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Wall Street Makes Contingency Plans For U.S. Default

S.J. Steinhardt
Published Date:
May 25, 2023

GettyImages-1131299321 Stock Market Broker

Fearing anything from computer glitches to cascading panic if the United States defaults and misses payments on Treasury bonds, the financial services industry is making plans to ensure that the financial markets continue to function, The Wall Street Journal reported.

The plans, led by the Securities Industry and Financial Markets Association (Sifma), a trade group, entail investors’ continuing ability to keep trading all U.S. Treasurys, even those with past-due interest or principal payments. Sifma would also conduct a series of conference calls to avoid chaos and confusion.

The threat of “execution tends to focus the mind,” the leader of the effort and the head of Sifma’s capital markets practice, Robert Toomey, a former lawyer at the Securities and Exchange Commission (SEC) and the New York Federal Reserve, told a conference last week.

Wall Street seems to have learned from its reaction to a possible default in 2011, according to a New York Fed transcript of a meeting at the time. Since then, progress has come along gradually, according to the Journal.

In recent days, Sifma has been making sure that its members, including broker-dealers, banks and asset managers, are aware of the default playbook. An assumption is that the group would get one day’s notice of a missed payment, after which it would schedule conference calls to determine if the Treasury Department had decided to delay, by a single day, a principal payment due the following morning. In such a case, trading of affected U.S. Treasurys could take place essentially as normal. But it is still unclear that if Treasury would ever miss a debt payment, even if it runs out of cash.

In 2011, the department decided at the last minute to give priority to debt payments over other types of spending, according to the transcript of the Fed meeting.

Treasury's  apparent plan is for it to continue to hold debt auctions to raise the cash needed to pay back maturing bonds, while delaying nondebt payments as necessary to preserve the cash needed to pay interest on Treasurys. 

Banks are also making contingency plans. JPMorgan and Bank of America would be willing to advance customers’ Social Security payments for a few days, assuming that a deal would be imminent. Bank of America Chief Executive Brian Moynihan said in February that the bank would prepare to waive late fees and other costs for its customers who get paid by the government.

If the Treasury did miss a debt payment, computer systems designed to ensure automated debt payments would need to be changed manually. Investors may not want to trade Treasurys that have technically already matured, or use them as collateral in short-term borrowing arrangements. The United States could see its ratings downgraded.

“It’s about preplanning,” Toomey told the Journal of his and his colleagues’ efforts. “It’s about people having the ability to make planning decisions should we get into what would be expected to be, under any set of circumstances, a disruptive situation.”

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