The key industry groups that seek to prevent seismic disruptions in the world’s biggest debt market aren’t waiting around to see if Treasury Secretary Steven Mnuchin can get Congress to lift the debt limit before America exhausts its borrowing capacity.
The Securities Industry and Financial Markets Association, the $14.1 trillion Treasury market’s self-regulatory body, is revisiting and revising work done ahead of previous debt-ceiling showdowns in a bid to lessen the potential market disruption should politicians fail to raise the debt ceiling in time. The group’s primary focus is how operational issues such as trading, clearing, and settlement would be affected should debt payments get delayed. Sifma’s preparations coincide with similar efforts being undertaken by the Federal Reserve-sponsored Treasury Market Practices Group.
“We are working with our members to dust off and review the assumptions we used in our work done during past debt-ceiling incidents,” said Robert Toomey, managing director and associate general counsel of Sifma. “We are sort of war-gaming different circumstances. We are organizing our members regarding the conference calls that would need to be made if changes of debt payment dates occurred.’’
Senate Majority Leader Mitch McConnell guaranteed this month that Congress will raise the limit in time. The Treasury has been using extraordinary accounting measures since March to avoid breaching the debt ceiling, and Mnuchin has said Sept. 29 is the “critical” deadline for when Congress must raise his borrowing authority. The Congressional Budget Office estimates the U.S. government will reach its statutory borrowing limit some time in October, in line with Wall Street forecasts.
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A key Sifma assumption is if the Treasury breaches the x-date and chooses to delay payments, it would do so only in one-day increments and on a day-by-day basis. With enough warning, Sifma says it would be able to coordinate with member firms to manually change the maturity dates for securities, limiting payment disruptions. Sifma members include the investment arms of the big life insurance companies, Wall Street giants like Goldman Sachs Group Inc. and JPMorgan Chase & Co., and Bloomberg LP, the parent of Bloomberg News.
“If the Treasury changes the payment date in a timely way, then from an operational point of view it wouldn’t impact the securities as they’d be still be fully transferable and processable,” said Toomey, referring to their treatment by systems such as the Fedwire Funds Service, the electronic system that transfers principal and interest payments.
The Treasury Market Practices Group, whose members include firms such as Morgan Stanley and BlackRock Inc., is digging up past contingency plans prepared during debt-limit impasses in 2011 and 2013.
The TMPG plans included guidelines for treatment of delayed principal and coupons, and compensation for delayed payments once the debt limit is raised.
TMPG contingency planning, “if implemented, would only modestly reduce, not eliminate, the severe operational difficulties posed by a delayed payment, an event that could cause significant damage to, and undermine confidence in, the markets for Treasury Securities and other assets,” the group wrote in its May minutes. Details from their June meeting have yet to be released.
Despite the preparations, Toomey said the organizations can’t prepare for all contingencies.
“This has never happened before, and there are unknowns embedded in here,” said Toomey. “This is still unknown territory,” he added. “Is our work a silver bullet? I don’t think so.’’
—-Read Treasury Bill Rates Surging as Debt-Ceiling Deadline Approaches on ThinkAdvisor.
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