Key Takeaways
- •Terrence A. Duffy (Chairman and CEO, CME Group) warned that allowing a London-based clearinghouse under Bank of England oversight to clear U.S. Treasury futures poses systemic risks.
- •Yesha Yadav (Professor, Vanderbilt Law School) testified that the Treasury market oversight structure is broken and lacks real-time information to identify risks like excess leverage.
- •Rep. Vargas (D, CA-52) pressed Duffy on the risks of foreign regulation, leading Duffy to argue that only U.S. regulators should oversee U.S. sovereign debt clearing.
- •Rep. Lucas (R, OK-3) and other Republicans praised the Basel III reproposal for reducing capital burdens, while Rep. Vargas (D, CA-52) emphasized protecting the Office of Financial Research.
- •The financial industry is preparing for the SEC’s mandatory central clearing of cash Treasury and repo transactions, which begins implementation in December 2026.
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Hearing Analysis
Overview
This hearing examined the critical role of derivatives—including futures, options, and swaps—in supporting the liquidity, price discovery, and resilience of the $30 trillion U.S. Treasury market. As the market prepares for a fundamental shift toward mandatory central clearing for cash Treasuries and repurchase (repo) agreements, the task force evaluated how these financial instruments mitigate risk for investors and lower borrowing costs for the federal government. The discussion also addressed the impact of bank capital requirements, specifically the Basel III "endgame" re-proposal, on market-making capacity and the potential systemic risks posed by foreign oversight of U.S. debt clearing.
Key Testimony & Policy
Witnesses emphasized that the Treasury and derivatives markets are inextricably linked, with Treasury futures volume now representing approximately 93% of the underlying bond market's value. Mr. Kevin McPartland of Crisil Coalition Greenwich testified that derivatives act as catalysts for demand, allowing dealers to hedge inventory and quote tighter bid-ask spreads. Mr. Terrence Duffy of CME Group highlighted the "basis trade"—an arbitrage strategy between cash Treasuries and futures—as a vital source of liquidity that aligns prices across markets, noting that basis trade-related holdings have reached $1 trillion in notional value.
A central theme was the implementation of the Securities and Exchange Commission (SEC) mandate for central clearing of cash Treasuries (effective December 2025) and repo transactions (effective June 2026). Mr. Jeff Cranston of Optiver noted that while central clearing reduces counterparty risk and allows for exposure netting, it requires significant "clearing capacity" from large banks acting as futures commission merchants (FCMs). Witnesses largely praised the March 2026 Basel III "endgame" re-proposal for moving away from previous versions that would have "double-counted" risk and penalized banks for holding Treasuries. They argued the new proposal better recognizes the risk-reducing benefits of central clearing and cross-margining.
Professor Yesha Yadav of Vanderbilt University Law School provided a more cautionary perspective, arguing that the current oversight structure is "broken, inadequate, and dated." She pointed to significant opacity in the bilateral repo market and a lack of real-time data sharing between the SEC and the Commodity Futures Trading Commission (CFTC). She warned that while Treasuries are considered "risk-free" assets, the markets they trade in are susceptible to leverage-driven shocks, such as the March 2020 "dash for cash."
Notable Exchanges & Partisan Dynamics
A significant portion of the hearing focused on a warning from Mr. Duffy regarding the FMX Futures Exchange and its use of the London-based LCH Group for clearing U.S. Treasury futures. Mr. Duffy argued that allowing a clearinghouse overseen by the Bank of England to handle U.S. sovereign debt creates a systemic vulnerability. He claimed that under UK law, the Bank of England could "tear up" or haircut U.S. Treasury contracts to protect the British financial system during a crisis, potentially destabilizing the U.S. market. This point was picked up by Rep. Juan Vargas (D, CA-52), who expressed concern over foreign regulatory power over the $30 trillion U.S. debt market.
Rep. Brad Sherman (D, CA-32) and Rep. Sean Casten (D, IL-6) raised concerns regarding the tokenization of Treasury securities. Rep. Sherman questioned whether "tokenized Treasuries" without actual reserves could mislead investors, while Rep. Casten discussed the jurisdictional split between the SEC and CFTC created by the Clarity Act regarding tokenized equities and derivatives.
Rep. Mike Flood (R, NE-1) shifted the focus to the agricultural sector, discussing how Treasury derivatives indirectly affect farmers by influencing interest rates for equipment loans and the cost of energy-dependent inputs like fertilizer. Mr. Duffy and Mr. McPartland confirmed that the stability provided by these financial markets is essential for agricultural producers to manage long-term risk.
Organizations Mentioned
* **Department of the Treasury (Treasury):** Discussed as the issuer of the underlying securities and the primary beneficiary of the lower borrowing costs facilitated by liquid derivatives markets. * **Securities and Exchange Commission (SEC):** Regulated the new central clearing mandate and recently approved additional clearinghouses and cross-margining relief. * **Commodity Futures Trading Commission (CFTC):** Oversees the futures and swaps markets; criticized for a lack of formal data-sharing arrangements with the SEC regarding Treasury clearing. * **CME Group Inc. (CME):** A major operator of Treasury futures and clearing services; its CEO testified on the benefits of cross-margining and warned against foreign clearing of U.S. debt. * **Bank of England:** Identified as the ultimate regulator of LCH; criticized by witnesses for its "early resolution authority" which could prioritize UK markets over U.S. Treasury stability. * **Fixed Income Clearing Corporation (FICC):** The primary clearinghouse for Treasuries; discussed regarding its partnership with CME and the expansion of its cross-margining program. * **Office of Financial Research (OFR):** Mentioned by Ranking Member Vargas regarding reported 60% staff cuts, which he argued would hinder the agency's ability to monitor systemic risk. * **LCH Group (LCH):** A London-based clearinghouse mentioned as a competitor for clearing U.S. Treasury futures under UK jurisdiction.
What's Next
The task force will continue to monitor the implementation of the SEC’s central clearing mandate, with key deadlines approaching in December 2025 and June 2026. Witnesses were asked to provide written responses to several follow-up questions, particularly regarding clearing capacity and the technicalities of the Basel III re-proposal, by June 3, 2026. Future discussions are expected to address the potential for a formal data-sharing agreement between the SEC and CFTC to improve market transparency.
Transcript
The Task Force on Monetary Policy, Treasury Market Resilience, and Economic Prosperity will come to order. Without objection, the chair is authorized to declare recess of the committee at any time. This hearing is entitled Examining Derivatives' Role in the Treasury Market. And without objection, all members will have five legislative days within which to submit extraneous materials to the chair for inclusion in the record. I now recognize myself for an opening statement. Welcome to today's task force hearing examining derivatives' roles in the treasury market. Thank you to our witnesses for providing their invaluable expertise. The treasury market is the deepest, most liquid, most important market in the world. Today we're discussing an aspect of the treasury market that continues to grow in popularity and raises important questions ahead of anticipated market structure changes and capital rulemaking. Part of the depth and liquidity of the treasury market is driven by trading on swaps, options, and futures on the underlying treasury. These derivative markets are key to managing risk. They allow market participants to hedge their exposures, create demand for treasuries, increasing market liquidity, and supporting price discovery and health of the broad treasury market. A recent paper from the Chicago Fed has pointed out enhanced liquidity in the derivatives market strengthens the functioning of the cash market, and the enhanced liquidity supports more stable, lower public financing. It's important that Congress continues to support the resilience of the treasury derivatives market as these instruments are so closely linked to the bedrock of the global financial system. I must especially pay attention now as the, we, I should say, must especially pay attention now as the industry undergoes a fundamental market structure shift with the looming deadlines for central clearing of cash treasury and repo in December and next June respectively. The SEC under the leadership of Chairman Atkins has been responsive to industry comments and proposals to make sure that the transition to mandatory clearing causes no disruptions in the treasury market. A recent example includes the approval of two additional CCPs, increasing customer choice and competition while reducing concentration risk. Demand for treasury derivatives is rising, and with it demand for cash and for clearing. It is absolutely critical that our capacity for clearing these transactions rises in kind. Last week, the SEC and the CFTC also granted exemptive relief to allow customer cross-margining for offsetting exposures of cash and future positions for treasuries. This is a welcome step to ease the transition to mandatory clearing and, as witness testimony has pointed out, will allow the redeployment of capital back into our treasury markets. I'm hopeful that all this risk-reducing activity will be fully recognized in the capital rules proposed by the bank regulators, as we discussed yesterday in the full committee hearing on this topic. We have substantial data and experience on the benefits of clearing from a risk management and margin efficiency standpoint due to its use in the derivatives markets. But getting the transition right to the broader treasury market will take Congress, the regulators, and the industry working in lockstep together. I look forward to our discussion today, and I yield back. I now recognize the ranking member of the task force, Mr. Vargas, for four minutes for an opening statement.
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