> 00:08:43,280 Speaker 1: paradigm by which this market is regulated is like none other, 153 00:08:43,600 --> 00:08:47,439 Speaker 1: UM in our space. The regulatory structure I think deserves 154 00:08:47,440 --> 00:08:51,720 Speaker 1: a conversation because it is really feels like it does 155 00:08:51,760 --> 00:08:54,520 Speaker 1: not work. Um, it is just not set to work. 156 00:08:54,760 --> 00:08:57,240 Speaker 1: This regulatory structure, the public structure as well as the 157 00:08:57,240 --> 00:09:00,840 Speaker 1: private structure, in some sense just leaves in nor miss gaps. 158 00:09:00,880 --> 00:09:04,600 Speaker 1: And the reason for those gaps possibly stems from the 159 00:09:04,640 --> 00:09:07,400 Speaker 1: belief that this market will be perfect and will always 160 00:09:07,440 --> 00:09:11,160 Speaker 1: perform and it's completely risk free. And so regulators, I feel, 161 00:09:11,559 --> 00:09:14,200 Speaker 1: have really taken their eye off the ball, and that 162 00:09:14,320 --> 00:09:17,760 Speaker 1: structure that we have in place today really just does 163 00:09:17,800 --> 00:09:21,440 Speaker 1: not exist to function to regulate a marketplace and to 164 00:09:21,480 --> 00:09:24,160 Speaker 1: match the marketplace that we have today, um, and so 165 00:09:24,200 --> 00:09:26,880 Speaker 1: it should not be surprising that we're seeing some of 166 00:09:26,920 --> 00:09:32,080 Speaker 1: these connections, Stracy said, happening with ever greater regularity because 167 00:09:32,160 --> 00:09:33,840 Speaker 1: some of the guard rails that have been put in 168 00:09:33,880 --> 00:09:36,600 Speaker 1: place in other markets just don't exist in treasuries, right, 169 00:09:36,920 --> 00:09:38,719 Speaker 1: and so it should not be surprising to us that 170 00:09:38,800 --> 00:09:41,360 Speaker 1: this is happening. You know. One of the things that 171 00:09:41,360 --> 00:09:44,680 Speaker 1: that you guys mentioned was in relation to the flash 172 00:09:44,720 --> 00:09:46,920 Speaker 1: crash and the flash rally in two thousand and fourteen, 173 00:09:47,440 --> 00:09:52,160 Speaker 1: and that's really set off this kind of regulatory circumspection, UM, 174 00:09:52,200 --> 00:09:55,679 Speaker 1: this reflection on US treasury markets. And I think that's 175 00:09:55,679 --> 00:09:58,400 Speaker 1: when regulators discovered that this market actually has a whole 176 00:09:58,440 --> 00:10:00,800 Speaker 1: bunch of risks that they never knew exist that and 177 00:10:00,840 --> 00:10:02,360 Speaker 1: that they had to come to this space with a 178 00:10:02,400 --> 00:10:06,079 Speaker 1: greater degree of deliberation and intention that they have done historically. 179 00:10:06,440 --> 00:10:09,040 Speaker 1: But it also showed that the regulatory structure that we 180 00:10:09,120 --> 00:10:11,880 Speaker 1: have today is really not set to do the job 181 00:10:11,960 --> 00:10:14,560 Speaker 1: that we expected to. And the reason for that is 182 00:10:14,600 --> 00:10:19,120 Speaker 1: that this market structure for regulating the public structure for 183 00:10:19,160 --> 00:10:23,880 Speaker 1: regulating US treasury markets is extremely fragmented, Unlike every other market, 184 00:10:24,040 --> 00:10:27,840 Speaker 1: like equities, observatives. This market does not have a lead regulator. 185 00:10:28,040 --> 00:10:30,880 Speaker 1: There is no one person that is policing this market. 186 00:10:30,960 --> 00:10:35,320 Speaker 1: We have a fragmented, loose association of four or five 187 00:10:35,760 --> 00:10:40,240 Speaker 1: superstar regulators, the big top regulators for the marketplace, but 188 00:10:40,360 --> 00:10:43,920 Speaker 1: none of them has elite status. Right So the US, 189 00:10:44,400 --> 00:10:47,600 Speaker 1: the US Treasury, Um, the New York FED, they are 190 00:10:47,640 --> 00:10:51,280 Speaker 1: responsible in the auction space. We have the sec UM 191 00:10:51,280 --> 00:10:54,400 Speaker 1: and FINRA that are taking care of the securities market 192 00:10:54,440 --> 00:10:57,079 Speaker 1: firms that trade in this space. We have the FED 193 00:10:57,160 --> 00:10:59,160 Speaker 1: to reserve the fat in the o c C that 194 00:10:59,200 --> 00:11:01,679 Speaker 1: look after the bands that are the main dealers in 195 00:11:01,679 --> 00:11:04,760 Speaker 1: this space. And so everyone is sharing a little bit 196 00:11:04,760 --> 00:11:07,000 Speaker 1: of the authority. And that can be great because they 197 00:11:07,000 --> 00:11:10,720 Speaker 1: bring their expertise and their insights into the space. But 198 00:11:10,800 --> 00:11:14,640 Speaker 1: equally it means that no one person always has incentive 199 00:11:14,679 --> 00:11:16,680 Speaker 1: to come forward and take a lead and set an 200 00:11:16,720 --> 00:11:20,800 Speaker 1: agenda and coordinate information costs. You have to share information, 201 00:11:20,880 --> 00:11:24,360 Speaker 1: you have to develop a plan for enforcement and reform. 202 00:11:24,480 --> 00:11:27,600 Speaker 1: And so we should not be surprised that rulemaking that 203 00:11:27,720 --> 00:11:30,360 Speaker 1: is taken for granted in other markets just does not 204 00:11:30,520 --> 00:11:34,079 Speaker 1: happen in US treasuries. It just hasn't happened in US treasuries, 205 00:11:34,600 --> 00:11:38,240 Speaker 1: And perhaps the starkest example of that is the lack 206 00:11:38,280 --> 00:11:42,440 Speaker 1: of information in this market. Right. So up until two 207 00:11:42,440 --> 00:11:45,160 Speaker 1: thousand and seventeen, and you guys are you know you 208 00:11:45,240 --> 00:11:47,679 Speaker 1: report on markets? You know this stuff? You are you 209 00:11:47,720 --> 00:11:51,200 Speaker 1: know you are steeped in this stuff. It's shocking, I 210 00:11:51,240 --> 00:11:53,439 Speaker 1: think for all of us to do this. It discovered it. 211 00:11:53,520 --> 00:11:56,960 Speaker 1: Up until two thousand and seventeen, there was no mandatory 212 00:11:57,040 --> 00:12:01,080 Speaker 1: secondary reporting regime portrayed in US treasuries, right, And that 213 00:12:01,320 --> 00:12:05,200 Speaker 1: is kind of shocking. And what that means is that 214 00:12:05,320 --> 00:12:10,160 Speaker 1: regulators have not had information to figure out what exactly 215 00:12:10,240 --> 00:12:14,040 Speaker 1: is happening in secondary market activity on a granular basis. 216 00:12:15,040 --> 00:12:18,240 Speaker 1: And it's you know, comes as no surprise that it 217 00:12:18,280 --> 00:12:20,880 Speaker 1: took a year to figure out what the flash rally 218 00:12:20,920 --> 00:12:22,959 Speaker 1: was about, and even then into the two thousand and 219 00:12:23,000 --> 00:12:25,480 Speaker 1: fourteen flash rally, and even then they did not have 220 00:12:25,559 --> 00:12:30,400 Speaker 1: a conclusion. We still don't fully know what caused marsh twenty, 221 00:12:30,920 --> 00:12:35,000 Speaker 1: the blowout that you were mentioning, the march madness, Tracy Um. 222 00:12:35,040 --> 00:12:38,160 Speaker 1: And the reason for so much of that is that 223 00:12:38,200 --> 00:12:42,600 Speaker 1: this market does not have comprehensive data, It does not 224 00:12:42,840 --> 00:12:48,000 Speaker 1: have granular reporting even today, Um sorry, can I jump 225 00:12:48,000 --> 00:12:50,400 Speaker 1: in there, because this is something I wanted to ask you. So, 226 00:12:50,679 --> 00:12:54,360 Speaker 1: given the lack of transparency in the US treasury market, 227 00:12:54,400 --> 00:12:56,360 Speaker 1: you know, even though it's the sort of bedrock of 228 00:12:56,400 --> 00:12:59,000 Speaker 1: the financial system, we don't quite know what's going on 229 00:12:59,080 --> 00:13:02,679 Speaker 1: with it at all times, how do we actually measure 230 00:13:03,200 --> 00:13:06,800 Speaker 1: treasury market liquidity? Like, what do you look at in 231 00:13:06,880 --> 00:13:10,960 Speaker 1: your research? I'm curious because everyone has different definitions of 232 00:13:11,200 --> 00:13:14,600 Speaker 1: ease of trading? So what are you watching and how 233 00:13:14,640 --> 00:13:17,600 Speaker 1: has it sort of evolved over time? Yeah, I mean 234 00:13:17,600 --> 00:13:19,600 Speaker 1: that's a that's a terrific question. It's a twenty one 235 00:13:19,640 --> 00:13:22,040 Speaker 1: trillion dollar question. In fact, it's a six billion dollar 236 00:13:22,120 --> 00:13:25,080 Speaker 1: question a daily basis, because that's that's the liquidity that 237 00:13:25,160 --> 00:13:28,200 Speaker 1: is coursing through the treasury secondary market in a daily basis, 238 00:13:28,240 --> 00:13:31,240 Speaker 1: compared to around five hundred billion in the equity space. Right, 239 00:13:31,320 --> 00:13:34,480 Speaker 1: So this is supposedly a market in which we have 240 00:13:34,640 --> 00:13:39,400 Speaker 1: six hundred billion odd I think that was March one. Rather, 241 00:13:39,760 --> 00:13:42,040 Speaker 1: you know, we have twenty six hundred billion dollars worth 242 00:13:42,040 --> 00:13:44,800 Speaker 1: of liquidity. Course in this market every day liquidity is 243 00:13:44,840 --> 00:13:47,760 Speaker 1: hard to measure. But the idea here is that you 244 00:13:47,800 --> 00:13:51,520 Speaker 1: should be able to trade without causing price impacts. Right, 245 00:13:51,640 --> 00:13:53,920 Speaker 1: particularly in this market, you should be able to make 246 00:13:54,160 --> 00:13:58,880 Speaker 1: large trades without there are being a price impact in 247 00:13:58,920 --> 00:14:01,600 Speaker 1: the market structure. That is exactly what we're not seeing. 248 00:14:02,120 --> 00:14:05,560 Speaker 1: So in the context of the blowout in February, for example, 249 00:14:06,120 --> 00:14:09,560 Speaker 1: we saw that the five year and the seven year 250 00:14:10,160 --> 00:14:14,160 Speaker 1: UH tenor just incredible amounts of movement in the spreads 251 00:14:14,240 --> 00:14:16,080 Speaker 1: in just a very short period of time, and that 252 00:14:16,160 --> 00:14:19,800 Speaker 1: was due to liquidity concerns. In the case of March, 253 00:14:20,400 --> 00:14:24,800 Speaker 1: we saw enormous prices locations that were happening because liquidity 254 00:14:24,840 --> 00:14:28,360 Speaker 1: in this market disappeared. And what that means is that 255 00:14:28,360 --> 00:14:32,160 Speaker 1: that the price changes are not happening because of fundamental 256 00:14:32,240 --> 00:14:36,160 Speaker 1: informational changes. Right. So of course we expect volatility takes 257 00:14:36,240 --> 00:14:40,720 Speaker 1: that's in the marketplace because information will affect how price 258 00:14:40,840 --> 00:14:45,240 Speaker 1: changes happen. But in the treasury market, we should not 259 00:14:45,360 --> 00:14:48,840 Speaker 1: expect these price changes to happen because the market is 260 00:14:48,920 --> 00:14:51,600 Speaker 1: becoming a liquid because dealers are not there to supply 261 00:14:51,760 --> 00:14:55,800 Speaker 1: trading opportunities constantly throughout the trading day. Liquidity in this 262 00:14:55,920 --> 00:14:58,280 Speaker 1: market should be taken for granted, so that the price 263 00:14:58,360 --> 00:15:01,600 Speaker 1: changes that are happening are big. Is even informational and 264 00:15:01,680 --> 00:15:06,480 Speaker 1: fundamental issues rather than because of liquidity issues, because they're 265 00:15:06,520 --> 00:15:10,040 Speaker 1: not enough trading opportunities for buyers to have sellers and 266 00:15:10,200 --> 00:15:13,560 Speaker 1: sellers to have buyers. So really, that's how I understand 267 00:15:13,600 --> 00:15:17,080 Speaker 1: it that we are that we are relying on a 268 00:15:17,200 --> 00:15:21,840 Speaker 1: marketplace that is supposed to be responding to information, not 269 00:15:21,960 --> 00:15:41,600 Speaker 1: a marketplace that should be responding to disappearances of trading opportunity. 270 00:15:43,760 --> 00:15:47,120 Speaker 1: So talk us through because in theory, you know, you 271 00:15:47,240 --> 00:15:51,960 Speaker 1: describe the old sleepy treasury market of the dealer community 272 00:15:52,160 --> 00:15:54,640 Speaker 1: and a lot of it being done by phone, and 273 00:15:54,680 --> 00:15:58,040 Speaker 1: now we have this sort of like I guess richer 274 00:15:58,240 --> 00:16:03,200 Speaker 1: treasury ecosystem and shifts and hedge funds and inter dealer 275 00:16:03,280 --> 00:16:06,400 Speaker 1: trading and all that stuff in theory and think, okay, 276 00:16:06,400 --> 00:16:10,120 Speaker 1: more participants, different preferences that would make it more liquid. 277 00:16:10,400 --> 00:16:13,760 Speaker 1: So what is the failure between theory and practice such 278 00:16:13,880 --> 00:16:16,240 Speaker 1: that even though there is this sort of you know, 279 00:16:16,280 --> 00:16:20,200 Speaker 1: a whole like flora and fauna of treasury participants, it 280 00:16:20,280 --> 00:16:24,640 Speaker 1: doesn't translate automatically to uh, greater liquidity. And we do 281 00:16:24,680 --> 00:16:26,920 Speaker 1: seem to see this rise of dislocations, like what are 282 00:16:26,920 --> 00:16:31,240 Speaker 1: the leading theories for why? Basically, yeah, that's an awesome question, Joe, 283 00:16:31,400 --> 00:16:34,280 Speaker 1: and you know, I think it's one that perplexes regulators 284 00:16:34,440 --> 00:16:38,560 Speaker 1: and perplexes market participants because exactly as you said, you 285 00:16:38,640 --> 00:16:41,360 Speaker 1: look at the market and you know there are there's 286 00:16:41,440 --> 00:16:44,960 Speaker 1: three hundred billion dollars worth of daily trading in the 287 00:16:44,960 --> 00:16:47,440 Speaker 1: inter dealer space, which is the super liquid space with 288 00:16:47,520 --> 00:16:51,000 Speaker 1: dealers are trading with each other, and on a normal day, 289 00:16:51,040 --> 00:16:56,040 Speaker 1: that liquidity seems so incredible, it seems so lush and 290 00:16:56,160 --> 00:17:00,360 Speaker 1: robust because we do have the primary dealers ELM, we 291 00:17:00,440 --> 00:17:03,720 Speaker 1: do have these brand new high frequency traders that are 292 00:17:04,119 --> 00:17:08,720 Speaker 1: expansively providing liquidity throughout the trading day. Now, the HFT 293 00:17:08,880 --> 00:17:12,320 Speaker 1: participation in the US inter dealer spaces around is around 294 00:17:12,400 --> 00:17:16,879 Speaker 1: sort of sixty five, And of course what that means 295 00:17:17,040 --> 00:17:20,520 Speaker 1: is that we expect them to be available and they 296 00:17:20,560 --> 00:17:25,200 Speaker 1: are generally to be providing liquidity robustly throughout the trading day. 297 00:17:25,240 --> 00:17:29,880 Speaker 1: But what we have is a problem that liquidity can 298 00:17:29,920 --> 00:17:33,000 Speaker 1: disappear just when we need it the most. In other words, 299 00:17:33,320 --> 00:17:37,679 Speaker 1: that the market participants here, the automated trader and HFT 300 00:17:37,800 --> 00:17:40,360 Speaker 1: traders as well as the primary dealers, have no incentive 301 00:17:40,760 --> 00:17:44,760 Speaker 1: to remain on the market when conditions get stressed. Rather, 302 00:17:45,400 --> 00:17:48,280 Speaker 1: these folks now are competing with one another. Right. Whereas 303 00:17:48,280 --> 00:17:52,240 Speaker 1: primary dealers dominated for much of the treasury market history, 304 00:17:52,400 --> 00:17:56,000 Speaker 1: right recent history. Now the competition with primary dealers in 305 00:17:56,000 --> 00:17:58,400 Speaker 1: the inter dealer space means that they've been pushed out. 306 00:17:58,800 --> 00:18:01,399 Speaker 1: Their margins are smaller, they're no longer the biggest players, 307 00:18:01,400 --> 00:18:03,720 Speaker 1: who don't have as much skin in the game in 308 00:18:03,760 --> 00:18:08,439 Speaker 1: this marketplace that they traditionally have done. And HFC experts, uh, 309 00:18:08,520 --> 00:18:12,920 Speaker 1: you know, these traders tend to operate which much leaner operations. 310 00:18:12,960 --> 00:18:15,840 Speaker 1: Their balance sheets are smaller. Um they are there. They 311 00:18:15,840 --> 00:18:18,919 Speaker 1: are they are more nimble, they are securities forms. They 312 00:18:18,960 --> 00:18:22,000 Speaker 1: don't tend to be the banks, right, and so there 313 00:18:22,080 --> 00:18:25,800 Speaker 1: is no incentive for folks to remain because age super 314 00:18:25,880 --> 00:18:29,399 Speaker 1: costly to be there. They're competing with each other, and 315 00:18:29,400 --> 00:18:34,560 Speaker 1: when conditions get stressed, the algorithms may not perform as 316 00:18:35,000 --> 00:18:38,880 Speaker 1: perfectly as they normally should, and so in those situations 317 00:18:38,920 --> 00:18:43,200 Speaker 1: it makes more sense to exit or reduce your participation, 318 00:18:43,400 --> 00:18:45,680 Speaker 1: or to reduce the market depth that which you participate, 319 00:18:45,760 --> 00:18:48,199 Speaker 1: or to reposition yourself um to the back of the 320 00:18:48,280 --> 00:18:52,080 Speaker 1: queue rather than necessarily be there to forth rightly provide liquidity. 321 00:18:52,080 --> 00:18:54,679 Speaker 1: And that's what we've seen time and time again in 322 00:18:54,720 --> 00:18:59,440 Speaker 1: these episodes. In March, for example, we saw we saw 323 00:19:00,080 --> 00:19:03,719 Speaker 1: HFT traders rather pull back quite drastically, very sharply in 324 00:19:03,760 --> 00:19:07,160 Speaker 1: the context of that that March episode. In this most 325 00:19:07,200 --> 00:19:10,480 Speaker 1: recent episode in February, it was just a general pullback. Right. 326 00:19:10,520 --> 00:19:13,360 Speaker 1: In this case, the primary dealers to the auction went horribly. 327 00:19:13,800 --> 00:19:16,040 Speaker 1: As you know, one of your colleagues, List McCormick has 328 00:19:16,040 --> 00:19:19,040 Speaker 1: written about so wonderfully recently, right that the auction went 329 00:19:19,080 --> 00:19:21,960 Speaker 1: horribly and there was just a general pullback and liquidity 330 00:19:22,000 --> 00:19:24,960 Speaker 1: at that at that at that moment. And so the 331 00:19:25,040 --> 00:19:27,959 Speaker 1: liquidity looks great on its surface on a normal day, 332 00:19:27,960 --> 00:19:31,240 Speaker 1: it looks beautiful and wonderful. But when it's time for 333 00:19:31,320 --> 00:19:33,280 Speaker 1: the rubbert to hit the road and when it's time 334 00:19:33,280 --> 00:19:36,200 Speaker 1: for stress, I think that's when we have the greatest 335 00:19:36,359 --> 00:19:40,760 Speaker 1: fear that it might disappear, causing these liquidity bouts to 336 00:19:40,800 --> 00:19:44,560 Speaker 1: happen and causing for prices to dislocate. And I think 337 00:19:44,640 --> 00:19:47,719 Speaker 1: what's really, really, really kind of horrifying for me as 338 00:19:47,800 --> 00:19:50,280 Speaker 1: a as a as a as a person that studies 339 00:19:50,280 --> 00:19:52,240 Speaker 1: this market, and for all of us really that need 340 00:19:52,320 --> 00:19:55,520 Speaker 1: this market is that the treasury market is supposed to 341 00:19:55,640 --> 00:20:00,399 Speaker 1: perform exactly during periods of stress, right, it says the 342 00:20:00,440 --> 00:20:03,919 Speaker 1: market that's a little bit countercyclical. In other words, that 343 00:20:03,960 --> 00:20:08,520 Speaker 1: when everything is going cluster is in the normal market. 344 00:20:09,040 --> 00:20:12,119 Speaker 1: This is the market that's supposed to stand up and 345 00:20:12,200 --> 00:20:14,920 Speaker 1: to be there and to be resilient and to provide 346 00:20:14,920 --> 00:20:16,800 Speaker 1: liquidity so that when we all rush in there in 347 00:20:16,800 --> 00:20:19,119 Speaker 1: our flight to safety, we're going to have the trading 348 00:20:19,160 --> 00:20:24,000 Speaker 1: opportunities we need either to buy or sell. Mhm. So, 349 00:20:24,800 --> 00:20:26,680 Speaker 1: just on that note, can you talk a little bit 350 00:20:26,680 --> 00:20:30,399 Speaker 1: more about the role of the primary dealers here, because 351 00:20:30,440 --> 00:20:33,840 Speaker 1: in theory, they're supposed to be, you know, the big 352 00:20:33,880 --> 00:20:38,359 Speaker 1: market maker um in the treasury market, and there's a 353 00:20:38,400 --> 00:20:42,760 Speaker 1: suggestion that because of various post crisis rules and trends, 354 00:20:42,800 --> 00:20:45,119 Speaker 1: they've sort of retreated from the market. And then, I 355 00:20:45,119 --> 00:20:47,399 Speaker 1: guess my second question is based on what you just 356 00:20:47,440 --> 00:20:51,439 Speaker 1: said about h f T s retreating from the market 357 00:20:51,560 --> 00:20:54,359 Speaker 1: at precisely the moment where you would want to have 358 00:20:54,480 --> 00:20:57,720 Speaker 1: them there to provide liquidity. Is the answer that you 359 00:20:58,400 --> 00:21:03,679 Speaker 1: somehow force primary dealers and other market makers to intermediate, 360 00:21:03,840 --> 00:21:08,320 Speaker 1: and how would you actually go about doing that? Yeah, 361 00:21:08,359 --> 00:21:10,520 Speaker 1: I'm so glad you asked that, Tracy, I mean on 362 00:21:10,640 --> 00:21:13,000 Speaker 1: on the on the first part, the role of the 363 00:21:13,000 --> 00:21:16,399 Speaker 1: primary dealers here is super interesting because as you said, 364 00:21:16,480 --> 00:21:20,119 Speaker 1: they've been involved throughout these folks have been they have 365 00:21:20,200 --> 00:21:22,840 Speaker 1: relied upon in the auction space, as we know, they 366 00:21:23,359 --> 00:21:26,040 Speaker 1: have traditionally been relied on in the secondary market, and 367 00:21:26,040 --> 00:21:28,800 Speaker 1: they do dominate in the dealers to decline space. So 368 00:21:28,840 --> 00:21:31,800 Speaker 1: there is one space, which is where the clients interact 369 00:21:31,880 --> 00:21:33,840 Speaker 1: with the treasury market when we are able to go, 370 00:21:33,920 --> 00:21:35,800 Speaker 1: when we have the big institutions and they're able to 371 00:21:35,840 --> 00:21:37,760 Speaker 1: go and buy and sell treasuries, the mutual funds, the 372 00:21:37,760 --> 00:21:40,600 Speaker 1: hedge funds, the foreign governments and others that are able 373 00:21:40,600 --> 00:21:43,600 Speaker 1: to obtain treasuries through the dealer to client market, and 374 00:21:43,640 --> 00:21:46,520 Speaker 1: that is still dominated by the primary dealers. And again 375 00:21:46,560 --> 00:21:49,160 Speaker 1: that's the market with around three hundred billion dollars worth 376 00:21:49,160 --> 00:21:52,439 Speaker 1: of daily turnovers. So it is a it is a 377 00:21:52,520 --> 00:21:56,159 Speaker 1: solid component that we rely on for primary dealers to 378 00:21:56,240 --> 00:21:58,960 Speaker 1: take care of, which is this dealers decline space, which 379 00:21:59,000 --> 00:22:01,280 Speaker 1: is still very much in ot see space and bilateral 380 00:22:01,520 --> 00:22:04,760 Speaker 1: space in which primary dealers are the key players. Now 381 00:22:04,760 --> 00:22:07,960 Speaker 1: their retreat as it were, competitively is really happened in 382 00:22:08,000 --> 00:22:10,679 Speaker 1: the intero dealers space, and so you know, one question 383 00:22:10,720 --> 00:22:12,919 Speaker 1: to ask is what's their skin in the game in 384 00:22:12,960 --> 00:22:16,240 Speaker 1: the market at present, And it's an interesting question because 385 00:22:16,720 --> 00:22:20,040 Speaker 1: they are facing balance sheet pressures. You guys had a 386 00:22:20,080 --> 00:22:22,800 Speaker 1: triffic podcast a couple of weeks ago with Saltan pots 387 00:22:22,800 --> 00:22:25,920 Speaker 1: Are on the SLR issue and other issues um that 388 00:22:26,040 --> 00:22:30,119 Speaker 1: discuss the balance sheet pressures on primary dealers in the 389 00:22:30,160 --> 00:22:32,919 Speaker 1: treasury market. And certainly there has been a lot of 390 00:22:33,000 --> 00:22:37,760 Speaker 1: commentary here that the post crisis reforms following Dodd Frank 391 00:22:38,560 --> 00:22:42,520 Speaker 1: have put pressure on primary dealer balance sheets. And the 392 00:22:42,560 --> 00:22:46,359 Speaker 1: other thing to appreciate here is that primate dealers are 393 00:22:46,400 --> 00:22:50,120 Speaker 1: also extremely active in the repo market right and they're 394 00:22:50,160 --> 00:22:54,119 Speaker 1: extremely active in the much larger repo market where US 395 00:22:54,160 --> 00:22:58,800 Speaker 1: treasuries are now post crisis, the preferred form of collateral. 396 00:22:59,280 --> 00:23:03,040 Speaker 1: So these folks, you're facing tremendous pressures on a daily 397 00:23:03,080 --> 00:23:07,440 Speaker 1: basis to maintain the function of the treasury market where 398 00:23:07,440 --> 00:23:10,720 Speaker 1: trillions of dollars of treasuries the essentially locked up as collateral, 399 00:23:11,200 --> 00:23:14,439 Speaker 1: as well as to have treasuries and cash available to 400 00:23:14,480 --> 00:23:16,919 Speaker 1: intermediate in the dealer's decline, as well as in the 401 00:23:17,119 --> 00:23:19,080 Speaker 1: inter dealer space as well as obviously in the auction 402 00:23:19,119 --> 00:23:21,800 Speaker 1: space to the extent they need cash to purchase on 403 00:23:21,840 --> 00:23:25,640 Speaker 1: a regular basis, So there are tremendous balance sheet pressures there. 404 00:23:26,000 --> 00:23:28,760 Speaker 1: And as you discussed in the episode a couple of 405 00:23:28,800 --> 00:23:31,840 Speaker 1: weeks ago, you do have the SLR issue that is 406 00:23:31,880 --> 00:23:34,520 Speaker 1: now we have an answer to that, but you also 407 00:23:34,560 --> 00:23:38,480 Speaker 1: have other regulations like that gesup charge. That means that 408 00:23:38,920 --> 00:23:42,280 Speaker 1: there is a constant balancing that is happening here, which 409 00:23:42,320 --> 00:23:46,679 Speaker 1: can be a little scary sometimes during crisis periods because 410 00:23:46,800 --> 00:23:49,840 Speaker 1: you don't know if primary dealers have the balance sheet 411 00:23:49,840 --> 00:23:52,840 Speaker 1: space to come in there and provide liquidity, to come 412 00:23:52,840 --> 00:23:55,280 Speaker 1: in there and provide cash if they need to. And 413 00:23:55,480 --> 00:23:57,800 Speaker 1: that is something that we need to worry about when 414 00:23:57,800 --> 00:24:01,280 Speaker 1: it comes to understanding the liquidity of this market under stress. 415 00:24:01,920 --> 00:24:03,760 Speaker 1: And so one thing you asked the second part of 416 00:24:03,760 --> 00:24:05,880 Speaker 1: your question, Tracy, which I think is a really brilliant 417 00:24:06,040 --> 00:24:09,080 Speaker 1: question on that policy side, which is what do we 418 00:24:09,160 --> 00:24:14,000 Speaker 1: do do we have what are afformative market making obligations 419 00:24:14,600 --> 00:24:17,639 Speaker 1: attaching to both HF the key h F T players 420 00:24:17,640 --> 00:24:20,440 Speaker 1: as well as the primary dealers, And I think that's 421 00:24:20,480 --> 00:24:22,560 Speaker 1: a that should be an idea on the table. In 422 00:24:22,600 --> 00:24:25,000 Speaker 1: other words, do we go back to the idea that 423 00:24:25,160 --> 00:24:29,479 Speaker 1: was prevalent in the equity market, for example, UM in 424 00:24:29,520 --> 00:24:32,159 Speaker 1: the eighties and nineties, that you have these afformative market 425 00:24:32,160 --> 00:24:35,600 Speaker 1: makers that always provide liquidity, that trade against the wind 426 00:24:35,600 --> 00:24:38,320 Speaker 1: if they have to, UM, that promised to stay on 427 00:24:38,359 --> 00:24:41,639 Speaker 1: the market, to trade even during times of stress. Do 428 00:24:41,720 --> 00:24:43,840 Speaker 1: we do that today in the treasury market because it's 429 00:24:43,840 --> 00:24:45,919 Speaker 1: more important and I think it's a good idea to 430 00:24:45,960 --> 00:24:49,360 Speaker 1: have on the table. The interesting question here is how 431 00:24:49,359 --> 00:24:51,760 Speaker 1: it links back to your first question, which is this 432 00:24:51,840 --> 00:24:55,320 Speaker 1: balance sheet space for primary dealers UM as well as 433 00:24:55,440 --> 00:24:58,400 Speaker 1: HFT folks who are who do have these thinner, smaller 434 00:24:58,400 --> 00:25:03,600 Speaker 1: balance sheets. In general, do these institutions today have the 435 00:25:04,080 --> 00:25:08,720 Speaker 1: elasticity in their balance sheets to be able to perform 436 00:25:08,760 --> 00:25:11,159 Speaker 1: in the event of a crisis and the event that 437 00:25:11,200 --> 00:25:13,760 Speaker 1: they are subject to informative market making because that is 438 00:25:13,800 --> 00:25:18,000 Speaker 1: expensive us as you can imagine. Let me let me 439 00:25:18,359 --> 00:25:20,560 Speaker 1: jump in there, because this brings to mind a question 440 00:25:20,560 --> 00:25:23,000 Speaker 1: I've been thinking about. So you've talked about the sort 441 00:25:23,000 --> 00:25:27,720 Speaker 1: of the fragmentation of regulation in this space. There isn't 442 00:25:27,760 --> 00:25:30,840 Speaker 1: a single clear regulator, but something I've been thinking about 443 00:25:30,960 --> 00:25:33,359 Speaker 1: and the sort of the tensions that led up to 444 00:25:33,400 --> 00:25:36,320 Speaker 1: the SLR decision. It was sort of around this is 445 00:25:36,359 --> 00:25:42,640 Speaker 1: this sort of like intersection between post GFC regulatory decisions 446 00:25:43,280 --> 00:25:48,080 Speaker 1: versus macro policy. So you have these determinations, it's like, Okay, 447 00:25:48,119 --> 00:25:51,400 Speaker 1: banks have to hold a certain amount of liquid assets 448 00:25:51,400 --> 00:25:53,960 Speaker 1: and have a certain amount of capital and so forth. 449 00:25:54,240 --> 00:25:57,280 Speaker 1: On the other hand, you have the FED making um 450 00:25:57,520 --> 00:26:01,440 Speaker 1: non regulatory macro decisions that even time about the size 451 00:26:01,440 --> 00:26:05,320 Speaker 1: of its balance sheet asset purchases, UH for you know, 452 00:26:05,640 --> 00:26:09,760 Speaker 1: for broader hitting its dual policy goals. How much is 453 00:26:09,800 --> 00:26:15,000 Speaker 1: the tension uh emerged from the fact that these regulatory 454 00:26:15,240 --> 00:26:19,520 Speaker 1: decisions that were made about bank balance sheets didn't necessarily 455 00:26:19,720 --> 00:26:25,800 Speaker 1: anticipate a decade of very expanded FED balance sheet, multiple 456 00:26:25,960 --> 00:26:30,679 Speaker 1: rounds of asset purchases, very heavy treasury issuance on a 457 00:26:30,760 --> 00:26:33,359 Speaker 1: historical scale. And it's sort of essentially this sort of 458 00:26:33,400 --> 00:26:37,960 Speaker 1: like collision course between two different priorities. It's a great question, 459 00:26:38,160 --> 00:26:41,840 Speaker 1: and unfortunately I'm gonna you know, I'm gonna do it 460 00:26:41,920 --> 00:26:43,800 Speaker 1: my law sheets do which is take a pass on 461 00:26:43,840 --> 00:26:47,480 Speaker 1: this one, because you know it's not you know, it's 462 00:26:47,520 --> 00:26:49,919 Speaker 1: it's it's such a tough one because I think you 463 00:26:49,920 --> 00:26:52,560 Speaker 1: know what I what I think has been happening here 464 00:26:52,720 --> 00:26:56,439 Speaker 1: and which your question really speaks to, is that we 465 00:26:56,480 --> 00:26:59,600 Speaker 1: don't have the regulatory picture as fully as we do 466 00:26:59,760 --> 00:27:03,919 Speaker 1: want it to be there, right, so we're making decisions 467 00:27:03,960 --> 00:27:07,960 Speaker 1: without necessarily seeing the full parts of the elephant. And 468 00:27:08,040 --> 00:27:11,000 Speaker 1: so obviously we come in after the two thou and 469 00:27:11,000 --> 00:27:15,119 Speaker 1: ten crisis clearly wanting to make bank balance sheets as 470 00:27:15,240 --> 00:27:18,239 Speaker 1: robust as possible. Right, of course we want to do that. 471 00:27:18,320 --> 00:27:20,600 Speaker 1: Of course we need to do that. And then of 472 00:27:20,640 --> 00:27:23,240 Speaker 1: course we also want to make sure the repo market 473 00:27:23,800 --> 00:27:26,720 Speaker 1: is as secure as possible. So we you know, so 474 00:27:26,840 --> 00:27:29,040 Speaker 1: we we try and make this market is dependent on 475 00:27:29,119 --> 00:27:32,879 Speaker 1: treasuries as possible with respect of the collateralization of this market. 476 00:27:32,920 --> 00:27:36,080 Speaker 1: And guess what, that's exactly what's happened, right, So sixty 477 00:27:36,080 --> 00:27:38,639 Speaker 1: seven percent or sixty eight percent of the market in 478 00:27:38,640 --> 00:27:41,639 Speaker 1: the Bilagal report market is now collateralized by treasurey. It's 479 00:27:41,640 --> 00:27:45,959 Speaker 1: even higher in the reverse report market around So of course, 480 00:27:46,160 --> 00:27:48,120 Speaker 1: you know, we've done a good job there to make 481 00:27:48,160 --> 00:27:51,359 Speaker 1: these markets SA. On the other hand, we still require 482 00:27:51,440 --> 00:27:53,679 Speaker 1: on the we still require the nuts and boats of 483 00:27:53,720 --> 00:27:58,320 Speaker 1: intermediation to be provided, and so we need the primary 484 00:27:58,320 --> 00:28:00,919 Speaker 1: dealers to have the elasticity in their balance sheets to 485 00:28:00,920 --> 00:28:03,080 Speaker 1: be able to do that. And then on the other side, 486 00:28:03,359 --> 00:28:08,120 Speaker 1: we have this incredibly dynamic macro picture in which, as 487 00:28:08,160 --> 00:28:13,440 Speaker 1: you said, QUEI FED purchases. Um, we just have this 488 00:28:13,800 --> 00:28:18,679 Speaker 1: really interesting global picture also emerging with respect to the 489 00:28:18,800 --> 00:28:20,680 Speaker 1: role of the US and the role of Treasury and 490 00:28:20,680 --> 00:28:22,639 Speaker 1: the role of the dollar that is happening. We have 491 00:28:23,119 --> 00:28:27,920 Speaker 1: so many factors to consider here, but what is missing 492 00:28:28,200 --> 00:28:32,200 Speaker 1: is a regulatory structure that can do that job. The FED, 493 00:28:32,600 --> 00:28:36,879 Speaker 1: the Treasury, the CFTC and others are all fragmented. In 494 00:28:36,920 --> 00:28:41,400 Speaker 1: the treasury space, The f STOCK, the Financial Stability Oversight 495 00:28:41,440 --> 00:28:44,080 Speaker 1: Council created in the wake of Dot Frank that could 496 00:28:44,120 --> 00:28:48,320 Speaker 1: coordinate doesn't coordinate in this space. So we're not having 497 00:28:48,360 --> 00:28:50,880 Speaker 1: the conversation that you want us to have, Joe, which 498 00:28:50,920 --> 00:28:53,840 Speaker 1: is being able to try and put these pictures together. Um. 499 00:28:53,880 --> 00:28:55,920 Speaker 1: And so you know, for that reason, I feel like 500 00:28:55,920 --> 00:28:58,760 Speaker 1: I have to take a past because there is no 501 00:28:59,640 --> 00:29:03,640 Speaker 1: real coherence to the approach that we have such that 502 00:29:04,320 --> 00:29:08,880 Speaker 1: trying to find a trying to find a a narrative 503 00:29:08,960 --> 00:29:14,480 Speaker 1: that can explain the interactions is really difficult. You mentioned 504 00:29:14,480 --> 00:29:17,360 Speaker 1: the REPO market there, And um, I wanted to get 505 00:29:17,400 --> 00:29:20,480 Speaker 1: your thoughts on repo market reform because it feels like 506 00:29:20,640 --> 00:29:24,600 Speaker 1: this was on the radar immediately after the financial crisis 507 00:29:25,080 --> 00:29:27,640 Speaker 1: because so much of you know, the two thousand eight 508 00:29:27,640 --> 00:29:31,480 Speaker 1: housing bubble sort of emanated from trouble in the repo market. 509 00:29:31,560 --> 00:29:34,960 Speaker 1: A lot of trades were collateralized with you know, sub 510 00:29:35,000 --> 00:29:38,800 Speaker 1: prime structured finance A B S and stuff like that, 511 00:29:39,240 --> 00:29:42,360 Speaker 1: and then it all went awry. But it also feels 512 00:29:42,400 --> 00:29:46,560 Speaker 1: like the repo market hasn't changed all that much, like 513 00:29:46,640 --> 00:29:49,680 Speaker 1: the the nature of the collateral has changed, but the 514 00:29:49,720 --> 00:29:54,880 Speaker 1: actual functioning, if anything, seems to have become more concentrated 515 00:29:55,000 --> 00:29:58,320 Speaker 1: on one or two key players. Um, what are your 516 00:29:58,360 --> 00:30:01,440 Speaker 1: thoughts there and how does the report market fit into 517 00:30:01,600 --> 00:30:08,719 Speaker 1: your overall research on treasuries? Great, So, the report market 518 00:30:09,200 --> 00:30:15,120 Speaker 1: is mammoth. It's extremely important, and it's a market in 519 00:30:15,160 --> 00:30:21,880 Speaker 1: which the daily consumption of treasuries in cash changes incredibly 520 00:30:22,000 --> 00:30:24,320 Speaker 1: differently on a on on a daily basis, Right, So 521 00:30:24,360 --> 00:30:27,040 Speaker 1: the needs of this market on a daily basis diverge 522 00:30:27,240 --> 00:30:29,240 Speaker 1: sharply from one week to the next, as we saw 523 00:30:29,240 --> 00:30:32,840 Speaker 1: in the case of the September as An incident September 524 00:30:32,880 --> 00:30:38,360 Speaker 1: two incident. The report market is liable still to sudden 525 00:30:38,400 --> 00:30:41,920 Speaker 1: disappearances in its liquidity and its functioning. UM. I have 526 00:30:41,960 --> 00:30:45,000 Speaker 1: a trific colleague at Vanderbout Morgan Rix who has written 527 00:30:45,000 --> 00:30:48,440 Speaker 1: about a report market reform from the structural perspective to 528 00:30:48,480 --> 00:30:51,280 Speaker 1: try and shore up some of the cash like aspects 529 00:30:51,320 --> 00:30:54,959 Speaker 1: of this market. But as you said, right, the attention 530 00:30:55,120 --> 00:30:57,440 Speaker 1: on the report market and on report market reform has 531 00:30:57,480 --> 00:31:01,160 Speaker 1: really has really disappeared, right. UM, we have not been 532 00:31:01,200 --> 00:31:03,960 Speaker 1: focusing on what we should do to make this market 533 00:31:04,000 --> 00:31:06,400 Speaker 1: secure to deal with the fact that it's still fragile. 534 00:31:06,800 --> 00:31:08,560 Speaker 1: Um that it does change in a week by week 535 00:31:08,560 --> 00:31:11,120 Speaker 1: basis that the consumption of treasuries in cash does change. 536 00:31:11,480 --> 00:31:14,520 Speaker 1: One of the proposals that's been on the table for 537 00:31:14,560 --> 00:31:16,920 Speaker 1: both the secondary market as well as for the report 538 00:31:16,960 --> 00:31:19,600 Speaker 1: market is in relation to central clearing, right, which is 539 00:31:20,280 --> 00:31:23,000 Speaker 1: trying to bring in a greater degree of clearing into 540 00:31:23,000 --> 00:31:25,520 Speaker 1: the space. We do have some we have the tri 541 00:31:25,640 --> 00:31:29,120 Speaker 1: party report market that does have some clearing arrangements, and 542 00:31:29,160 --> 00:31:32,640 Speaker 1: whether or not we should think about making clearing more 543 00:31:32,840 --> 00:31:35,200 Speaker 1: systematically a part of this as well as the secondary 544 00:31:35,200 --> 00:31:38,040 Speaker 1: market in treasury. So that is one idea that has 545 00:31:38,080 --> 00:31:40,840 Speaker 1: been on the table. But again, as you say, you know, 546 00:31:40,920 --> 00:31:44,880 Speaker 1: the question is this market has become enormous. It is 547 00:31:45,120 --> 00:31:48,320 Speaker 1: a market in which we are intermediating around six trillion 548 00:31:48,360 --> 00:31:51,800 Speaker 1: dollars worth every single day to meet the daily financial 549 00:31:51,840 --> 00:31:54,960 Speaker 1: needs or financial farms across the system. So trying to 550 00:31:55,000 --> 00:31:58,520 Speaker 1: get this into a clearinghouse even is something that does 551 00:31:58,600 --> 00:32:01,840 Speaker 1: feel slightly intimidating and haunting and scary um and possibly 552 00:32:01,880 --> 00:32:04,600 Speaker 1: something that we could talk about in this conversation. But 553 00:32:04,880 --> 00:32:07,800 Speaker 1: it does feel like it's become a problem from the 554 00:32:07,840 --> 00:32:11,520 Speaker 1: structural standpoint that maybe has become a little too big 555 00:32:11,600 --> 00:32:15,040 Speaker 1: to address at this point. So it feels like we're 556 00:32:15,080 --> 00:32:18,280 Speaker 1: going on like we've done before and really using the 557 00:32:18,320 --> 00:32:22,480 Speaker 1: fact of treasuries as being the performed form of collateral 558 00:32:22,880 --> 00:32:25,160 Speaker 1: to provide the safety that we need in this market. 559 00:32:25,320 --> 00:32:29,200 Speaker 1: In otherwise, in other words, we're looking to collateralization as 560 00:32:29,240 --> 00:32:32,640 Speaker 1: the means of securing this market rather than structural reform 561 00:32:32,680 --> 00:32:35,400 Speaker 1: as my colleagues have talked about, or you know, moving 562 00:32:35,400 --> 00:32:38,160 Speaker 1: into central clearing as a way to try and protect 563 00:32:38,720 --> 00:32:41,960 Speaker 1: this market against us. Can you just you mentioned that 564 00:32:42,360 --> 00:32:45,000 Speaker 1: central clearing and can you sort of just spell out 565 00:32:45,160 --> 00:32:48,440 Speaker 1: the basic idea of what that would theoretically look like 566 00:32:48,480 --> 00:32:51,440 Speaker 1: in the treasury market and what the I don't know, 567 00:32:51,560 --> 00:32:54,560 Speaker 1: drawbacks of that would be. Yeah, I'm so glad you 568 00:32:54,600 --> 00:32:57,600 Speaker 1: asked that, Joe, because you know, clearing, clearing is clearing 569 00:32:57,640 --> 00:33:00,520 Speaker 1: is this amazing thing that we have in our securities markets, right, 570 00:33:00,560 --> 00:33:03,000 Speaker 1: clearing houses are as I'm sure I thought of your 571 00:33:03,040 --> 00:33:06,200 Speaker 1: listeners know, this is the fundamental structure in our market 572 00:33:06,240 --> 00:33:08,960 Speaker 1: that protects all of us and that we hardly ever 573 00:33:08,960 --> 00:33:11,719 Speaker 1: get to see. And that's a good thing. So essentially, 574 00:33:11,760 --> 00:33:15,120 Speaker 1: you know, central clearing houses, they are the guardians of 575 00:33:15,200 --> 00:33:18,080 Speaker 1: the market. They protect us against counterparty risk failure that 576 00:33:18,120 --> 00:33:21,600 Speaker 1: the counterparty trading what will not provide the securities of 577 00:33:21,600 --> 00:33:24,920 Speaker 1: the cash that you need. And in return, what clearing 578 00:33:24,920 --> 00:33:26,880 Speaker 1: houses do is that they have a whole bunch of 579 00:33:26,920 --> 00:33:30,120 Speaker 1: things that they put in place to keep the keep 580 00:33:30,160 --> 00:33:33,000 Speaker 1: themselves and the market safe. In other words, they make 581 00:33:33,040 --> 00:33:39,200 Speaker 1: sure that the folks participating in the market provide collateral margin, 582 00:33:39,560 --> 00:33:43,320 Speaker 1: that they have procedures in place to share losses between 583 00:33:43,360 --> 00:33:46,600 Speaker 1: their members. Um, but the clearing house is well resourced 584 00:33:46,960 --> 00:33:50,560 Speaker 1: in case even their their members don't have the resources 585 00:33:50,560 --> 00:33:52,560 Speaker 1: that they need. So this is the structures that's design 586 00:33:52,880 --> 00:33:56,120 Speaker 1: that's designed to absorb and buffer risk, and for the 587 00:33:56,160 --> 00:34:00,840 Speaker 1: most part it works really well. But as you might expect, 588 00:34:01,360 --> 00:34:04,600 Speaker 1: this is a structure that's also just incredibly too big 589 00:34:04,640 --> 00:34:07,320 Speaker 1: to fail, and it's one that has grown in its 590 00:34:07,320 --> 00:34:10,600 Speaker 1: footprint following Dot Frank as we rely on clearing houses 591 00:34:10,680 --> 00:34:14,480 Speaker 1: much more systematically to protect the gervatives and swaps market. 592 00:34:15,080 --> 00:34:17,600 Speaker 1: So the idea here has been and Darryl Daffie and 593 00:34:17,640 --> 00:34:20,120 Speaker 1: others have have have thought about to try and bring 594 00:34:20,320 --> 00:34:22,520 Speaker 1: central clearing into the U S. Treasuries market, and I 595 00:34:22,560 --> 00:34:25,879 Speaker 1: think it's a it's a terrific idea, but I think 596 00:34:26,440 --> 00:34:28,800 Speaker 1: if we take a step back, it's worth while noting 597 00:34:29,239 --> 00:34:34,000 Speaker 1: that clearing does actually exist in the U S. Treasury markets. Unfortunately, 598 00:34:34,280 --> 00:34:36,880 Speaker 1: the clearing in this market, as it does exist, is 599 00:34:36,920 --> 00:34:41,080 Speaker 1: a hot mess. So we do have central clearing in 600 00:34:41,120 --> 00:34:43,120 Speaker 1: a in the U S. Treasury market, but it's a 601 00:34:43,160 --> 00:34:48,400 Speaker 1: completely hodge podge and confusing system. Central clearing does exist 602 00:34:48,400 --> 00:34:51,920 Speaker 1: when you have say two dealers to primary dealers for example, 603 00:34:51,960 --> 00:34:54,680 Speaker 1: that trade with one another, but it does not exist 604 00:34:54,840 --> 00:34:57,319 Speaker 1: or you will not get central clearing when you have 605 00:34:57,440 --> 00:35:00,719 Speaker 1: saying eight two hift s trading with one another. So 606 00:35:00,840 --> 00:35:03,960 Speaker 1: this is a patchwork of clearing that exists in the U. S. 607 00:35:04,000 --> 00:35:08,279 Speaker 1: Treasury market, and unfortunately that's a disaster Joe. That is 608 00:35:08,320 --> 00:35:11,640 Speaker 1: like the worst off the two worlds that we could 609 00:35:11,680 --> 00:35:14,920 Speaker 1: possibly imagine. In other words, we have a clearinghouse that 610 00:35:15,000 --> 00:35:19,080 Speaker 1: exists that partially clears US treasuries. I think there was 611 00:35:19,080 --> 00:35:23,200 Speaker 1: a terrific treasure market Treasury Practice Markets Group report UM 612 00:35:23,239 --> 00:35:25,799 Speaker 1: in two thousand and eighteen, I think that dealt with 613 00:35:26,360 --> 00:35:28,799 Speaker 1: clearing in the U. S. Treasury markets, and what it 614 00:35:28,880 --> 00:35:33,920 Speaker 1: described was that approximately seventy five of the thing the 615 00:35:33,960 --> 00:35:38,080 Speaker 1: inter dealer market is not essentially cleared, but t is. 616 00:35:38,560 --> 00:35:41,759 Speaker 1: And so you can imagine the risks of that that 617 00:35:41,920 --> 00:35:45,440 Speaker 1: the clearing house does not have a full picture of 618 00:35:45,560 --> 00:35:48,439 Speaker 1: what the risks in this market are. That market participants 619 00:35:48,680 --> 00:35:51,439 Speaker 1: who are members of the clearinghouse don't have a full 620 00:35:51,440 --> 00:35:53,920 Speaker 1: picture of what is happening in this market will kind 621 00:35:53,960 --> 00:35:56,640 Speaker 1: of risk the clearinghouse faces and you don't get the 622 00:35:56,680 --> 00:36:00,000 Speaker 1: benefits of central clearing for the market as a whole um. 623 00:36:00,040 --> 00:36:03,000 Speaker 1: You don't have set off a netting across all these 624 00:36:03,000 --> 00:36:06,000 Speaker 1: secondary market treasury transactions that could reduce the risk of 625 00:36:06,040 --> 00:36:08,920 Speaker 1: the clearing house and individual members space. So this is 626 00:36:08,920 --> 00:36:13,120 Speaker 1: a really confusing and just an unacceptable picture for central 627 00:36:13,120 --> 00:36:16,360 Speaker 1: clearing in US treasuries in the secondary market space at present. 628 00:36:16,960 --> 00:36:18,880 Speaker 1: So you know, the question is whether or not we 629 00:36:19,000 --> 00:36:21,400 Speaker 1: bring central clearing in here, and I think it's a 630 00:36:21,400 --> 00:36:24,600 Speaker 1: solution that needs to be on the table because obviously 631 00:36:24,640 --> 00:36:27,080 Speaker 1: it's one that has worked in other markets. But to 632 00:36:27,239 --> 00:36:31,640 Speaker 1: do this, we need to be extremely careful because we 633 00:36:31,760 --> 00:36:34,160 Speaker 1: are going to be setting up the clearing houses to 634 00:36:34,320 --> 00:36:38,040 Speaker 1: end all clearing houses right for US treasury market function. 635 00:36:38,280 --> 00:36:41,520 Speaker 1: And again, given the counter cyclical aspect of treasury markets, 636 00:36:41,560 --> 00:36:43,600 Speaker 1: that is that they have to work when every other 637 00:36:43,640 --> 00:36:47,399 Speaker 1: market is collapsing, that we really need to make sure 638 00:36:47,480 --> 00:36:51,399 Speaker 1: that this clearing house, over and above every single other 639 00:36:51,440 --> 00:36:54,719 Speaker 1: financial institution in the whole wide galaxy world whatever, is 640 00:36:54,760 --> 00:37:14,080 Speaker 1: the one that is safe enough to protect us. So 641 00:37:14,719 --> 00:37:17,919 Speaker 1: I get the sense from this discussion that a lot 642 00:37:18,000 --> 00:37:21,240 Speaker 1: of the problems that are happening in the treasury market 643 00:37:21,480 --> 00:37:24,239 Speaker 1: um and the weaknesses that you described, like a lot 644 00:37:24,320 --> 00:37:28,319 Speaker 1: of those are the results of similar forces to what 645 00:37:28,360 --> 00:37:32,640 Speaker 1: we've seen in other asset classes. So stocks has gone through, 646 00:37:33,000 --> 00:37:37,000 Speaker 1: you know, its own a bout of electronification. People have 647 00:37:37,000 --> 00:37:40,160 Speaker 1: had the same discussions about whether or not high frequency 648 00:37:40,200 --> 00:37:44,200 Speaker 1: traders actually provide liquidity in stocks and moments of stress. 649 00:37:44,880 --> 00:37:47,720 Speaker 1: But and and to some extent, you know, corporate bonds 650 00:37:47,719 --> 00:37:51,040 Speaker 1: are sort of going through this as well. But I 651 00:37:51,080 --> 00:37:53,560 Speaker 1: guess my question is, like, is the problem that the 652 00:37:53,600 --> 00:37:59,480 Speaker 1: treasury market is encountering these issues that aren't necessarily specific 653 00:37:59,520 --> 00:38:04,080 Speaker 1: to treasures? But the difficulty is that regulatory fragmentation that 654 00:38:04,120 --> 00:38:07,320 Speaker 1: you describe before. Is that a fair way of thinking 655 00:38:07,400 --> 00:38:11,320 Speaker 1: about it, Like, this is not necessarily a treasury market 656 00:38:11,400 --> 00:38:14,160 Speaker 1: specific problem, but the thing that makes it bad is 657 00:38:14,200 --> 00:38:17,000 Speaker 1: the fact that no one's responsible for it, and no 658 00:38:17,040 --> 00:38:20,799 Speaker 1: one's looking at it in a holistic way. Exactly. I 659 00:38:20,800 --> 00:38:23,200 Speaker 1: feel like you just wrote a law of your article, Tracy. 660 00:38:23,239 --> 00:38:25,480 Speaker 1: I think that was that was that was the perfect 661 00:38:25,880 --> 00:38:29,200 Speaker 1: that was the perfect summary there. That's exactly what you know. 662 00:38:29,239 --> 00:38:31,360 Speaker 1: That at least to me, that seems to be the 663 00:38:31,400 --> 00:38:35,880 Speaker 1: problem that we have exactly as you said, seeing these 664 00:38:36,400 --> 00:38:39,359 Speaker 1: phenomena before in other markets. Post two thousand and ten 665 00:38:39,480 --> 00:38:43,560 Speaker 1: with the flash crash, regulators went through an incredible degree 666 00:38:43,560 --> 00:38:46,440 Speaker 1: of investigation and research, and the SEC and the CFTC 667 00:38:46,560 --> 00:38:49,880 Speaker 1: did such a great job in collating a whole amount 668 00:38:49,880 --> 00:38:53,000 Speaker 1: of research and doing the analysis, doing a bunch of rulemaking, 669 00:38:53,080 --> 00:38:56,160 Speaker 1: so we saw systems compliance and integrity, for example, the 670 00:38:56,239 --> 00:38:58,799 Speaker 1: SEC rule, direct market access. All of these different rules 671 00:38:58,840 --> 00:39:01,319 Speaker 1: come into place did trying to shore up the resiliency 672 00:39:01,360 --> 00:39:05,880 Speaker 1: of a highly automated, super fast market structure. And for 673 00:39:05,960 --> 00:39:09,200 Speaker 1: the most part, these reforms have done a great job 674 00:39:09,440 --> 00:39:13,600 Speaker 1: in making this market more resilient, more robust. I think, 675 00:39:13,600 --> 00:39:15,600 Speaker 1: you know, we've gone through periods of volatility, We've gone 676 00:39:15,640 --> 00:39:18,680 Speaker 1: through periods of extreme stress, and that market structure has 677 00:39:19,040 --> 00:39:23,080 Speaker 1: held up. Unfortunately, US Treasury market, even these very very 678 00:39:23,120 --> 00:39:27,640 Speaker 1: basic reforms just to safeguard the resiliency of the trading 679 00:39:27,680 --> 00:39:31,280 Speaker 1: infrastructure just haven't happened, right, They just haven't taken place. 680 00:39:31,320 --> 00:39:34,480 Speaker 1: And the X factor that I that I that I 681 00:39:34,520 --> 00:39:37,560 Speaker 1: put some of this blame at is this super fragmented 682 00:39:37,840 --> 00:39:40,240 Speaker 1: regulator model that we have in the U S Treasury market. 683 00:39:40,400 --> 00:39:44,239 Speaker 1: It's unsurprising that regulatory updating in this market is so 684 00:39:44,360 --> 00:39:48,040 Speaker 1: thin because we have to get a lot of regulators, 685 00:39:48,040 --> 00:39:50,839 Speaker 1: big busy regulators in the same room to talk about 686 00:39:50,880 --> 00:39:53,400 Speaker 1: these issues, to share information, to come up with the 687 00:39:53,480 --> 00:39:56,320 Speaker 1: plan to coordinate. There are a whole bunch of costs 688 00:39:56,560 --> 00:39:59,480 Speaker 1: that just don't exist for the regulators that are primary 689 00:39:59,520 --> 00:40:03,200 Speaker 1: regulators and other markets. They can act essentially with enormous 690 00:40:03,239 --> 00:40:06,400 Speaker 1: amounts of power, control and deference given to their actions 691 00:40:06,760 --> 00:40:08,520 Speaker 1: in the equity space with the SEC, or in the 692 00:40:08,560 --> 00:40:11,680 Speaker 1: gersy space with the CFTC in the treasury markets. However, 693 00:40:11,719 --> 00:40:13,839 Speaker 1: they have to come together to coordinate, and there are 694 00:40:13,960 --> 00:40:17,560 Speaker 1: barriers here to their coordination. So, for example, there have 695 00:40:17,680 --> 00:40:22,319 Speaker 1: been difficulties between regulators and sharing information. There are institutional 696 00:40:22,360 --> 00:40:26,120 Speaker 1: constraints that they have in providing fulsom information to each other. 697 00:40:26,840 --> 00:40:29,960 Speaker 1: In addition, we're dealing with regulators that have very different 698 00:40:29,960 --> 00:40:32,799 Speaker 1: approaches at times. Right, So the FAT in the New 699 00:40:32,840 --> 00:40:36,200 Speaker 1: York FED and the o c C. These are prudential regulators. 700 00:40:36,239 --> 00:40:39,480 Speaker 1: They are designed to safeguard the safety and soundness of 701 00:40:39,480 --> 00:40:42,839 Speaker 1: the financial system in general. That doesn't mean that that 702 00:40:42,840 --> 00:40:45,360 Speaker 1: that means that they don't love the idea of a 703 00:40:45,400 --> 00:40:48,760 Speaker 1: whole bunch of disclosure in the market to tell everyone 704 00:40:49,040 --> 00:40:52,480 Speaker 1: what the skeletons in this market might be, as it 705 00:40:52,560 --> 00:40:55,960 Speaker 1: might create some conditions for a systemic run for a 706 00:40:56,080 --> 00:40:59,279 Speaker 1: problem to happen in that market space. On the other hand, 707 00:40:59,320 --> 00:41:01,440 Speaker 1: we have the cft you see in Finnver that are 708 00:41:01,480 --> 00:41:04,360 Speaker 1: that are the securities markets. Regulators, they are much more 709 00:41:04,400 --> 00:41:08,880 Speaker 1: into creating these super liquid markets just disclosure and transparency 710 00:41:08,880 --> 00:41:13,799 Speaker 1: in these other factors. So we have differences in approach, 711 00:41:14,160 --> 00:41:17,839 Speaker 1: we have differences in agency mandates. We have the need 712 00:41:17,960 --> 00:41:20,560 Speaker 1: for all of these institutions to come together to develop 713 00:41:20,640 --> 00:41:24,160 Speaker 1: a plan. And it should not be any surprise whatsoever 714 00:41:24,560 --> 00:41:27,319 Speaker 1: that we just haven't seen the kind of rulemaking that 715 00:41:27,400 --> 00:41:30,920 Speaker 1: we have in other markets. So I'm not saying that 716 00:41:31,080 --> 00:41:34,239 Speaker 1: we have, you know, a huge amount of regulation here 717 00:41:34,320 --> 00:41:37,000 Speaker 1: that that's not That's not what I'm saying. What I'm 718 00:41:37,040 --> 00:41:38,840 Speaker 1: saying is that we at least need to have a 719 00:41:38,840 --> 00:41:42,919 Speaker 1: regulatory structure in place that is geared towards providing even 720 00:41:42,960 --> 00:41:46,440 Speaker 1: the most basic reforms that how are tried and tested 721 00:41:46,440 --> 00:41:48,880 Speaker 1: in other markets, that work in other markets, but that 722 00:41:48,920 --> 00:41:51,960 Speaker 1: are sadly missing in US treasuries, and that leave this 723 00:41:52,040 --> 00:41:58,040 Speaker 1: market therefore very vulnerable the systematic fragility. Yes, thank you 724 00:41:58,080 --> 00:42:01,200 Speaker 1: so much for coming on. That was Thank you guys 725 00:42:01,200 --> 00:42:03,640 Speaker 1: so much for having me. I just completely I wish 726 00:42:03,680 --> 00:42:05,200 Speaker 1: you could have seen me in my little room. My 727 00:42:05,320 --> 00:42:09,560 Speaker 1: arms are boiling everywhere. I was going crazy. You know, 728 00:42:09,680 --> 00:42:12,680 Speaker 1: you have such great questions, and you know I could 729 00:42:12,680 --> 00:42:14,600 Speaker 1: talk to you guys for like another hour like this 730 00:42:14,640 --> 00:42:18,279 Speaker 1: is you know, this is so cool. We'll definitely have 731 00:42:18,320 --> 00:42:20,319 Speaker 1: to do it again. Yeah, I would love it. And 732 00:42:20,360 --> 00:42:22,560 Speaker 1: thank you guys so much. I mean, it was so cool. 733 00:42:22,600 --> 00:42:25,680 Speaker 1: Your questions were just brilliant. You're writing. Some of the 734 00:42:25,680 --> 00:42:28,240 Speaker 1: reporting that you guys do has been so important to 735 00:42:28,400 --> 00:42:30,000 Speaker 1: the writing I've done. I could not have got the 736 00:42:30,040 --> 00:42:33,440 Speaker 1: information and insights I did without that. Um and honestly, 737 00:42:33,480 --> 00:42:35,680 Speaker 1: I just have so much fun. I just thank you 738 00:42:35,719 --> 00:42:52,560 Speaker 1: so much. That's great. Thank you so Joe. I thought 739 00:42:52,640 --> 00:42:56,640 Speaker 1: that was really fascinating conversation and such an important one because, 740 00:42:56,840 --> 00:42:59,920 Speaker 1: as you laid out at the very beginning, this is 741 00:43:00,080 --> 00:43:04,880 Speaker 1: an ultra significant market for well, for the entire market, 742 00:43:04,960 --> 00:43:08,400 Speaker 1: and it's sort of the thing on which everything else rests. 743 00:43:08,520 --> 00:43:12,000 Speaker 1: It's the you know, the benchmark risk free rate, and 744 00:43:12,000 --> 00:43:14,800 Speaker 1: and there is this assumption, I mean you should touched 745 00:43:14,800 --> 00:43:17,760 Speaker 1: on it. There is an assumption that in times of trouble, 746 00:43:18,440 --> 00:43:22,560 Speaker 1: you should be able to liquidate a risk position and 747 00:43:22,800 --> 00:43:26,440 Speaker 1: trade it for something considered safe, which you know would 748 00:43:26,520 --> 00:43:29,120 Speaker 1: usually be a U. S. Treasury bond. And if the 749 00:43:29,160 --> 00:43:33,520 Speaker 1: market can't serve that function, it seems like that's a 750 00:43:33,520 --> 00:43:38,240 Speaker 1: bit of a problem. Yeah. Absolutely, Like this idea that's like, okay, 751 00:43:38,280 --> 00:43:42,600 Speaker 1: like in times, you know, normal times, treasury trading is fine, 752 00:43:43,080 --> 00:43:47,200 Speaker 1: and higher volatility times actually you know, victorizes treasury trading 753 00:43:47,280 --> 00:43:49,520 Speaker 1: is still probably fine. But then this idea that's like 754 00:43:49,640 --> 00:43:52,640 Speaker 1: you hit some new threshold with the volatility in last 755 00:43:52,680 --> 00:43:56,080 Speaker 1: March was the clear example, get so high that this 756 00:43:56,480 --> 00:43:59,480 Speaker 1: sort of like safety veilve market that exists out there, 757 00:43:59,560 --> 00:44:02,919 Speaker 1: even it starts to break, then it becomes a real 758 00:44:02,960 --> 00:44:06,680 Speaker 1: problem and can't sort of perform the I guess countercyclical 759 00:44:06,719 --> 00:44:09,440 Speaker 1: function the hope it would. Of course we had to. 760 00:44:09,560 --> 00:44:12,880 Speaker 1: We saw the FED step in last year. It definitely 761 00:44:12,920 --> 00:44:15,560 Speaker 1: seems like if they're that level, whenever it is, we 762 00:44:15,600 --> 00:44:17,719 Speaker 1: don't hit it that often, but we seem to hit 763 00:44:17,760 --> 00:44:20,799 Speaker 1: it enough that it's, uh, you know that it's an 764 00:44:20,840 --> 00:44:24,959 Speaker 1: issue that needs addressing. Yeah. Absolutely, And it is kind 765 00:44:25,000 --> 00:44:28,960 Speaker 1: of frightening that, as we discussed, we still don't know 766 00:44:29,400 --> 00:44:34,840 Speaker 1: exactly why these volatility issues keep propping up or you know, 767 00:44:34,920 --> 00:44:37,840 Speaker 1: why we are getting these moments of drama in the market, 768 00:44:37,960 --> 00:44:40,799 Speaker 1: and that's kind of I mean, that's a little bit 769 00:44:40,800 --> 00:44:43,480 Speaker 1: frightening because it is this twenty one trillion dollar market 770 00:44:43,920 --> 00:44:46,960 Speaker 1: um that kind of touches on everything else. It seems 771 00:44:47,000 --> 00:44:51,239 Speaker 1: weird that people aren't um more dedicated to tracking it 772 00:44:51,320 --> 00:44:53,880 Speaker 1: and sort of figuring out what's going on. But I 773 00:44:53,880 --> 00:44:58,200 Speaker 1: guess that speaks to the regulatory fragmentation that Yesha was describing. 774 00:44:58,960 --> 00:45:01,200 Speaker 1: It still seems like they're is more that, like, I 775 00:45:01,239 --> 00:45:03,839 Speaker 1: don't know, maybe the FED could do to treat treasuries 776 00:45:04,080 --> 00:45:07,360 Speaker 1: as a true risk free asset. And I know we 777 00:45:07,440 --> 00:45:11,520 Speaker 1: talked about this a little bit in our discussion with 778 00:45:11,840 --> 00:45:16,279 Speaker 1: Josh Younger, but obviously reserves are sort of like the 779 00:45:16,360 --> 00:45:19,759 Speaker 1: ultimate ultimate risk free asset because they're all fungible, they're 780 00:45:19,800 --> 00:45:23,360 Speaker 1: all identical, and treasuries are close. But because they have 781 00:45:23,400 --> 00:45:27,480 Speaker 1: different liquidity h questions and different maturities and stuff, they're 782 00:45:27,480 --> 00:45:29,600 Speaker 1: not quite the same. But it still feels like perhaps 783 00:45:29,640 --> 00:45:32,920 Speaker 1: there could be more done, such that like a standing 784 00:45:32,960 --> 00:45:36,520 Speaker 1: reverse repo facility something such that at any time someone 785 00:45:36,640 --> 00:45:39,240 Speaker 1: can be guaranteed by the government to get a liquid 786 00:45:39,239 --> 00:45:42,480 Speaker 1: cash for their treasuries. It seems like that could be 787 00:45:42,760 --> 00:45:45,920 Speaker 1: part of the answer. But that's just that's just my 788 00:45:46,160 --> 00:45:48,879 Speaker 1: that's just to take no, no, no. I think you're right, 789 00:45:48,960 --> 00:45:52,320 Speaker 1: and I think it does feel like the FED is 790 00:45:52,440 --> 00:45:56,239 Speaker 1: taking more of an interest or UM I guess, a 791 00:45:56,320 --> 00:46:00,880 Speaker 1: more proactive approach to the treasury market overall. Like it. 792 00:46:01,000 --> 00:46:04,200 Speaker 1: So I've said before that like I think the treasury 793 00:46:04,320 --> 00:46:07,360 Speaker 1: like smooth functioning of the treasury market is now a 794 00:46:07,520 --> 00:46:12,400 Speaker 1: sort of unspoken UM priority, if not target for the 795 00:46:12,440 --> 00:46:14,600 Speaker 1: FED UM And I think that's right, and I think 796 00:46:14,640 --> 00:46:16,319 Speaker 1: they're going to be looking at it more and more 797 00:46:16,480 --> 00:46:20,040 Speaker 1: as these issues crop up. Yeah, no, and it should be. 798 00:46:20,080 --> 00:46:22,400 Speaker 1: I mean, look at you know, the the the entire 799 00:46:22,480 --> 00:46:25,480 Speaker 1: Yode curve as I see it, should be understood as 800 00:46:25,520 --> 00:46:28,720 Speaker 1: a policy instrument, and you have like the shortest lowest 801 00:46:28,800 --> 00:46:32,000 Speaker 1: duration assets are reserves and the longest duration like way 802 00:46:32,000 --> 00:46:34,800 Speaker 1: out on the curve. But it always an expression of policy. 803 00:46:34,840 --> 00:46:36,400 Speaker 1: And I think this gets to the question that I 804 00:46:36,440 --> 00:46:40,080 Speaker 1: asked about, like this sort of intersection between macro policy 805 00:46:40,080 --> 00:46:42,759 Speaker 1: and regulatory policy, because you know, it's all right, we're 806 00:46:42,840 --> 00:46:46,359 Speaker 1: running large deficits, because we're running countercyclical fiscal policy right now, 807 00:46:46,600 --> 00:46:49,160 Speaker 1: we're running a large balance sheet policy on the part 808 00:46:49,200 --> 00:46:52,280 Speaker 1: of the FED. So at some level, the regulative the 809 00:46:52,320 --> 00:46:56,000 Speaker 1: regulatory regime has to acknowledge that the fiscal and monetary 810 00:46:56,040 --> 00:46:59,040 Speaker 1: regime needs to use these tools from time to time 811 00:46:59,040 --> 00:47:01,080 Speaker 1: and sort of recognize that. But again, I guess that 812 00:47:01,160 --> 00:47:02,920 Speaker 1: guests to the answer of like, well, who is the 813 00:47:02,960 --> 00:47:05,040 Speaker 1: individual regulator that's going to make that call? And we 814 00:47:05,040 --> 00:47:08,680 Speaker 1: still don't have that? Yeah, all right, Um, shall we 815 00:47:08,760 --> 00:47:12,520 Speaker 1: leave it there? Yeah? Leave it there? Alright. This has 816 00:47:12,560 --> 00:47:16,480 Speaker 1: been another episode of the All Thoughts Podcast. I'm Tracy Halloway. 817 00:47:16,719 --> 00:47:19,960 Speaker 1: You can follow me on Twitter at Tracy Halloway and 818 00:47:20,000 --> 00:47:22,560 Speaker 1: I'm Joe Wisn't though. You can follow me on Twitter 819 00:47:22,719 --> 00:47:26,760 Speaker 1: at the Stalwart. Follow our producer Laura Carlson. She's at 820 00:47:26,840 --> 00:47:30,440 Speaker 1: Laura M. Carlson. Followed the Bloomberg head of podcast francesco 821 00:47:30,560 --> 00:47:33,600 Speaker 1: Lead at Francesca Today, and check out all of our 822 00:47:33,640 --> 00:47:37,759 Speaker 1: podcasts at Bloomberg under the handle A Podcast. Thanks for 823 00:47:37,840 --> 00:48:06,640 Speaker 1: listening to A