HOUSE FINANCIAL SERVICES COMMITTEE TASK FORCE ON MONETARY POLICY & TREASURY MARKET RESILIENCE
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On April 8, the House Financial Services Committee Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity held a hearing entitled, “U.S. Treasury Debt in the Monetary System.” Witnesses in the hearing were:
- Tom Wipf, Managing Director at UBS, serving as CEO of Credit Suisse US Entities
- Scott O’Malia, CEO, International Swaps & Derivatives Association (ISDA)
- Dr. Kristin Forbes, Jerome and Dorothy Lemelson Professor of International Economics and Management, MIT – Sloan School of Management
- Nellie Liang, Senior Fellow, Economic Studies, Brookings Institution.
Key Takeaways
The following is a summary of the main topics explored in the hearing, with further details in the Discussion section below.
- Task Force Chairman Lucas (R-OK) warned that the rapid growth of national debt exceeding $35 trillion combined with regulatory constraints like the Supplemental Leverage Ratio (SLR) is impairing dealer intermediation and threatening market liquidity. He called for the permanent exclusion of Treasuries from both the SLR and the Enhanced SLR (ESLR), arguing that near riskless assets should not be treated as balance sheet burdens. Task Force Chairman Lucas and Committee Chairman Hill (R-AR) questioned whether the Fed’s $4 trillion balance sheet might distort pricing and impair market functioning.
- Chairman Lucas cautioned that the Fed’s involvement may distort pricing and liquidity, emphasizing that monetary policy must not come at the expense of Treasury market resilience. Forbes warned that shrinking the balance sheet too quickly could introduce stress, while noting that maintaining an outsized balance sheet could also crowd out market participants. Wipf supported the Securities and Exchange Commission’s (SEC) central clearing mandate issued in December 2023, stating that it will enhance liquidity and resilience, but noted the importance of careful implementation to avoid market disruption.
- O’Malia emphasized that central clearing must be supported by revisions to capital and margin requirements, specifically the Global Systemically Important Bank (GSIB) surcharge and the SLR. Liang raised that multilateral netting through central clearing can improve risk management and increase intermediation capacity, but acknowledged that operational, accounting, and regulatory challenges remain unresolved. They agreed that further reforms must be coordinated and targeted to strengthen market functioning, especially given the scale of projected Treasury issuance and evolving investor behavior.
- Representative Flood (R-NE) highlighted China’s role as the second-largest foreign holder of U.S. Treasury securities, noting that as of January 2025, China held $760 billion of outstanding U.S. debt. He raised concerns about the impact of a broader decoupling scenario with China on the Treasury market, citing continued high levels of U.S. debt issuance amid persistent deficits. He called for caution around China’s position in current trade disputes and retaliations, emphasizing the risk that China could reduce its Treasury holding and compound market risks. Forbes noted that while foreign ownership of U.S. Treasuries has declined from over fifty to thirty percent, the reliance on more leveraged domestic investors such as hedge funds increases systemic risk.
Opening Statements and Testimony
Task Force Chairman Frank Lucas(R-OK)
The willingness of global investors to hold Treasuries, attracted by their low risk and high liquidity, is unrivaled but the Treasury market has undergone fundamental changes. The volume of U.S. debt has been rapidly increasing; our national debt has skyrocketed to over $35 trillion. Supply chain constraints, global conflicts, and irresponsible fiscal policy have contributed to unparalleled and unsustainable growth of our national debt. Treasury must market this debt to investors to meet spending obligations. With more than $28 trillion outstanding, the Treasury market has doubled in the last decade alone. The last decade has brought significant changes in technology and regulation, impacting the capacity of dealers to provide market liquidity in periods of stress. This was seen in March 2020, where dramatic volatility in the Treasury market required the Fed to step in to calm markets. The Treasury market is an essential tool for the Fed’s monetary policy goals, with the Fed holding more than $4 trillion dollars of Treasuries on its balance sheet; the largest single holder of Treasury debt. The composition of the Fed’s balance sheet has a profound impact on market conditions and economic stability.
Task Force Ranking Member Juan Vargas (D-CA)
The President’s economic policies are making Americans feel less confident about the economic future, with the Consumer Confidence Index falling to its lowest level since January 2021. It is not just consumers who are feeling these effects; businesses are also struggling with the chaos and uncertainty. Chairman Powell recently cautioned that these tariffs are significantly larger than expected, which will likely lead to higher inflation and slower growth. The U.S. Treasury market is the bedrock of the global financial system, with investors trusting the stability and credit of the U.S. Recent administrative actions may jeopardize that trust, with foreign investors potentially losing interest in purchasing more Treasuries, as a recent Bloomberg article warned. We must focus on and always look for ways to improve efficiency, resilience, and overall functionality within the Treasury market. Central clearing is an area where we can strengthen the Treasury market and mitigate risk. The SEC’s effort to increase the number of Treasury market transactions that are centrally cleared is commendable, and it is encouraging to see market participants committed to a collaborative approach to reduce risk.
Committee Chairman French Hill (R-AR)
The Treasury market is the world’s largest and most liquid government bond market, with $28 trillion of Treasury securities outstanding. As the fundamental anchor of the dollar-based reserve currency system, the Treasury market offers investors the opportunity to purchase nearly risk-free assets, enabling the U.S. to use the proceeds for investments in national priorities. The global critical role of the Treasury market requires our attention. While the Treasury is a global safe-haven asset for many trading partners, the largest purchaser of U.S. debt is not a foreign nation but the Fed. The Fed is the single largest owner of U.S. debt, holding over $4 trillion in Treasuries through QE rounds. Increasing federal budget deficits and burdensome regulations raises concerns about the resilience of the Treasury market because one that fails to function effectively undermines our economic growth.
Tom Wipf, Managing Director at UBS, serving as CEO of Credit Suisse US Entities
The U.S. Treasury repo market plays a key role in transmitting U.S. monetary policy. Primary dealers, banks, and broker-dealers designated as counterparties of the Fed are the largest buyers of new Treasury debt and act as market makers or intermediaries in the secondary market. Treasury securities are widely held and actively traded by both public and private institutions, especially financial institutions. The original Basel III proposals, including the fundamental review of the trading book, would disincentivize banks from market-making in U.S. Treasuries. Revisions to the GSIB surcharge could inhibit liquidity in Treasury futures. The SEC finalized a rule in December 2023 requiring most market participants to centrally clear eligible cash and repo transactions. Over the past year, SIFMA worked to develop standardized documentation, policies, and procedures to facilitate the transition to mandated central clearing. SEC Chairman Uyeda extended the implementation date for the mandated central clearing of Treasury securities and repo to ensure a smooth transition and avoid disruption. The SEC could make certain technical fixes to the rule.
Scott O’Malia, CEO, International Swaps & Derivatives Association (ISDA)
The Basel III endgame and the GSIB surcharge must be revised to remove unnecessary and disproportionate taxes on clearing. Margining and capital treatment of client clearing exposures must be revised to reflect the actual risk in a portfolio. Policymakers, market infrastructure providers, and market participants must work together on operational, legal, and regulatory issues regarding the clearing mandate’s implementation. Concerns about bank intermediation capacity in 2020 led the Fed to temporarily exclude U.S. Treasuries from the SLR calculation. Since the SLR serves as a non-risk-sensitive constraint on banks, it can hinder their ability to act as intermediaries during times of stress. ISDA supports this exemption being made permanent. Although the SLR is not part of the Basel III endgame package, it requires separate consultation to amend.The Basel III endgame rules and the surcharge on GSIBs are inappropriately calibrated. The proposed Basel rules and the GSIB surcharge would increase capital on U.S. Treasury client clearing businesses by over eighty percent. This punitive tax contradicts the objective of promoting central clearing and would jeopardize the economic viability of client clearing precisely when it is needed most. Efficient clearing of U.S. Treasuries requires margin posted to reflect the actual risk of client exposures across their portfolios, and capital requirements should also reflect this risk. Margin offsets across Treasury securities and futures transactions need to extend to client positions as well as clearing members, ensuring that risk offsets are recognized when banks determine exposure under U.S. capital frameworks. Without this recognition, bank capital requirements will overstate portfolio risk. We support Treasury clearing and recognize the critical need for markets to implement the clearing mandates safely and efficiently. The Committee’s continued review of implementation timelines will support this. ISDA is collaborating to develop appropriate client documentation and clearinghouse offerings, which still require regulatory approvals and counterparty agreement to new terms. We must ensure that capital and margin rules support Treasury market liquidity, reflect risk accurately, and facilitate clearing. Policymakers must address necessary corrections in bank capital regulations to ensure effective implementation of the clearing mandate. Legal and operational solutions are already underway, but more work remains to ensure the market continues to function smoothly and effectively.
Dr. Kristin Forbes, International Economics & Management, MIT
Some underlying fragilities have worsened since 2020: 1) the increased scale of Treasury issuance, 2) the limited ability of broker-dealers to intermediate between buyers and sellers, 3) changes in who is purchasing U.S. government debt and how, and 4) shifts in geopolitical alliances and increasing restrictions on trade and financial flows could reduce the demand for U.S. dollars and Treasuries over time. The U.S. budget deficit is forecast to approach $2 trillion this year. Under current law, this must be financed with new debt issuance, and a growing share of existing debt is in short-term Treasury bills, which need to be rolled over annually. This combination makes the Treasury market more vulnerable to shocks, even short-lived ones. The capacity of middlemen has not kept pace with the increasing size of the Treasury market and could lead to liquidity issues, less efficient pricing, and volatility in borrowing costs. Foreign purchasers are buying less, while U.S. institutions, such as hedge funds and asset managers, are purchasing more. These U.S. institutions are not simply holding Treasuries but are using repurchase agreements, futures, derivatives, and hedging strategies, combined with high leverage. Highly leveraged investors are more prone to fire sales that could trigger market dysfunction. Monetary policy also faces additional challenges: disruptions to trade and supply chains will increase both inflation and unemployment. Central bank independence is under pressure worldwide. While an independent central bank cannot avoid painful economic adjustments, it can stabilize inflation more quickly, limit price increases, and reduce job losses. Periods of transition create opportunities but can also exacerbate underlying risks and vulnerabilities. The risks to the Treasury market are particularly large today, given the sharp increase in debt and other developments.
Nellie Liang, Senior Fellow, Economic Studies, Brookings Institution
Electronic trading has increased, with principal trading firms now representing most of the trading in electronic dealer markets, while traditional securities dealers have reduced their market-making due to strengthened capital standards and risk management practices.The dysfunction in the Treasury market at the onset of the COVID-19 pandemic in March 2020 illustrates the risks. Without liquidity, Treasury prices fell, and interest rates rose sharply which was an unusual move, as investors typically flee to safe-haven Treasuries in such situations. Market functioning was restored only after the Fed began purchasing large amounts of Treasury securities to provide liquidity and ensure effective transmission of monetary policy. This highlights the importance of regulatory reforms to strengthen Treasury market resilience. Central clearing, which is used for other assets, can reduce risk by standardizing risk management and increase intermediation capacity through multilateral netting. There are operational, accounting, and regulatory issues that still need resolution, and industry groups are actively engaged. Although deadlines were extended by a year, further changes should be considered to the SLR, such as excluding central bank reserves from the SLR calculation while ensuring no reduction in total bank capital. To reduce surges in selling during stress periods, open-end bond funds should be required to reduce significant liquidity mismatches that force Treasury sales. Supervisors should also prevent excessive hedge fund leverage in trades such as futures basis trades to avoid rapid or disorderly unwanted positions.
Discussion
Representative Lucas (R-OK): What are the outstanding questions in the swaps market clearing rule that the incoming SEC Chair should address immediately to ensure the industry can fully implement the rule ahead of next year’s deadlines? O’Malia:The SEC is highly focused on this rule and should be able to address it in a reasonable and timely manner. We recommend a few changes to SEC rules, particularly regarding inter-affiliate and accounting rules, to ensure the effectiveness of these measures. The SEC must partner with us to approve the various rulebooks of the DTCC, CME, and ICE, which are the competing clearinghouses. The goal is to maintain deep, liquid markets and ensure cost-effective clearing, which includes cross-product netting solutions and necessary operational changes. On the industry side, we need to collaborate to ensure proper implementation timetables for operational changes, the integration of clearing and custody, and the legal agreements that support the various clearing regimes being developed.
Representative Lucas (R-OK): How important is it for all relevant agencies and regulators to work together? Would it have been helpful for the prudential regulators to collaborate with the CFTC and the SEC before proposing a rule like Basel III? O’Malia: The left hand did not quite know what the right hand was doing on Basel III endgame. The clearing mandate, which is a safer form of management for the Treasury market, came through in the meantime, but the endgame proposal has significantly higher charges for client clearing of up to eighty percent. Those two policies are not aligned at all. We think the SLR, which is not part of the endgame, should be included to ensure we have deep, liquid markets. ISDA and SIFMA identified elements that were “gold plated” and should be revisited to a risk metric with a more appropriate level, which we can provide to this task force.
Representative Vargas (D-CA): How important is the added implementation time for mandated central clearing, and what do you think about it being delayed further? Wipf: The ability to transmit risk between buyers and sellers during periods of market volatility is critically important. For buyers of treasuries seeking a risk-free asset, it is essential that they receive those securities as promised. We emphasize the importance of robust infrastructure and central clearing because reducing friction in periods of high volatility allows the market to function smoothly. The full faith and credit of the U.S. government remains permanent, providing confidence in these transactions.
Representative Hill (R-AR): What happens when the primary dealers run out of capacity to absorb U.S. treasury debt? Wipf: This goes back to the discussion about the SLR and the ability for the primary dealers to intermediate large positions during both normal and stressful times, ensuring that the infrastructure around the market, post-trade, is sufficient to handle greater and greater volumes. The same holds true here. Regardless of the size, we must ensure that the infrastructure around the U.S. Treasury market remains robust. Central clearing is one of the answers. Reducing the supplementary leverage ratio by any degree will allow those bank intermediaries and primary dealers to provide the ability to intermediate during times of stress, preventing some of those outcomes and at least limiting volatility to some degree by being able to step in and intermediate without running into large capital requirements.
Representative Hill (R-AR): Is maintaining a large Fed balance sheet impeding market functioning, as some argue has happened in Japan? What are the risks if it remains an outsized percentage of GDP, especially given the uncertainty around how many excess reserves are needed? What should that number be? Forbes: Definitely not. I am sure the number changes based on the market environment, which has changed quite a bit. Shrinking the balance sheet is a goal. If you have too large a balance sheet, it can impede market functioning in and of itself if the government owns too much of the market. It is not efficient. That is why Japan had to shift from buying government bonds to buying corporate bonds and equities because it was impeding the market. It is good to get out, but it is good to get out slowly. If QT and reducing the balance sheet is done too quickly, it could cause stresses to emerge. The goal is to reduce it slowly enough to avoid those stresses.