Conference Presentation, Panel
Lessons Learned: Market Volatility and Opportunities Ahead
Milken InstituteMichael Piwowar, Stephen Berger, Jeffrey T. Dinwoodie, Darrell Duffie, Barbara Novick, Mike Divivar
- The Treasury market is projected to grow beyond its current $20 trillion size, with structural changes needed to manage liquidity surges that are expected to become smaller yet increasingly likely to overwhelm the existing framework, potentially necessitating more frequent Federal Reserve intervention.
- Participants warn that a lack of central clearing in the Treasury market could force the Fed to act as a lender of last resort during tail events, while the perception of such rescue capabilities creates a moral hazard encouraging excessive risk-taking.
- Proposed SEC regulations for government securities platforms aim to impose Reg ATS requirements for public conflict-of-interest disclosures and confidential data protection, alongside Systems and Compliance Integrity (SCI) standards for systems integrity, business continuity, and annual operational reviews.
- Reforms in over-the-counter derivatives, including central clearing and straight-through processing, have enhanced market safety and efficiency, though these improvements have not yet been fully battle-tested under stress conditions.
- Recommendations include introducing central clearing to the U.S. Treasury market to optimize bank balance sheet usage and enable "all-to-all" trading, alongside establishing a post-trade consolidated tape for bond and derivatives markets in Europe to replicate U.S. corporate bond transparency.
- Regulatory mandates require a board meeting when money market fund liquidity drops below 30%, creating uncertainty regarding investor access to these buffers, while swing pricing remains legal but non-operational in the U.S. due to the need for a simultaneous ecosystem-wide regulatory shift.
- The Treasury reporting regime's Trace data, collected since July 2017, has not yet been disseminated to the investing public; full disclosure is viewed as necessary for market resilience and requires further action.
- Equity markets demonstrated stability during March's volatility through technological investment and automation, contrasting with manual, voice-based markets that are predicted to challenge future stability.
- Cyber security issues are identified as the primary risk to financial institutions and the public sector, while the U.S. housing finance system is flagged for serious reform following reviews by the FHFA and FSOC.
- An official quantitative study is deemed necessary to assess whether current market structures can meet growing liquidity demands driven by expanding bond market sizes, with a call for future policy changes to be data-driven rather than speculative.
- The rise of retail investing is recognized as a positive development for market democratization but raises concerns regarding sales practices, payment for order flow, and market incentives that require close regulatory scrutiny.