The Fed's third-in-command: The concentrated clearing of US debt is progressing ahead of expectations, and the ample reserve framework is effective.

John Williams, president of the Federal Reserve Bank of New York, said that the centralized clearing of U.S. Treasury securities and Treasury repurchase agreements has progressed faster than expected, and reiterated the effectiveness of the current ample reserve framework.

In his latest remarks, Williams pointed out that the industry has begun to expand its cleared repo and cash trading infrastructure ahead of schedule, and trading activity is shifting from non-clearing markets to clearing markets, with the overall progress ahead of regulatory deadlines. This development signifies that structural reforms in the U.S. Treasury market are being implemented at an accelerated pace.

At the same time, Williams reiterated that the Fed’s current operating framework for maintaining “ample” bank reserves has proven to be “highly effective” in ensuring that market interest rates remain stable within the federal funds target range and in supporting the normal functioning of financial markets.

Last week, Federal Reserve officials unanimously voted to raise interest rates by 25 basis points, the first rate hike since 2023, and the latest economic projections show that most officials support at least one more rate hike this year. Williams did not comment on the monetary policy stance in his speech.

Centralized clearing is being advanced ahead of schedule, accelerating the restructuring of the treasury bond market.

According to regulatory requirements, eligible secondary market transactions, repurchase agreements, and reverse repurchase agreements for U.S. Treasury securities must be cleared through a central counterparty.

Williams stated that the industry had proactively expanded its infrastructure ahead of the deadline, and trading activities were migrating to the clearing market in advance.

This reform aims to enhance the transparency and resilience of the U.S. Treasury market and reduce counterparty risk, and is considered one of the most important structural changes in the U.S. fixed income market since the 2008 financial crisis.

The faster-than-expected progress indicates that market participants are more adaptable to the framework than anticipated, and has also alleviated regulators' concerns about market volatility during the transition period to some extent.

The framework of ample reserves was reaffirmed, and the Federal Reserve pledged to provide flexible supply.

Williams reiterated that the Federal Reserve will adhere to the principle of flexible reserve supply. He stated, "If the fundamental demand for reserves changes due to regulatory, market structure, or any other reason, the Federal Reserve will adjust the supply of reserves accordingly over time."

In the decades following the 2008 financial crisis, the Federal Reserve established an operational framework designed to maintain adequate liquidity in the banking system and ensure that financial institutions could meet regulatory and settlement requirements.

At the end of last year, the Federal Reserve stopped shrinking its balance sheet and began using reserve management bond purchases to maintain bank reserves at a target "ample" level.

Williams' statement was intended to send a clear signal to the market: no matter how external conditions change, the Federal Reserve's policy stance of maintaining the stable operation of the money market will not waver, which is of great reference value to financial institutions and investors who rely on the short-term funding market.

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