Ellen Correia Golay on the Keys to Improving Treasury Market Resiliency

Ellen Correia Golay is an advisor in the Markets Group at the Federal Reserve Bank of New York, focusing on the US Treasury market. She also helped lead an interagency working group report and a recent conference on the Treasury market. Ellen joins David on Macro Musings to talk about these and other Treasury-related developments. Ellen and David also discuss her career journey and role at the New York Fed, the current and future challenges in the Treasury Market, necessary areas for reform, and more.

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DISCLAIMER: Ellen Correia Golay’s views are her own, and they do not represent those of the Federal Reserve Bank of New York or the Federal Reserve System.

David Beckworth: Ellen, welcome to the program.

Ellen Correia Golay: Thanks for having me, David. I'm excited to be here.

Beckworth: It's great to have you on. Now, when I first met you, if I recall correctly, I was visiting a Money Marketeers event in New York City.

Golay: That's right.

Beckworth: I believe you were the moderator of that event. Correct?

Golay: I was. It was Mark Cabana and Bill Nelson if I remember correctly. Yes, it was a good event. Money Marketeers is always a fun time for folks to get together and debate about some of the plumbing issues. So, it's always a lot of fun to be involved with those.

Beckworth: Yes, it was great to be a part of it. I was just visiting New York City, and I know Bill Nelson. He's been on the show a few times, and I know Bill is a big champion of the scarce reserve corridor operating system, and Mark took the other side of that. [It was a] very pleasant discussion. You moderated. I do remember one funny moment from that conversation, though, where Bill was making a case— it was so simple to forecast reserve demand back in the good old days, and you were like, "Actually, I was the one forecasting. It wasn't so simple," if I remember correctly.

Golay: Yes. No, that's true. So, my first job when I joined the New York Fed— I was a rotational analyst, which is like a junior analyst in the Markets Group that switches jobs every year. My first job was to forecast the Treasury General Account, and that's a major driver behind the supply of reserves, because as the Treasury General Account increases, reserves decrease. For a 22-year-old, it was a lot of pressure. And when I did make a mistake, it did move the effective fed funds rate, and I would get a talking to by my colleagues on the money markets desk who were trying to hit the target rate. So, I don't recall it being that easy, personally.

Beckworth: Well, that's interesting. You can go back to some of the early federal funds rate data, and you can see a little squiggle, and you can say, "That was me."

Golay: But we didn't want to see any squiggles because of me.

Beckworth: Right.

Golay: Ideally, no squiggles.

Beckworth: Okay. Ideally, no squiggles. Fair enough. No, it was great meeting you there, and then I've followed you since, and you had this really interesting conference. You had this interagency working group report on the Treasury market, resiliency— what have we done? What can we continue to do to make it better? But let's spend a little bit more time on your work at the Federal Reserve, because we're touching on that. Tell us about your journey. If I understand correctly, you've been there almost 19 years, at the New York Fed.

Ellen’s Career Journey and Role at the New York Fed

Golay: That's right, yes, basically my whole career. But first, let me say that the views I am expressing today are my own, and not those of the Federal Reserve Bank of New York or the Federal Reserve System. But, as I was mentioning, I went to the New York Fed straight out of undergrad and joined a rotational program in the Markets Group where I switched jobs each year— my first job forecasting the Treasury General Account, and that was a really great experience. It taught me a lot about how the Markets Group works, how financial markets work, [and] how the Fed implements monetary policy, because the Markets Group at the New York Fed is the arm of the Federal Reserve System that actually implements monetary policy.

Golay: So, I learned a lot through all of that. From there, I left for grad school for a couple of years, went and got my MBA at MIT Sloan. Then, I came back in January 2009 as part of a hiring surge to bolster the desk's ranks as we were in the global financial crisis. So, that was a great time to come back. It was super fascinating. There was a ton of work to be done. I initially joined the money markets team, and so I focused on money market issues, and I also ran the Survey of Primary Dealers for several years, which is a survey of dealer economists, that gets their views on the economy and Fed policy.

Golay: Then, from there, I moved to the mortgage team for several years. Then, from the mortgage team, I moved to the Treasury markets team in 2015. So, I like to joke that after doing a rotational program out of undergrad, out of business school, I made my own little rotational program, but I stopped rotating when I got to Treasury markets, and I've been there since 2015, which has been great.

Beckworth: So, you're the in-house Treasury expert of sorts. In fact, you've led this conference, this report. Tell us a little bit more about the work you do in Treasury markets, because the Fed is so intricately tied to the Treasury markets. So, do you lead a team of experts on the Treasury market, and what exactly are they doing?

Golay: Sure. When I moved over to the Treasury markets area in 2015, it was to lead a team that analyzed the Treasury market and reported to policymakers on what was happening in the Treasury market, and developments there, and our monetary policy there. Then, the team also executes monetary policy in the Treasury market. That team worked closely on monitoring those issues and was responsible for executing the large-scale purchases that occurred from 2020 to 2022. So, I oversaw that group doing that COVID intervention, which was pretty interesting.

Golay: From there, in 2022, once those purchases wrapped up, I moved into an advisor role. In the advisor role, I oversee the New York Fed's work on Treasury market resilience issues, which is basically focusing on trying to sustain and improve the functioning of the Treasury market. So, as part of that, I'm part of the Interagency Working Group for Treasury Market Surveillance, which is a cross-agency group that works together on Treasury market issues. I oversee the Treasury Markets Practices Group, which is a group sponsored by the New York Fed that promotes best practices in the Treasury, agency debt, and agency MBS markets. Then, there's my team that I used to run. They're all still there and [are] supporting this work with their analysis in the Treasury market and executing monetary policy in the Treasury market.

Beckworth: Okay. So, you were on the team that actually bought and sold Treasuries as a part of monetary policy. Now, you're on the advising, the thought, the “let's make good policy, let's think about the issues in the Treasury market [team].”

Golay: Exactly.

Beckworth: So, you've done it all, it sounds like, on Treasury issues. So, you probably have a hard time escaping the Treasury market. When you go to sleep at night, you dream about the Treasury market.

Golay: I used to joke that one of our operations, the Treasury rollover operation, was my third child. So, yes, it's a very big part of my life, for sure.

Beckworth: So, when you go on vacations, is it hard not to check your phone and check markets?

Golay: I try not to. I think it's good for my family and myself for me to be engaged with them, but it is always something that you're watching on the side, for sure.

Beckworth: Yes. The whole world watches the 10-year Treasury yield, so I must imagine that you [watch it] even more so. Just a few more questions about the Fed's interaction with the Treasury market, since you've been on the front line [and] you're now a thought leader at the New York Fed on this issue. So, you mentioned that you were involved, and that this team was involved in the QE, or the big large-scale asset purchases.

Golay: Sure.

Beckworth: So, I imagine that same team is also responsible for the QT and the unwinding.

Golay: That's right, yes.

Beckworth: Also, when we think about the Fed's balance sheet— so, we can imagine a world where, let's say that we get to the final destination size of the Fed's balance sheet, whatever it may be. Even before 2008, there was always some size to the Fed's balance sheet, some permanent level, that was slowly growing over time. Part of it, I guess— what I'm wondering about is, you would have to deal with, in your role, to keep that balance sheet permanent— because those Treasury securities eventually will all roll off, right, even if you do nothing?

Golay: Yes.

Beckworth: Even in the absence of QE and QT, the Fed is having to buy and replenish securities as they roll off, just to keep the steady course, correct?

Golay: Yes. So, there's two aspects of that. One is, what the Fed does is, when it wants to reinvest maturing Treasury securities, what it actually does is that it performs a Treasury rollover, where it exchanges its maturing Treasury securities for new Treasuries at auction. And so, in that process, the Fed, if it's rolling over all of its maturities, could keep the portfolio completely flat. What it's doing now is basically just not rolling over part of those maturities and exchanging only a part for new Treasuries. So, that's one way to maintain the size of the portfolio. However, when you do get to a steady state, what happens is that currency in circulation is always growing.

Golay: People always need cash dollars for gifts, and other countries' US dollars are often used in cash, and so there's always growth in currency in circulation. So, even if you're in a steady state where the committee were to say, "Okay, this is it, we hit perfect ample reserves, stop declining the Treasury portfolio," you would at that point say, "Okay, we do need to grow Treasuries by some amount each month or each year to offset the growth in currency in circulation," because as currency increases, reserves decline. So, we were doing that starting in August 2019.

Golay: We had started buying Treasuries to offset that growth in currency in circulation. Then, after the repo market pressures in September 2019, we then started buying a lot of bills to try and add more reserves to the system, to try and increase the reserves. Then, of course, we moved into the large-scale purchases in March of 2020. So, even in a steady state, there's this exchange of maturing Treasuries for new Treasuries, and there's purchases of Treasuries to offset the growth in currency in circulation.

Beckworth: That makes complete sense. As the size of the economy grows, you've got to grow the stock of money because there's money demand, and then also the stock of the debt on your balance sheet. Then, you mentioned 2019. So, my understanding is that, initially, a lot of that was repo-related. And so, you said bills before you guys later went to true large-scale asset purchases.

Golay: That's right.

Beckworth: Does your team do both— the repo intervention as well as the QE-type purchases?

Golay: So, my team is responsible for the outright purchases and sales, if there were ever any. So, the money markets team— they're the ones who came in, in 2019, with repos, in light of those repo strains. Then, they were the ones who managed the standing repo facility, the overnight RRP. Then, what we did was launch bill purchases to try and rebuild some of the reserves so that the reserve scarcity that we had found ourselves in, in September 2019, could be offset. The repos were offsetting that reserve scarcity on a temporary basis, but the idea is that our bill purchases would offset that reserve scarcity on a permanent basis. Then, eventually, the repos that were being done could be wound down— Still offer repos, but not doing as many.

Beckworth: Oh, okay. That's interesting. So, you have a money market team that does the standing repo facility, the repo interventions, the overnight reverse repo, and then [there is] your group, which is more the permanent or the outright asset purchases.

Golay: Exactly.

Beckworth: Okay. Then, obviously, you guys are talking to each other.

Golay: We are.

Beckworth: And someone like you, in your role, is probably making sure that the whole organization is on the same page on Treasury market issues.

Golay: Trying. Yes.

Beckworth: Trying, alright. So, do you then help write the annual report? Because at the end of the year, you guys have the big SOMA or balance sheet report, which looks at your balance sheet, looks at the market value, par value, [and] has projections [for] where it's going to go. Is that part of what you do, too?

Golay: There's usually someone in the Markets Group who's the lead author who organizes that. I've never had that role, but I definitely contribute to the report. I think, two years ago, there was a box on Treasury market resilience issues. So, that box— I helped with the text there and reviewed it and that sort of thing. Then, of course, just reviewing the general narrative in the annual report and making sure it's consistent with our understanding of what happened that year and that it's hitting the points on policy implementation that we think make sense. The annual report is a massive group effort in the Markets Group. Like I said, there's a lead author, but that person, God bless them, is always talking to, I don't know, probably 30-40 different people, at least, to get input and feedback to get that to its final product.

Beckworth: So, we've been talking about work on the Treasury that your office, the New York Fed, would do in light of, say, a crisis that hits the economy or the financial system, or just how you would do your day-to-day operations. Sometimes there's external things, though, that you come up against, and I'd like to hear your observation about it. So, for example, when you look at the Treasury Department, when they're making their decisions on public debt management, what the average maturity is going to be, you must be sitting there in your office thinking, "Okay, they're doing that. That means this for me."

Golay: 100%. We have a good working relationship with the Office of Debt Management at Treasury, which— they're the ones who make the debt management decisions, and it's definitely something that we follow closely. I usually attend the Treasury Borrowing Advisory Committee meetings that occur each quarter as part of that process. So, it's definitely very interesting for us to observe because, of course, their decisions dictate the Treasury issuance that will occur. And so, that very much affects us as folks executing in the Treasury market and monitoring the Treasury market.

Golay: So, yes, that's something that we cover closely, and it is something that, at times, can affect financial markets. Usually, it's more of a longer-term thing, but there are times, like last fall in 2023, where there's more market focus on the announcements from the quarterly refunding. And so, then, at that time, we'll definitely be watching what's happening, trying to understand how market participants are reacting, and communicating that up to policymakers so that they understand what's happening in the Treasury market.

Beckworth: Oh, I was going to ask you about TBAC, but you already answered my question, so, you're engaged with that as well?

Golay: Yes.

Beckworth: We'll come back to them a little bit later. Alright, so, the last external crisis I have in mind that you guys have to endure from time to time— whenever we come to these debt crisis moments where Congress has to re-sign legislation to issue new debt, and you're sitting there at the New York Fed, [and] you're probably on pins and needles waiting for this thing to pass, getting a little antsy. How do you feel during these times?

Golay: It's always a challenging time, I think, for anybody in the Treasury market during the debt limit impasses as you're watching price action in the bill curve often, where you're seeing the bills that are maturing around the time that the market expects that Treasury may run out of money. You see those start pricing differently than the other bills around them, and you need to look at the liquidity and market functioning of the bill market and see how that's working. It's also something where market participants generally think about their contingency plans.

Golay: The Treasury Market Practices Group, which I oversee— they have a white paper about considerations around such a situation and what kind of things market participants should think about in terms of their contingency planning so that that's something that the TMPG will look at, at those times, and something that we'll look at and see how it's held up from the impasse before. But it's definitely a very challenging time. Many folks across the official sector are getting lots of questions, but at the end of the day, it's a congressional issue. And so, we're, like everyone else, just waiting for the debt limit to be raised because, as you know, the debt limit— it's funding expenses that have already been made by Congress, approved by the budget. So, it's kind of a check-in-the-box thing, but the problem is, when the box isn't checked, it can become challenging for us, and for the market generally.

Beckworth: Okay, so, we've been talking about the Treasury market, [so] let's maybe just lay it out. What is the Treasury market? I know that, for some listeners, this will be obvious, but just in your view, if someone asks you, "What is the Treasury market?" what do you say?

Breaking Down the Treasury Market

Golay: That's a good question. So, if you go really basic— so, what is a Treasury security? A Treasury security— and this is exactly what we were just talking about, the way that the government borrows money to fund its expenses; things like infrastructure, military, Social Security— all of the things government spends its money on. That's just an instrument where the government issues a security and someone pays them the principal, and the government pays them interest over time and the principal back at the maturity date. So, the Treasury market is basically just a place where those securities can be traded back and forth.

Golay: There's two main segments of the Treasury market. There's the cash Treasury market, and that's where Treasuries are bought and sold outright. That's probably what most people think of when they think of the classic Treasury market, and that market is extremely diverse. There's a lot of electronic trading in newly issued Treasury securities. Then, there's a lot of over-the-counter trading in less newly issued securities, and you've got investor bases from principal trading firms, hedge funds, all the way to sovereign wealth funds, pensions. It's like the whole gamut of investors are active in the cash market.

Golay: The other segment of the Treasury market that's very important as well is the repurchase market, the repo market. In the repo market, what happens is, people can use Treasuries to effectively get a collateralized loan. So, they sell a Treasury to someone with the agreement to repurchase it later. That's why it's called a repurchase agreement or a repo. In a repo, one side is borrowing cash and the other side is earning some extra return on their cash through the repo. That takes the Treasury market from a place where you just buy and sell securities to a place [where] you can obtain leverage for those securities and transform them into lots of different investments. And so, that really increases the complexity of the Treasury market.

Beckworth: So, you mentioned repos, and something related to that, I guess, is the inter-dealer market. What would that fall under? Would that fall under the cash market? Is it separate from the cash market?

Golay: So, there's an inter-dealer market in the cash market and in the repo market, and both of those are just dealers trading with each other. Usually, in that case, it's dealers cleaning up whatever positions they have with other dealers while they intermediate for their clients.

Beckworth: Is that where all of the high-frequency trading takes place?

Golay: So, the high-frequency trading takes place on inter-dealer brokers, so, IDBs. Those are like electronic exchanges, central limit order books, where you can trade very quickly and in very large size. And so, that's been a big part of the transformation with the cash market over the past 20 years or so, has been the increase of principal trading firms that mostly use high-frequency trading over those inter-dealer brokers.

Beckworth: I was going to get to this in a minute, but we're here. Let's talk about it. Some of the challenges in the Treasury market, and one that I've heard, is that these principal trading firms, high-frequency trading, has stepped in to fill the void that the other traditional primary dealers were filling in the past, but because of regulations, they don't have the capacity to do it anymore. So, the Treasury market is more reliant upon this, but you're saying that maybe it predates Dodd-Frank and the financial crisis?

Current and Future Challenges in the Treasury Market

Golay: I've done too much investigating into this, and my understanding is that the inter-dealer brokers opened up to trading by non-dealers around 2004. So, that's when, basically, the principal trading firms could have come on. But I think the point where they became extremely significant in the electronic market was in 2004. That was just when the door opened. When we first really learned about this was after the flash rally in October 2014. So, in that case, there was a major price move in Treasury markets that was really impossible to explain by any fundamental factors on the day.

Golay: So, what happened was the various organizations in the Inter-Agency Working Group for Treasury Market Surveillance, the IAWG, came together and got a bunch of data and did a ton of research to try and figure out what happened, and the finding was that the principal trading firms had become extremely active on the electronic trading platforms and that they were a major driver behind the price move that day. And I would say, at that point in time, it was really new information to many, that they had become such a dominant factor in the cash Treasury market.

Beckworth: So, is it fair to say that they're filling a void created by the constraint on primary dealer balance sheets?

Golay: It’s definitely fair to say that primary dealer balance sheets have not kept pace with the growth in the Treasury market, and, as a result, the principal trading firms have taken more of the cash electronic trading. To be clear, the cash electronic trading— It's very high volume, highly active, but still a subset of all of the cash trading that happens every day. So, there's still a lot of trading that happens that is not done by principal trading firms. Dealer balance sheets are definitely more constrained than they were pre-global financial crisis, and it's definitely the case that they are not as active in the Treasury market, by share, as they were pre-global financial crisis. That's for sure, yes.

Beckworth: That was intentional, right? The regulations that came out of that, Dodd-Frank and the new Basel, was to make sure that they don't make mistakes again that helped contribute to the crisis. And I guess one could argue, maybe, that it's not so much the constrained balance sheets as it is the US government just running big, big deficits year after year. What is it? Is it the deficits, or is it the constrained capacity of the primary dealer balance sheets?

Golay: I think it's both. I think that if you graph primary dealer balance sheets and Treasuries outstanding, and you look at how they're interrelated, you find that the dealer balance sheets aren't keeping up. So, that's partly that the dealers are dedicating less to Treasury market making than maybe they might have before the global financial crisis. But it's also that the Treasury market is just growing. It's like $25 trillion, $26 trillion now, and the Congressional Budget Office forecasts that it's supposed to grow by another $20 trillion over the next 10 years. So, it's just a very large market that's just increasing massively. And so, while the principal trading firms have taken some of this share, there's also just more Treasury trading to go around for everyone, and that's part of what they've done as well.

Beckworth: And that's what you're working on, how to make the Treasury market resilient to this expected growth and given the constraints that are in the market.

Golay: Yes.

Beckworth: One last question about the market structure and [then] we'll move on, but the futures market. We heard a lot about that during the Dash for Cash in 2020. Tell us about that segment.

Golay: So, there's a Treasury futures market where you can trade futures on Treasury securities. That market is also entirely electronic, and it's also centrally cleared. So, that market actually held up quite well in 2020 during the Dash for Cash, relative to the most recently issued Treasury securities or the older Treasury securities. The crux of the strains in 2020 were in those older Treasury securities, because those are not electronically traded.

Golay: They really struggled because they were being sold in very large size and the dealer balance sheets were at capacity and they were not able to take them. Whereas the futures market actually held up fairly well, which, I think, is likely due to the fact that it's electronic, centrally cleared, and, also, I think part of what was happening was that there were a lot of investors who really, truly just wanted to convert their physical Treasury securities to cash. And so, that was a real focus of what was happening outside of what was happening in the futures market.

Beckworth: So, Ellen, we've touched on these issues— the constrained dealer balance sheets, the growth of debt. [Are there] other issues that you're worried about in the Treasury market?

Golay: I think a main focus of the official sector has been the resiliency of the Treasury market, really in light of the strains we've been talking about; the repo market strains in 2019, the Dash For Cash in 2020, [and] the flash rally in 2014. And so, starting in 2021, the IAWG came together and put together a plan for analysis and policymaking to try and improve the resiliency of the Treasury market. I should probably just stop for a minute and explain which agencies and organizations are in the IAWG. So, the IAWG was founded in 1992 following the Salomon Brothers trading scandal in the Treasury market.

Golay: It was determined, at that point, that more cross-agency coordination in the Treasury market would be beneficial. And so, the IAWG today consists of staff from the US Treasury, the CFTC, the SEC, the Board of Governors at the Federal Reserve, and us at the New York Fed. That group has been working together for 30 years on various issues, but following the Dash For Cash in 2020, the group came back together to think about, how can we improve the resilience of the Treasury market so that these bouts of fragility and illiquidity become more rare? So, the IAWG has, over the last four years, written a series of staff progress reports to talk about the various initiatives that the organizations have taken on and the progress on those.

Golay: We have— At the New York Fed, we posted a conference on the US Treasury market for the past 10 years that brings together the official sector, academia, [and] the private sector, to talk about these issues and try and flesh out some of the challenges. I think that there's been a lot of good work and progress out of all of that. Some of the early progress after the strains in 2020— the Federal Reserve introduced the standing repo facility and the FIMA repo facility. Both of those are intended to service backstops to help facilitate effective monetary policy implementation, but they also would help in these Dash for Cash type situations where folks need to turn their Treasury holdings into cash easily.

Golay: They both would help in those situations, and you can see, in 2020, that the FIMA holdings— the FIMA is Foreign and International Monetary Authority holdings. Those are holdings by foreign official accounts at the New York Fed. And you can see, on the Federal Reserve's balance sheet, that those holdings went down pretty notably in 2020. If something like the FIMA repo was there at that time, that could have maybe prevented some of those sales and perhaps have folks repo instead. So, that was an initial progress by one of the IAWG organizations. More recently, the main focus, I would say, right now, in the Treasury market is the SEC's rule on the expansion of central clearing in the Treasury market. The SEC finalized that rule last December. Basically, that rule is going to result in an estimated $4 trillion of Treasury trades each day to transition into central clearing. So, that's a pretty massive change for the structure of the Treasury market, and that's definitely a big focus of the Treasury market right now.

Beckworth: Are you really hopeful for that transformation that's going to reduce some of the pressures on the Treasury market?

Golay: I am. I think it's the sort of thing that, on a day-to-day basis, will improve risk management standards and will provide some efficiency for the market. But then, in the tail events, I think that is where the central clearing will really show its benefits, where just the settlement flows, the waits you'll see will be much smaller than they would be otherwise.

Beckworth: So, I often hear this talked about in terms of private participants in the marketplace, but the New York Fed is heavily involved in the Treasury market. Would central clearing also affect the New York Fed [and] how it engages the Treasury market?

How Would Central Clearing Impact the Fed and the Treasury Market?

Golay: So, part of the rule that the SEC laid out was that central banks are exempt from the rule. So, the New York Fed and other central banks are not required to centrally clear. It's definitely a topic of market discussion, but it's not something that the FOMC has opined on recently.

Beckworth: Well, I'll just mention that I heard Darrell Duffie give a talk where he recommended that the standing repo facility use increased central clearing [and] use that as a tool to effectively get more counterparties to the standing repo facility. [It] wouldn't have to directly deal with them, but through central clearing, it could do that. So, his thing is that we could effectively open up the standing repo facility to more counterparties without really increasing the Fed's footprint via central clearing, and I think that Lorie Logan said something similar a few weeks back, but she's a policymaker. We'll leave it with her and the rest of the FOMC to determine whether that actually happens.

Golay: Yes. 

Beckworth: So, the SEC's adoption of the central clearing rule, and as you mentioned, that's going to be unfolded over time, right? 2026 is the terminal date?

Golay: Yes, end-2025 is when the cash clearing needs to go into effect. Then, mid-2026 is the repo clearing. The repo clearing is the bigger chunk of the rule, because the cash trades that are required to clear— they're the trades over inter-dealer brokers that are not currently cleared. So, basically, those are mostly trades by principal trading firms over inter-dealer brokers. They're important, but the dollar value of those is much less than the amount of repo trades that will need to move into clearing.

Beckworth: Now, in your report, the Interagency Working Report, you listed a number of other items. So, let me just throw the next one out. The Treasury Department launched a buyback program to bolster Treasury market liquidity, as well as to enhance Treasury's own cash management capabilities. Tell us about that development.

Explaining the Treasury Department Buyback Program

Golay: Sure. Treasury launched the buyback program, and the buyback program— I guess I forgot to mention about all of the things my team does. They also execute the buyback program on behalf of Treasury as fiscal agent. So, they're very busy. So, Treasury introduced the buyback program, [and] the buyback program has two components. It has a liquidity support component and a cash management component. The liquidity support operations are intended to provide a backstop liquidity offering to the market in older Treasury securities, so, not the most recently issued, but some of the older Treasury securities.

Golay: That program has been going on for some months now, and it's receiving offers at the operations, and sometimes Treasury has purchased the full amount, and sometimes it has not purchased anything at all. They are price-sensitive in what they're looking to do, because they're really looking to be a backstop to the market. I think that that program— It's small in size, so there's only an amount it can achieve just given its size relative to the $26 trillion or so amount we were talking about before, but it provides that regular backstop that folks know is coming, and the schedule, in typical Treasury fashion, is released very far in advance.

Golay: It's known to the market, what's coming, so that they know that if they have a position in a particular security, that they can offer that security into the buyback program. The cash management purchases are for Treasury to manage its cash balance around times when it gets more cash inflows, to try and help them manage bill supply and that sort of thing. Anyway, it's a really interesting development for the Treasury market, and it's something— Treasury has been talking and considering buyback purchases for decades, so, it's very interesting to see them take this on now.

Beckworth: It's a long time coming, huh?

Golay: Well, it's deciding that— I think they've considered it many times, and then said, "Okay, maybe not now," and so here we are.

Beckworth: Yes. I remember reading a TBAC report where they recommended that Treasury go ahead with it. So, I imagine that the market said, "Let's do it," [and] everyone else said, "Let's do it," and they finally did it. Now, this, the buyback program— this is to be only for normal time, standard operating procedure. It's not meant necessarily as a crisis tool, like what you guys would do at the Fed.

Golay: That's right, yes. They've been very clear about, that they don't intend or expect for this to be something that would address a crisis situation.

Beckworth: They would leave that in your lane. That would be a Fed response.

Golay: Yes.

Beckworth: That's the idea. Of course, you never know what happens in crisis, but that's the intention, alright. So, we're clear about that. We've talked about central clearing. We've talked about Treasury buyback. The report also mentions that the SEC adopted new rules to require registration by market participants who act as dealers. Why is that consequential?

Golay: So, it's currently the case where there are some market participants— and again, we're back again to the principal trading firms who are pretty active in the Treasury market, but aren't currently required, or weren't prior to the rules finalization— weren't required to register as dealers. And I think that the point of view of the SEC was that if a firm is making two-way markets, being a consistent liquidity provider in the Treasury market, [then] they should register as dealers. So, I think that SEC Chair Gensler has said that the rule was intended to capture high-frequency trading strategies, in that rule. I will say that the rule has been subject to some lawsuits. So, I think that the market is looking to see what the outcome of those lawsuits might be to get an idea of where it's going.

Beckworth: So, it's not a guaranteed thing at this point.

Golay: I can't speak to that. That's way out of my knowledge base.

Beckworth: There's some uncertainty surrounding it, for sure.

Golay: Yes.

Beckworth: Let's go to the next development that you guys covered in the report and that is the commencement of the dissemination of data on individual transactions in the on-the-run or the most liquid, most recently issued nominal coupon Treasury securities.

The Commencement of Data Dissemination on Individual Nominal Coupon Treasury Transactions

Golay: So, that's another initiative that has been discussed for some years. In 2017, FINRA began collecting data on Treasury transactions through its TRACE data collection program. That's been data that's been available to the official sector since then, and there's been a lot of debates over the ensuing years about data transparency and to what extent should data be made available to the public. In the past few years, there's been more steps to making this transaction-level data available to the public.

Golay: The TRACE data had been released in aggregate form, so giving weekly aggregate information on the transactions in the Treasury market. Then, they moved to daily aggregate data, and now this step to releasing the actual data on on-the-run transactions on a daily basis. They are released with dissemination caps. Those are basically just size caps that make it so that very large trades aren't shown to the market, because one of the concerns raised by market participants was that if every trade was known with perfect transparency right after it occurred, and every market participant knew that a market participant out there had just bought a very large amount of some very deep off-the-run security, that if you then went to try and sell that security, the market might move against you. And so, to mitigate that risk, these dissemination caps were put in place so that if it trades above a particular size, it just says, "$250 million plus," or something like that.

Beckworth: Okay, and that would help the Treasury market because it would make more apparent what's going on?

Golay: Exactly. So, for the regular person who maybe isn't trading on the electronic trading screens and doesn't have as much access to real-time flow, you can go look at that data and get an idea of the transactions that are happening in the on-the-run market.

Beckworth: [The] last thing you have in the report is the finalization of Treasury's Office of Financial Research, or OFR, of a rule to require reporting of non-centrally cleared bilateral repurchase agreements or repos.

Requiring the Reporting of Non-Centrally Cleared Bilateral Repos

Golay: Right. So, this is pretty exciting. I think this is really a great initiative. The non-centrally cleared bilateral repo market is probably the largest segment of the repo market, and the OFR estimates that it's like $2 trillion in size. Meanwhile, as of now, there's almost no data available to it— to the official sector, to the public, anyone. That's something that the OFR has been looking at for some time, and this data collection will address that. This is something that was actually pointed out by the TMPG in a white paper that they did on data and transparency a couple of years ago.

Golay: And I think it's something that will really help people have much better understanding about what's happening in the repo market, and this is a really important repo market segment, because it's not centrally cleared and it is very large. And many of the trades are going to move into central clearing. Most of them are going to be coming from this market segment, and so understanding this segment better is going to be really critical to that transition. So, this is a really exciting development, that the OFR is going to be getting this data.

Beckworth: So, those last two or three there really have to deal with more data, more transparency, what's happening in the market. What do you think is the most important? If you had to rank what you've just gone through, what do you think are the biggest [and] most exciting? You seem pretty excited about the repo market data, but how would you rank that relative to, say, the increased central clearing or the Treasury buyback program?

Golay: The increased central clearing— that's the biggest thing that's happened to the Treasury market in decades. It's going to be a massive change in how the Treasury market works, the market structure, and it's a complex initiative. Trying to get the market from where it is today to one that is much more centrally cleared is going to be a challenge. It is a challenge. It's what everyone in the Treasury market is talking about every day. So, that's really the big, I think, initiative occurring currently. The rest of these are also super interesting, important, [and are] helping, but that's the big area of focus, for sure.

Beckworth: Alright, so, we've talked about your report that you're a big part of. You also helped organize a conference on the Treasury market— a lot of the same people and groups. And I'll tell you what, I was impressed by this conference, Ellen, because you brought together so many important people. Normally, when I organize a conference, one important person shows up [and] another important person doesn't want to be there at the same time. But you, I believe, had Chair Powell, you had Vice Chair Michael Barr. Was Gary Gensler there too?

Golay: Yes. Chair Powell was over video, but the rest of the luminaries were in person, yes.

Beckworth: Yes, you had a lot of luminaries. It was very impressive, because, you may know this from previous events yourself, one luminary wants to shine. Sometimes it's hard to bring another luminary on board, but somehow you did it. You brought them all together for this conference. Tell us a little bit about it.

The 2024 U.S. Treasury Market Conference

Golay: The conference this year went amazingly well. It was our 10th annual conference, so that is one of the hooks that we used when trying to get all of these luminaries to come-

Beckworth: Ah. That's the secret sauce.

Golay: -was that it was a very important anniversary. So, we had a video from Chair Powell. We had New York Fed President John Williams, Vice Chair for Supervision Barr. We had Treasury Secretary Yellen, SEC Chair Gensler, and then CFTC Chair Behnam. So, it was a great lineup of keynote speakers. One thing that helps our conference is that it's sponsored by the IAWG. All of the IAWG organizations are working on the conference over the year. So, they're able to go speak to their principals and say, "This is important, and it'd be great if you could be there."

Golay: This year, we got attendance from everyone, which was great. It was a great attendance of keynote speakers. Otherwise, the conference— there were three key themes that I took from the conference this year. The first was that there was a lot of focus on the evolving structure of the Treasury market, which I found interesting, because the theme of the original conference was the evolving structure of the Treasury market. But we're back there again with this central clearing change that we've been talking about. It's really going to change the market structure.

Golay: And so, that was a big focus at the conference this year. I think another focus was the progress that had been made by the IAWG organizations over the past few years, and that's all of the initiatives that we've been talking about today. I think that was another focus of the conference. Then, the third, I think, was really the challenges ahead, the challenges with the growing Treasury market, like we've been talking about, the challenges with the implementation of this central clearing rule. It's a fascinating time in the Treasury market, but it's a challenging time. There's a lot of work to be done, and so there was a lot of discussion of that as well.

Beckworth: So, looking ahead, one of the big challenges, as you just mentioned and we've talked about throughout this program, is the expected ongoing deficits, the growth of the Treasury market. That's something outside of your control, but what are other things that you see happening in the future that's something that you could influence, or steps that the regulatory policy could address? One item I've heard, for example, is all-to-all trading in the Treasury market. I don't know, are there other areas for future progress or reform that you would like to see happen?

Future Areas for Reform in the Treasury Market

Golay: Sure. I actually wrote a paper with a bunch of my official sector colleagues a couple of years ago on all-to-all trading. I think, for the Treasury market, it hasn't really taken off yet outside of the newly issued securities that we've been talking about, and it's possible, with the expansion of central clearing, that that might pave the way for some more engagement there. Besides the central clearing, it also needs some market innovation. It needs some trading platform to step in and say, "Hey, I'm going to try and build something here." And central clearing is not enough to make it happen, but it probably helps, because for two different market participants to trade with each other, if they're centrally cleared, [then] they don't have to set up clearing relationships with each other.

Golay: So, it takes out one hurdle of all-to-all trading, and that could be helpful if we get there down the line. Another thing that is important that the Treasury Markets Practices Group is working on that I think we should be thinking about is margin practices in the repo market. There's a lot happening in the repo market right now. Like I was talking about, there's this big non-centrally cleared segment. There are those segments are centrally cleared. There's a tri-party repo market. Then, all of these are moving around right now with the central clearing mandate coming.

Golay: We're already seeing migration from the uncleared to the cleared in anticipation of the mandate. So, as we're looking at this, we're learning different things about how margin is being paid on those repo trades, and margin is an important risk management practice to make sure that if a trade were to not be completed, that the other side of the trade would be protected. And we're finding that in the non-centrally cleared market, that sometimes little or no margin is being paid. We're finding that in the centrally cleared market, sometimes margin is being paid not by the client, not by the firm borrowing the funds, but, actually, by their dealer counterparty who's sponsoring the trade into clearing.

Golay: So, this is something that the TMPG is looking at. If margin is not paid, that can really result in risk management not being done as well as it could, and it could increase financial stability risks around the repo market. So, that's another really important topic that's coming out of all of this market structure change. Some folks are talking about this more, and I'm really excited to see the work that the Treasury Markets Practices Group is going to do on this.

Beckworth: Well, it sounds like there's lots of opportunity for further refinement and work in the Treasury market, so, Ellen, it sounds like you're going to continue to be very busy in your job advising policymakers and staying on top of the Treasury market. But we'll have to come back in a few years again and see where things stand on some of these topics that we've touched on today. But with that, our time is up. Our guest today has been Ellen Correia Golay. Ellen, thank you so much for coming back on the program.

Golay: Thank you so much. It's been great.