Speech by President Lorie Logan
Lorie Logan
Thank you, Julie [Remache], for your introduction. I appreciate the organizers for curating a program that addresses critical financial market dynamics and providing the opportunity to moderate this engaging panel discussion.
I’d like to offer some perspectives to frame our conversation. These views are my own and do not necessarily represent those of my Federal Reserve colleagues.
The panel’s focus on “Market Liquidity and Leverage in a Digital Age” underscores three pivotal elements shaping modern financial systems. First, market liquidity—the capacity to seamlessly trade assets—forms the backbone of core U.S. markets like Treasuries and money markets, which are vital for monetary policy and economic stability. While these markets typically function efficiently, their vulnerabilities were exposed during the 2020 pandemic, when liquidity dried up and market functioning became a critical risk to the broader economy.
Second, leverage—the use of borrowed assets to enhance trading capacity—interacts closely with liquidity. While leverage can improve market efficiency by lowering transaction costs, it also magnifies risks. During downturns, leveraged investors may liquidate positions rapidly, overwhelming intermediaries and destabilizing markets. The 2020 stress period demonstrated this feedback loop, emphasizing the need for prudent risk management by both market participants and regulators.
Third, technology continues to redefine financial markets. While some perceive trading infrastructure as mere “plumbing,” its role is fundamental. Well-designed technological advancements can enhance liquidity, reduce systemic risks, and improve capital flow. However, flawed implementations can introduce new vulnerabilities, as seen in 2012 when a software malfunction at Knight Capital caused severe market disruption. Such episodes underscore the necessity of adaptive oversight and industry collaboration to manage innovative tools responsibly.
The evolution of the Treasury market exemplifies the value of coordinated efforts. Following the 2007 financial crisis, the Treasury Market Practices Group (TMPG) was established to promote best practices. Subsequent research and annual conferences have addressed challenges like the 2014 flash crash and 2020 volatility, leading to meaningful reforms. Notably, the SEC’s central clearing mandate for Treasury transactions aims to strengthen risk management and transparency. While this mandate does not extend to Federal Reserve operations, voluntary central clearing of FOMC activities could enhance operational efficiency and market resilience.
Today’s discussion will explore ongoing advancements, including blockchain applications for collateral integration and the growing prominence of cyber risks in digital trading environments. Our panelists bring diverse expertise to these topics: Roberto Perli, managing the System Open Market Account at the New York Fed; Don Wilson, CEO of global trading firm DRW; and Jay Kahn, an economist specializing in short-term funding markets at the Federal Reserve Board.
Each panelist will present opening remarks, followed by a moderated discussion and audience Q&A. Let’s begin with Roberto’s insights.
