Wall Street firms dust off plans as debt limit talks go to the wire

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WASHINGTON, Sep 29 (Businesshala) – Wall Street firms are sounding alarm bells and dusting off contingency plans as fears that Congress may fail to reach an agreement to raise the country’s debt limit in a timely manner, officials said.

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With federal government funding ending Thursday and the right to borrow on October 18, Democrats who narrowly control both chambers of Congress are scrambling to prevent an unprecedented US credit default. Huh. On Tuesday his latest efforts were blocked by Republicans.

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The government’s failure to meet its budget deficit and raise the legal limit on how much money it can borrow to meet debt obligations, currently set at $28.4 trillion, could send a shockwave to global markets.

“If there is some sort of failure to pay Treasury securities, we honestly don’t know what will happen,” said Rob Tomey, managing director and associate general counsel for capital markets at the Securities Industry and Financial Markets Association (SIFMA). .

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“Certainly, you can expect significant volatility, and the market needs to be prepared for that.”

JPMorgan Chase & Co CEO Jamie Dimon told Businesshala on Tuesday that the bank has begun preparations for the prospect of a US default, a “potentially catastrophic” event, though he said he expects lawmakers to last minute. reach the deal.

However, some analysts say the uncertainty is spreading between one-month Treasury bills and three-month Treasury bills, which are believed to carry a lower risk of default. One-month bills are currently at 0.07%, compared to 0.04% for three-month bills. Both gave returns of around 0.08% at the beginning of the year.

The past debt limit crises have caused a stir in global markets, even after they are resolved. The now-infamous 2011 impasse over the ceiling prompted S&P Global Ratings to downgrade US sovereign debt for the first time, taking $2.4 trillion off US stocks. Negotiations again fizzled out in 2017, albeit with less disruption.

Given how badly exposed Wall Street banks, dealers and investors will be, they have to be prepared for this possibility, even as they expect the crisis to resolve.

“We’ve been through this many times,” Tommy said, adding that the group reiterated its previous plans for a scenario in which the Treasury is unable to pay debt due.

“We’re dusting off work like this with our members to make sure everyone’s on the same page.”

SIFMA is working on two scenarios. More likely, the Treasury will have to buy time to pay back bondholders before payment that it will roll over those maturing securities for another day. This will allow the market to continue to function even when there is widespread volatility.

SIFMA said the other, much less likely scenario, would allow Treasury bonds to mature, which would be more disruptive because the unpaid bonds would still need to be settled, but would no longer exist in the US Federal Reserve’s system.

In general, the purpose of these plans is to ensure that firms have sufficient technical capacity, personnel and cash to handle high trading volumes to ensure that the market continues to function.

The Treasury Market Practice Group, a group of bond dealers convened by the New York Fed, also plans to trade defaulted Treasuries, which were reviewed earlier this year.

Internally, individual banks are also planning.

Dimon said JPMorgan had begun scenario-planning how a default would affect the repo and money markets, its capital ratio and rating agencies’ response. The bank has started combing through their customer contracts to understand how they will respond.

“You have to check the contracts to try to predict it,” he said. “It’s a lot of work.” (Reporting by Michelle Price and Pete Schroeder; Additional reporting by David Henry and Elizabeth Dilts in New York; Editing by Nick Ziminsky)

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