Below, we excerpt from recent statements by Treasury and Federal Reserve officials involving the possible launch of floating-rate Treasury securities and regulation of money funds and repurchase agreements. First, the latest minutes from the Quarterly Refunding Statement of Treasury Acting Assistant Secretary for Financial Markets Matthew Rutherford May 2012 says, "One member asked about the status of negative bidding and awards in Treasury bill auctions. Acting Assistant Secretary Rutherford briefly stated that there were several operational challenges that are currently being addressed. He noted that more information on this topic would likely be shared in the coming months."
It continues, "Next, the discussion turned to Floating Rate Notes (FRNs). Director Kim presented key takeaways of Treasury's request for information (RFI) on FRNs, stating that most respondents thought this product would be a useful debt management tool. There was a consensus that the product should initially have a maturity of 2 years and under. However, there was a lack of consensus on the reference index, with respondents divided between Treasury bills, the federal funds effective rate, and a Treasury general collateral rate."
The Treasury minutes state, "After Director Kim's synopsis of key takeaways, Acting Assistant Secretary Rutherford mentioned that Treasury planned to continue to study the benefits and optimal terms of FRNs. Moreover, he noted that system limitations would prevent any possible issuance of FRNs until 2013. The Committee again unanimously recommended that Treasury pursue an FRN program, citing the merits of expanding the investor base and providing a cost effective means of extending the average maturity. In discussing the best index, the member recommendations were divided, with 4 members voting for Treasury bills, 3 members voting for a general collateral rate, and 6 members voting for the federal funds effective rate."
A separate press release adds on the Floating Rate Notes topic, "As noted in the February quarterly refunding statement, Treasury believes that there are benefits to issuing floating rate notes (FRNs). In recent weeks Treasury has received a significant amount of feedback on the topic, in part through a formal request for information published in the Federal Register. Treasury is in the process of analyzing the feedback, and we continue to study the benefits and optimal terms of a Treasury FRN. Treasury will announce its conclusion about issuance of FRNs at a later date, after our analysis has been completed. Please send comments and suggestions on these subjects or others related to debt management to debt.management@treasury.gov."
In other news, Fed Governor Daniel Tarullo spoke Wednesday on "Regulatory Reform since the Financial Crisis." He said, "While there is a well-defined set of regulatory measures to address too-big-to-fail, the same cannot be said for the second major challenge revealed by the crisis: the instability of the shadow banking system. Although some elements of pre-crisis shadow banking are probably gone forever, others persist. Moreover, as time passes, memories fade, and the financial system normalizes, it seems likely that new forms of shadow banking will emerge. Indeed, the increased regulation of the major securities firms may well encourage the migration of some parts of the shadow banking system further into the darkness -- that is, into largely unregulated markets. And it bears reminding that, just as the fragility of major financial firms elicited government support measures during the crisis, so the runs and threats of runs on the shadow banking system brought forth government programs such as the Treasury's insuring of money market funds."
He added, "Two areas where the case for reform in the short-run is compelling are money market funds and the tri-party repo market. The requirement adopted by the Securities and Exchange Commission (SEC) in 2010 for a greater liquidity buffer in money market funds was a step in the right direction, but the combination of fixed net asset value, the lack of loss absorption capacity, and the demonstrated propensity for institutional investors to run together make clear that Chairman Schapiro is right to call for additional measures. As to the tri-party repo market, there are several important concerns. A major vulnerability lies in the large amount of intraday credit extended by clearing banks on a daily basis. An industry initiative to address the issue led to some important operational improvements to the tri-party market, but, to be frank, fell short of dealing comprehensively with this problem. So it now falls to the regulatory agencies to take appropriate regulatory and supervisory measures to mitigate these and other risks."
