The financial industry has been preparing for a similar crisis in the past, most recently in September 2021. One senior industry official said that this time the short timeframe for reaching a deal has bankers on edge.
Janet Yellen, the U. S. Treasury Secretary, reaffirmed the deadline of June 1 on Sunday.
Jane Fraser, CEO of Citigroup (C. N), said that this debate over the debt ceiling was "more worrying" than any previous one. Jamie Dimon, CEO of JPMorgan Chase & CO. (JPM. N), said that the bank holds weekly meetings to discuss the implications.
The global financial system is based on U. S. government debt, so it's difficult to gauge the full impact of a default. However, executives are expecting massive volatility in equity, debt, and other markets.
Wall Street executives who advised the Treasury on its debt operations warned that the Treasury market would quickly spread into the derivative, mortgage, and commodity markets as investors would doubt the validity of Treasuries, which are widely used as collateral to secure trades and loans. Analysts said that financial institutions could ask counterparties for replacement bonds if payments are missed.
This includes planning how payments on Treasury Securities would be handled, how the funding markets would react to a high volume of trading; ensuring that there is enough technology, staffing, and cash for this; and checking any potential impact on client contracts.
The Securities Industry and Financial Markets Association, a leading industry association, has developed a playbook that outlines how Treasury market participants - the Federal Reserve Bank of New York (FRBNY), the Fixed Income Clearing Corporation, clearing banks, and Treasuries Dealers - will communicate in advance and during days of possible missed Treasuries Payments.
The Treasury would buy time by announcing in advance of payment it would be rolling over those maturing securities, extending them a day at a.
In the worst scenario, the Treasury does not pay both the principal and the coupon and does no extend maturities. Unpaid bonds would no longer be able to trade or be transferable via the Fedwire Securities Service which is used for holding, transferring, and settling Treasury securities.
"It's difficult because it's unprecedented, but we're just trying to make sure that we develop a strategy with our members to navigate through what could be a disruptive scenario," said Rob Toomey. SIFMA's managing Director and associate general counsel of capital markets.
According to the meeting minutes posted on the Treasury Market Practices Group's website, dated November 29, the group also has a trading plan for unpaid Treasuries that it will review at the end of 2022. The New York Fed declined further comment.
In previous debt-ceiling standoffs, in 2011 and 2013, Fed staff and policymakers created a playbook that would likely serve as a starting point. The last and most sensitive move is to remove defaulted assets from the market.
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