In this market segment, business is conducted bilaterally on an over-the-counter (OTC) basis – typically by phone or through electronic trading platforms like Tradeweb and Bloomberg that are based on the traditional request-for-quote model. The U.S. Treasury has issued a detailed request for information seeking public comment on the many factors that are affecting the structure and liquidity of the U.S. Treasury market, and is seeking comments on the relevant data gaps. 4 This is an important step that will help clarify what further work is needed in this area. Even in the corporate bond market where we have detailed TRACE transaction data, this still tells an incomplete story. TRACE data show what trades have taken place, not what trades have potentially been foregone because of any possible diminution of market liquidity. Gaining a better understanding of this phenomenon is being actively researched by my staff. In contrast to the market liquidity metrics such as bid-ask spreads, indirect evidence on market liquidity suggests that there has been a decline. Asset managers report that large blocks of securities are now harder to buy and sell without generating significant movements in prices. Also, average trade sizes have decreased (Exhibit 4) and there is evidence of a growing bifurcation in the corporate bond market, with greater activity and liquidity in those bonds that were issued more recently, larger in size or brought to market by larger issuers.
See Section 13(3) of the Federal Reserve Act (12 USC 343) and Regulation A (12 CFR 201.4(d)). BIS central bankers’ speeches  5  In the U.S., given the restrictions on central bank lending, if a securities firm were to lose access to funding the remaining options available would be finding a means of replenishing the firm’s capital, selling assets, or selling all or part of the securities firm’s operations. While this might be manageable in the case of a firm-specific idiosyncratic shock, it might prove more difficult if a common shock was broadly hitting the securities industry. In this circumstance, the failure of one firm could increase the stress on other firms that were facing similar difficulties. If all of the requirements for Section 13(3) are met, the central bank could provide liquidity support. However, since this is not a certainty, it is worth considering possible alternatives. Now that all major securities firms in the U.S. are part of bank holding companies and are subject to enhanced prudential standards as well as capital and liquidity stress tests, providing these firms with access to the Discount Window might be worth exploring. To me, this is a more reasonable proposition now than it was prior to the crisis when the major dealers weren’t subject to those safeguards.