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Investing.com -- Deputy Treasury Secretary Michael Faulkender announced on Tuesday that officials are currently discussing the effects of the supplementary leverage ratio (SLR) on the $29 trillion Treasuries market. The discussions are focused on understanding the extent to which the SLR could be binding during periods of market stress.
Faulkender made these comments at an Investment Company Institute event in Washington. He emphasized that the ongoing investigation is aimed at assessing whether the SLR could unnecessarily limit the Treasuries market’s capacity during periods of heightened stress.
The SLR is a regulatory measure that requires financial institutions to maintain a certain level of capital reserves against their positions in Treasuries. Its applicability to the Treasuries market was temporarily suspended by the Federal Reserve during the Covid crisis, but it has since been reinstated.
Several market participants have expressed concern that the use of the SLR could diminish the capacity of major dealers to engage in market-making, thereby negatively affecting liquidity. Faulkender’s comments indicate that these concerns are being taken into consideration by the Treasury.
Faulkender stated, "The question that we continue to ask ourselves is, in times of market volatility, or if there were to be a stress event, do we have adequate liquidity coming into the system." He further suggested that if the SLR is found to be unnecessarily binding during times of stress, officials might explore ways to increase the bond market’s capacity to handle large volume days.
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