View original document

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

For release on delivery
9:00 a.m. EDT
October 19, 2023

Opening Remarks

Philip N. Jefferson
Vice Chair
Board of Governors of the Federal Reserve System
at the
18th Central Bank Conference on the Microstructure of Financial Markets
Board of Governors of the Federal Reserve System

Washington, D.C.

October 19, 2023

It is my pleasure to welcome you to the 18th Central Bank Conference on the
Microstructure of Financial Markets. This is the first time that this event has been held at the
Federal Reserve Board, and we are very pleased to host the conference.
Before I begin, let me remind you that the views I will express today are my own and are
not necessarily those of my colleagues in the Federal Reserve System.
Our guests include academics from a number of institutions, both in the U.S. and abroad;
fellow central bankers, including colleagues from the Bank of England, the Bank of Japan, and
the Bank for International Settlements; and friends from across the Federal Reserve System and
from several U.S. government agencies, such as the Commodity Futures Trading Commission
(CFTC), the Securities and Exchange Commission (SEC), and the U.S. Treasury, including the
Office of Financial Research (OFR).
Now, since this is what you have gathered here to discuss, I do not have to convince this
group of the critical importance of well-functioning financial markets for the economy. In my
case, coming as a macroeconomist from the academic world to the Federal Reserve has only
reinforced that conviction.
Market Microstructure Is Important
Central bankers, regulators, and market participants ask a lot of financial markets. We
want financial markets to be effective and efficient, and to aggregate and reflect all pertinent
information. We rely on these markets to help us gauge how the economy is performing, to help
us measure market expectations of monetary policy, and even to help us predict how the
economy might evolve in the future. We want financial markets to be deep and liquid in good
times, but also to remain deep and resilient when the economy is stressed. We want financial
markets to be fair, so as not to favor certain participants. And central bankers, obviously, rely

critically on financial markets for the implementation and transmission of monetary policy. As
we have broadened our arsenal of policy tools over the past two decades and as markets have
become larger, more complex, and more diverse, I would argue that it has become even more
critical for us to understand in detail how financial markets operate.
Effective and efficient financial markets do not happen automatically. The precise
structure of each financial market, its trading rules, the mix of market participants and the
constraints they face, how and how fast information is transmitted, all part of the microstructure
of that market, do make an important difference. I think that fact has now become more widely
recognized by economists. But it was not the case just a couple of decades ago, when most
macroeconomists almost routinely assumed in their models that financial markets would function
perfectly in the background. I believe that has changed—witness, for instance, the growth of
macrofinance in recent years—and that change has certainly been an improvement.
A Few Words about the Program and Interagency Work
Now, let me say a few words about the first financial market this conference will focus
on, the market for U.S. Treasury securities. The U.S. Treasury market clearly remains the largest
and deepest government securities market in the world. But it has changed a lot. To quote a
recent speech by our former Fed colleague Nellie Liang, who is now the Under Secretary for
Domestic Finance at the Treasury, “The market has changed significantly over time, with
changes in technology, participants, and regulations, and Treasury debt outstanding has grown
substantially.” 1
Some episodes of stress in the Treasury market, including a flash event in 2014 and, more
recently, the Treasury repo market disruptions of September 2019 and the so-called dash-forSee Nellie Liang (2022), “Remarks by Under Secretary for Domestic Finance Nellie Liang at the 2022 Treasury
Market Conference,” remarks, November 16,


cash episode in 2020, have focused the attention of researchers and U.S. government agencies on
the plumbing of the market and on the composition and behavior of its participants. For
example, an interagency working group, composed of staff from the U.S Treasury, the SEC, the
CFTC, the New York Fed, and the Board of Governors—several members of the group are
here—has been studying a broad range of ideas to enhance the resilience of the market. The U.S.
Treasury has also spearheaded initiatives to enhance data transparency. And the SEC has sought
comments on several proposals that could materially alter the structure of the market.
The Federal Reserve does not regulate markets, but we obviously have a special interest
in the Treasury market, in part because some of our policy tools operate through that market and
because of how important Treasury market functioning is to financial stability. And the recent
discussions on the Treasury market have involved a lot on market microstructure and market
design, including questions such as the following:

Is the current intermediation capacity of dealers sufficient given the size of the market?


Would an increase in the share of transactions that are centrally cleared help that
intermediation capacity?


Is a decentralized dealer-intermediated market optimal, or could an all-to-all market for
Treasury securities be more resilient under stress?


What are the respective roles of banks and nonbanks in this market?


Are the incentives faced by market participants naturally leading the Treasury market to
become more resilient over time? Or would some carefully crafted intervention be
As you can hear, this list of research questions contains a heavy dose of market

microstructure content. Why am I sharing them with you? Just to make my final point: As

economists focused on market microstructure, what you do is important, and what you do is
immediately relevant.
So, again, welcome to the Federal Reserve Board. I wish you an excellent conference.