Bond Market Association Asks US Treasury To Weigh Costs Of Creating Securities Lending Facility

In a letter sent to the US Department of Treasury, the Bond Market Association has asked that the department take a close look at the benefits that would be created if it goes ahead with plans to establish a securities

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In a letter sent to the US Department of Treasury, the Bond Market Association has asked that the department take a close look at the benefits that would be created if it goes ahead with plans to establish a securities lending facility and decide whether the facility warrants high establishment costs.

The BMA says it supports the goals of the Treasury Department, in a recent white paper concerning the establishment of a federal lending facility, but the association says the federal government may be unwarranted in some of the policies it established in response to “widespread and chronic ‘fails’ in the market.” The BMA cites a lack of evidence that any chronic fails have negatively impacted the liquidity of the Treasury market and also that market participants have already made progress in correcting risk and price anomalies.

“A lending facility would represent a significant structural change to the U.S. Treasury market which plays a critical role in the global financial system,” says Rob Toomey, vice president and assistant general counsel of the Bond Market Association. “While it might offer some level of protection from the risks posed by continuing widespread fails, the possible benefits of the facility are outweighed by the costs of setting it up and other potential negative consequences it could have on the normal trading environment.”

The BMA’s letter also says changes in market practice and improved focus on the risk issues of recent chronic fails have lowered the likelihood that more fails will occur in the future.

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