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Aguilar Calls for Treasury Market Regulatory Overhaul

SEC Commissioner Luis Aguilar in a recent statement called for the SEC to spearhead an inter-agency review to reassess the regulatory framework for the Treasury markets. Aguilar’s comments came after a recent joint report issued by regulators, including the SEC, that examined the causes of significant volatility in Treasury markets on October 15, 2014. Aguilar notes the “transformative changes” that “have vastly reshaped the landscape of the Treasury market,” including the rise of high-frequency trading, and that the last comprehensive review of the Treasury market regulatory framework was in 1998.

Aguilar notes that the average daily trading volume of Treasuries dwarfs the U.S. equities markets at $530 billion versus $193 billion for the first quarter of 2015 and argues that Treasuries are “an essential building block of the U.S. economy—and, indeed, of the entire global financial system.” As a result, he charged the working group that issued the joint report to “consider how best to protect the integrity, liquidity, and efficiency of the Treasury market.”

Of particular concern, according to Aguilar is the liquidity of Treasury markets, because “[b]road, deep, and resilient liquidity in the secondary market ensures continuous price discovery, and gives investors comfort that they can quickly purchase or sell even sizeable amounts of Treasuries at minimal cost.” Aguilar cites reports that trading depth in the markets has fallen drastically.  According to one report, it was possible last year to trade $280 million in Treasuries without moving the market, while this year that figure is down to $80 million. Since a peak in 2006, reports suggest that daily volume relative to total market size has fallen 70 percent.

As a part of the comprehensive review, Aguilar offers a number of proposals for regulators:

  • The SEC should consider revising Regulations ATS and SCI to cover alternative trading systems that only trade treasuries, which are currently excluded.
  • Regulators should develop a consolidated audit trail, whereas currently trading data only resides with individual market participants.
  • Regulators should work with electronic trading platforms to implement circuit breakers and kill switches in the treasury market.
  • The SEC should consider enhancing oversight of treasury market participants as some active participants are not registered with the SEC.
  • Regulators should consider measures to enhance pre-trade transparency and implement post-trade transparency.