Better Safe Than Sorry

May 12, 2023   |   Tom Jordan, President & CEO, Jordan & Jordan 

While having dinner last week at Harry’s at Hanover Square with the Head of Trading at a mid-size firm, I asked what would happen if the U.S. Government defaulted? Her response was consistent with most Americans - no way that will happen, it is just scare tactics. We all hope they are right, but just in case, FIF held a webinar to discuss the operational and technology disruptions that could occur if we’re not that lucky.  In the Army, that’s called contingency planning or as we tell our kids and grandkids, better safe than sorry.

FIF had a meeting with the SEC staff to inform them of potential disruptions and to offer any assistance in reducing industry impact.

FIF then invited me to moderate a panel of industry experts and 200 members on the 11th of May to discuss some processing discontinuities for which we should plan.

• Compliance/OMS Issues- Government Bonds are the flight to quality and many order management systems evaluate pricing based on that benchmark.  Order processing includes pre-order price compliance, and some orders will be routed to the trading desk or violate compliance policy.  There will be significant increases in the number of exception handling.
• Pricing - Vendors may have different ratings for issues such as default, distressed or business as usual.  You should verify their process because it will affect your processing.  Firms Security Master may be updated with default, which would not be the proper outcome.
• Margin Processing- Some firm systems may process 100% margin and others will take a different approach. This will impact any account that is priced off a government bond.
• Accounting- How do you evaluate the bonds on the balance sheet?  We may receive government guidance on this topic.
• Settlement- There may be uncertainty in terms of short-term settlement.  Many firms use Treasury Bonds as equivalent to cash, so they may have short term cash management problems. Could be in violation of 15c3-3 customer protection rule if value drops precipitously.
• Impact on Other Securities – Some other instruments are dependent on government treasury pricing i.e., Collateral, Repo’s, Indexes, Options Adjusted Spreads.  BNY Mellon has published a paper on payments to client accounts and the interaction with Fedwire.

The timing of decisions and transactions will be key and will depend on the Treasury for guidance, including any potential auctions.  FIF will continue to follow any activity in this space and work with the SEC, Treasury, and members on operational and technology issues until we are back to business as usual.