The Fed Says It’s Considering a Central Clearing Facility for the Treasury Market

By Pam Martens and Russ Martens: November 13, 2020 ~

Randal Quarles

Randal Quarles, Vice Chairman for Supervision, Federal Reserve

The Vice Chairman for Supervision at the Federal Reserve, Randal Quarles, dropped a bombshell during the House Financial Services Committee hearing held yesterday, but because mainstream media ignores these hearings unless they have something to do with Donald Trump, this critical news went unreported.

Congressman Bill Foster of Illinois addressed Quarles with this statement:

Congressman Bill Foster at Virtual Hearing of House Financial Services Committee on November 12, 2020

“The Treasury market is the most liquid fixed income market in the world. It serves as a critical benchmark for other bond markets that are essential. It allows the U.S. Dollar to operate as the world’s dominant reserve currency. That is why it is crucial that these financial pipes continue to function well, especially as we continue to fight COVID-19 and we work to provide fiscal relief to millions of struggling families and small businesses.

“When the Fed has to step in to support the market for Treasury bonds, I view it as the financial equivalent of our military going to DEFCON 2….”

Foster was referring to the dysfunction in the Treasury market in March as the pandemic escalated in the U.S. and millions of investors around the world moved out of both stocks and Treasuries and into cash.

The subsequent exchange between Foster and Quarles went as follows:

Foster: “Could you explain to us your view of why requiring central clearing of treasuries might be beneficial to market functioning and what are the drawbacks and tradeoffs, if any, of this approach.

Quarles: “So, as we look at the lessons from the Treasury market in March, we have been looking closely at this issue of central clearing of Treasuries. The advantage would be that central clearing would reduce pressure on dealer balance sheets. The current system requires dealers take those Treasuries onto their balance sheets when there isn’t another side to the trade. That’s obviously a significant strain.

“The cons are really the cons of any CCP [Central Clearing Party] (inaudible). It’s a complex risk management problem. And so we want to think that through carefully for a market that is as large and as central, as you correctly identified the market as being.

“The pros are attractive. We’re looking through this carefully with an inter-agency group. I would say, just as an additional thought though, that that could lead to improved market functioning generally. What we saw in March, though, was simply that everyone was selling and no one was buying. There was a period of a few days when there just wasn’t another side to the transaction. And so a smoother mechanism for matching buyers and sellers probably would not have addressed the March issue because the question was that there just wasn’t a buyer. But that doesn’t mean it’s not a useful wakeup call for thinking about the structure of the Treasury market.”

One critical aspect regarding securing the integrity of the U.S. Treasury market involves the failure of William Barr’s U.S. Department of Justice to properly charge JPMorgan Chase for what the Justice Department described on September 29 as “thousands of instances of unlawful trading in U.S. Treasury futures contracts and in U.S. Treasury notes and bonds…” JPMorgan’s illegal manipulation of the Treasury market, which is essential, as Congressman Foster said, to the confidence in the U.S. Dollar as the world’s reserve currency, went on for more than eight years.

And yet, the Department of Justice attempted to downplay the severity of JPMorgan’s actions by combining those charges with charges of the bank’s rigging in the precious metals markets. And, in an unprecedented move, the Justice Department announced two felony counts against JPMorgan Chase in a press release instead of holding a press conference so that reporters could ask questions.

The bank was once again put on a three-year probation by the Justice Department instead of having its Board and CEO removed. These were the fourth and fifth felony counts brought by the Justice Department against this same bank in the past six years, all under the tenure of Chairman and CEO, Jamie Dimon. The banks has admitted to all five felony counts.

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