# Explainer-How Wall Street is preparing for possible US debt default Author: Pal Sinha, Barnali Author URL: https://financedigest.com/author/pal-sinha-barnali Published: 2023-05-22 Category: NEWS Category URL: https://financedigest.com/category/news Meta Title: How Wall Street Prepares for US Debt Default Meta Description: As talks over raising the U.S. government's $31.4 trillion debt ceiling go down to the wire, Wall Street banks and asset managers are gearing up for URL: https://financedigest.com/explainer-how-wall-street-is-preparing-for-possible-us-debt-defaulthtml ![undefined](https://prod.superblogcdn.com/site_cuid_cm5qst7v3003gwirgwqtxn8i8/images/2023-05-22t045410z2lynxmpej4l03frtroptp4usa-markets-etps-1736813986847-compressed.jpg) # Explainer-How Wall Street is preparing for possible US debt default By Davide Barbuscia and Pete Schroeder NEW YORK/WASHINGTON (Reuters) – As talks over raising the U.S. government’s $31.4 trillion debt ceiling go down to the wire, Wall Street [banks and asset managers](https://www.financedigest.com/exclusive-allianz-in-talks-with-banks-for-china-asset-management-venture-sources.html "Exclusive-Allianz in talks with banks for China asset management venture -sources") have been preparing for the fallout from a potential default. The financial industry has [prepared for such a crisis](https://www.financedigest.com/six-ways-to-prepare-for-a-personal-finance-crisis.html "Six ways to prepare for a personal finance crisis") before, most recently in September 2021. But this time, the relatively short time frame for reaching a compromise has bankers on edge, said one senior [industry official](https://www.financedigest.com/leading-blockchain-firm-to-unveil-decentral-project-at-official-consensus-industry-closing-event.html "Leading Blockchain Firm to Unveil Decentral Project at Official Consensus Industry Closing Event"). Less than two weeks remain until June 1, when the Treasury Department has warned that the federal [government might not be able to pay](https://www.financedigest.com/uk-trial-lawyers-to-end-strike-after-accepting-government-pay-offer.html "UK trial lawyers to end strike after accepting government pay offer") all its debts, a deadline U.S. Treasury Secretary Janet Yellen reaffirmed on Sunday. Citigroup CEO Jane Fraser said this debate on the [debt ceiling is “more worrying”](https://www.financedigest.com/dollar-eases-before-inflation-data-with-nagging-worries-over-debt-ceiling-impasse.html "Dollar eases before inflation data, with nagging worries over debt ceiling impasse") than previous ones. JPMorgan Chase & CO CEO Jamie Dimon said the [bank is convening weekly](https://www.financedigest.com/marketmind-rba-shock-hike-starts-huge-week-for-central-banks.html "Marketmind: RBA shock hike starts huge week for central banks") meetings on the implications. ### WHAT WOULD HAPPEN IF THE U.S. DEFAULTED? U.S. government bonds underpin the [global financial system so it is difficult to fully gauge the damage a default](https://www.financedigest.com/concern-over-us-default-risk-grips-global-markets-as-talks-resume.html "Concern over US default risk grips global markets as talks resume") would create, but executives expect massive volatility across equity, debt and other markets. The ability to [trade in and out of Treasury positions in the secondary](https://www.financedigest.com/sharespost-announces-ats-approval-for-secondary-trading-of-security-tokens.html "SharesPost Announces ATS Approval for Secondary Trading of Security Tokens") market would be severely impaired. Wall Street executives who have advised the Treasury’s debt operations have warned that Treasury market dysfunction would quickly spread to the derivative, mortgage and commodity markets, as [investors would question the validity of Treasuries widely used as collateral for securing trades](https://www.financedigest.com/how-to-begin-investor-trading-in-australia.html "How to begin investor trading in Australia") and loans. [Financial institutions could ask counterparties to replace the bonds affected by missed](https://www.financedigest.com/a-missed-opportunity-research-reveals-that-while-small-finance-accounting-businesses-view-themselves-as-cost-savvy-most-arent-switching-water-suppliers-or-other-services.html "A missed opportunity: research reveals that while small finance & accounting businesses view themselves as cost-savvy, most aren’t switching water suppliers, or other services") payments, said analysts. Even a short breach of the debt limit could lead to a spike in [interest rates](https://www.financedigest.com/ecb-needs-to-keep-interest-rates-sustainably-high-to-combat-inflation-lagarde.html "ECB needs to keep interest rates ‘sustainably high’ to combat inflation – Lagarde"), a plunge in equity prices, and covenant breaches in loan documentation and leverage agreements. Short-term [funding markets](https://www.financedigest.com/white-bullets-collaboration-with-polands-sygnal-association-significantly-reduces-ad-funded-piracy-in-key-european-market.html "White Bullet’s collaboration with Poland’s Sygnał Association significantly reduces ad-funded piracy in key European market") would likely freeze up as well, Moody’s Analytics said. ### HOW ARE INSTITUTIONS PREPARING? Banks, brokers and trading [platforms are prepping for disruption to the Treasury market](https://www.financedigest.com/investment-platform-giant-etoro-expands-into-u-s-market.html "Investment Platform Giant eToro Expands Into U.S. Market"), as well as broader volatility. This generally includes game-planning how payments on Treasury securities would be handled; how critical funding markets would react; ensuring sufficient technology, staffing capacity and cash to handle high trading volumes; and checking the [potential impact](https://www.financedigest.com/the-potential-impact-of-coronavirus-covid-19-for-riveting-tools-market-revenue-opportunity-forecast-and-value-chain-2021-2028.html "The Potential Impact Of Coronavirus (Covid-19) For Riveting Tools Market Revenue, Opportunity, Forecast And Value Chain 2021-2028") on contracts with clients. [Big bond](https://www.financedigest.com/pimco-cut-big-position-in-russia-cds-by-adding-bonds-in-q2.html "PIMCO cut big position in Russia CDS by adding bonds in Q2") investors have cautioned that maintaining high levels of liquidity was important to withstand potential violent asset price moves, and to avoid having to sell at the worst possible time. Bond trading platform Tradeweb said it was in discussions with clients, industry groups, and other [market participants](https://www.financedigest.com/powder-dispenser-market-market-2019-2029-where-should-participant-focus-to-gain-maximum-roi.html "Powder Dispenser Market Market (2019 – 2029) | Where Should Participant Focus To Gain Maximum ROI ") about contingency plans. ### WHAT SCENARIOS ARE BEING CONSIDERED? The [Securities Industry and Financial Markets](https://www.financedigest.com/industrial-cyber-security-solutions-and-services-strong-increase-in-user-base-pans-out-for-north-america-to-lead-market.html "Industrial Cyber Security Solutions and Services – Strong Increase in User Base Pans Out for North America to Lead Market") Association (SIFMA), a leading industry group, has a playbook detailing how Treasury market stakeholders – the Federal Reserve Bank of New York, the Fixed Income Clearing Corporation (FICC), clearing banks, and Treasuries dealers – would communicate ahead of and during the days of potential missed Treasuries payments. SIFMA has considered several scenarios. The more likely would see the Treasury [buy time](https://www.financedigest.com/rising-oil-prices-buy-iran-time-in-nuclear-talks-officials-say.html "Rising oil prices buy Iran time in nuclear talks, officials say") to pay back bondholders by announcing ahead of a payment that it would be rolling those maturing securities over, extending them one day at a time. That would allow the [market to continue functioning](https://www.financedigest.com/continual-inventions-to-accelerate-the-flavored-and-functional-water-market.html "Continual Inventions To Accelerate The Flavored and Functional Water Market") but interest would likely not accrue for the delayed payment. In the most disruptive scenario, the Treasury fails to pay both principal and coupon, and does not extend maturities. The unpaid bonds could no longer trade and would no longer be transferable on the Fedwire [Securities Service](https://www.financedigest.com/facilitating-open-finance-through-secure-services.html "Facilitating open finance through secure services"), which is used to hold, transfer and settle Treasuries. Each scenario would likely lead to significant [operational problems](https://www.financedigest.com/australias-qantas-apologises-to-customers-for-operational-problems.html "Australia’s Qantas apologises to customers for operational problems") and require manual daily adjustments in trading and settlement processes. It is difficult because this is unprecedented but all we’re trying to do is make sure we develop a plan with our members to help them navigate through what would be a disruptive situation,” said Rob Toomey, SIFMA’s [managing director and associate general counsel for capital markets](https://www.financedigest.com/digitized-overhaul-to-drive-the-radiation-dose-management-market.html "Digitized overhaul to drive the Radiation Dose Management Market"). The Treasury [Market Practices Group – an industry](https://www.financedigest.com/computer-assisted-anesthesia-systems-market-industry-analysis-opportunities-technology-demand-top-players-and-growth-forecast-2027.html "Computer Assisted Anesthesia Systems Market Industry Analysis, Opportunities, Technology, Demand, Top Players and Growth Forecast 2027") group sponsored by the New York Federal Reserve – also has a plan for trading in unpaid Treasuries, which it reviewed at the end of 2022, according to meeting minutes on its website dated Nov. 29. The New York Fed declined to comment further. In addition, in past debt-ceiling standoffs – in 2011 and 2013 – Fed staff and policymakers developed a playbook that would likely provide a starting point, with the last and most sensitive step being to [remove defaulted securities from the market](https://www.financedigest.com/extracorporeal-co2-removal-market-in-depth-analysis-by-trends-opportunities-drivers-challenges-and-growth-factors-by-2026.html "Extracorporeal CO2 Removal Market: In-Depth Analysis by Trends, Opportunities, Drivers, Challenges and Growth Factors by 2026") altogether. The Depository Trust & [Clearing Corporation](https://www.financedigest.com/clearing-out-your-garage-benefiting-from-corporate-simplification-2.html "Clearing Out Your Garage – Benefiting from Corporate Simplification "), which owns FICC, said it was monitoring the situation and has modeled a variety of scenarios based on SIFMA’s playbook. We are also [working with our industry](https://www.financedigest.com/hybrid-working-a-risk-or-opportunity-for-the-financial-services-industry-2.html "Hybrid working: a risk or opportunity for the financial services industry?") partners, regulators and participants to ensure activities are coordinated,” it said. (Reporting by Davide Barbuscia; Editing by Megan Davies, Michelle Price and David Gregorio) --- This blog is powered by Superblog. Visit https://superblog.ai to know more. ---