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TABB Group Anthony J Perrotta Jr

Increased regulation of US Treasury market may cause more harm than good, says TABB


Following the extreme market volatility experienced in October 2014, the regulatory agencies that oversee the US Treasury market began efforts to examine market structure and determine whether increased regulation is required.

TABB Group’s latest research, “US Treasury Market 2016: Bamboo Market Structure,” indicates that the market is fundamentally sound and injecting an external catalyst, such as increased regulation in the form of execution or transparency mandates, may actually upend the delicate balance that has evolved and maintained efficiency in the treasury markets.
Anthony Perrotta (pictured), report author and head of research and consulting at TABB, interviewed a cross section of market participants to gain a better understanding of market infrastructure and trading behaviour, discovering a bifurcated market that is uniquely adapted to dealing with the demands of being the world’s benchmark market.
The research assesses the Joint Staff Report released in July 2015 on the initial findings on the market’s current structure, as well as the catalysts spurring change, and examines whether shifts in liquidity truly are causing the market to become unhinged.
According to TABB, the US Treasury market serves as a benchmark for a variety of financial markets and remains a proxy for the risk-free rate for many institutional and retail investors. When certain events such as geopolitical turmoil, natural disasters or market volatility are present, the market is considered to be a safe haven for investment funds around the world. Despite this information, federal regulators have put the marketplace under review with many calling for greater transparency and centralised clearing.
Liquidity is a highly scrutinised issue for the marketplace and though TABB’s research believes changes at Global Systemically Important Banks (G-SIBs) and capital adequacy requirements are the primary drivers of any liquidity shifts underway, the Joint Staff Report seemingly ignored the impact in their analysis of the unique liquidity circumstances on price movement on the day in question in October 2014.
TABB also details why the narrative that liquidity in the US Treasury market is waning and that banks are no longer providing liquidity is overly misleading. TABB finds investors continue to source most, if not all, of their liquidity directly from banks.
“The majority of the firms we have spoken with believe the US Treasury market is extraordinarily efficient and while the liquidity landscape is shifting, it has been doing so over the last decade,” says Perrotta. “Market structure is changing organically and while the US Treasury market has been bending to meet the needs of participants, it rarely breaks while adapting to these shifting sands. The mechanisms, protocols and relationships utilised to move capital throughout the system work in an orchestral harmony and as such we find little evidence to support the belief that this market requires any wholesale regulatory or structural changes.”

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