Simon M Potter: Challenges posed by the evolution of the treasury market Remarks by Mr Simon M Potter, Executive Vice President of the Markets Group of the Federal Reserve Bank of New York, at the 2015 Primary Dealer Meeting, New York City, 13 April 2015. *  *  *  I would like to thank Michael McMorrow for his excellent assistance in the preparation of these remarks and colleagues in the Federal Reserve System for numerous insightful comments and suggestions. Welcome to this year’s primary dealer meeting, and thank you for joining us today. As primary dealers, you play an integral role as the Federal Reserve’s counterparties in operations to implement monetary policy, as participants in U.S. Treasury auctions, and as important providers of information on market developments to support the Desk’s monitoring of financial markets.1 Today’s meeting provides us with a valuable opportunity to communicate our expectations for you as our counterparties and to strengthen our important relationship. Today, I’ll discuss the market for U.S. Treasury securities, with a focus on how the market’s structure has changed in recent years. As you all know, the U.S. Treasury market is one of the most important financial markets globally and is valued as a source of safety and liquidity. Indeed, both domestic and global investors, including private sector institutions, retail investors, and foreign central banks, hold Treasury securities at least in part for these reasons. A deep and liquid Treasury market also helps to underpin the U.S. dollar’s status as the global reserve currency.
As I will explain later, the Treasury Market Practices Group has updated its best practices to emphasize the importance of supporting market liquidity as well as avoiding automated trading strategies that create a false impression of market price, depth, or liquidity. In conjunction with those best practices, the TMPG also released a white paper on automated trading that reviews several categories of associated risk, including operational risk, potential systemic counterparty risk, market manipulation risk, and transmission risk. October 15 Let me now turn to the unusual events of October 15. On that day, Treasury yields exhibited extreme volatility, with the benchmark ten-year yield trading in a range of about 35 basis points between the market open and close. This included a sharp decline in yields following the U.S. retail sales report at 8:30 ET that morning, and a highly unusual round-trip in yields just after 9:33 a.m. At that time, the ten-year yield fell about 15 basis points in a five-minute period, before nearly fully retracing that move in roughly the same increment of time. That very short “event window” was a remarkable occurrence in one of the world’s most liquid markets, and likely reflected a unique dynamic on what was already an unusual day. Indeed, the net change on the session as a whole was less than 10 basis points – a small fraction of the extraordinary intraday range that we are still discussing today (see the chart).