Treasury collateral may not be good enough

The CFTC may rule that Treasuries are not not sufficient as collateral for swaps and futures. So much for Treasuries being viewed as a risk free asset. The CFTC is arguing that the collateral may not be liquid enough in a crisis. Hence, there is a need for another collateral source. Seems like the CTFC needs to talk with the Treasury Department about this. This will be a very expensive proposition for investors and traders in the swap market. The higher collateral costs will be passed onto traders at the CME. This will destroy liquidity in these markets. if there is actual for more collateral during or right before a crisis, the impact could be devastating. Even in the post-crisis period, a further increase in collared demands could ensure that the markets will not stabilize. There actually could be more stability in a non-exchnage system whereby a bank could flat a loan to a swap trader who is short collateral in the short-run but has real assets to back any loan. The bank can also provide a line of credit in an emergency that can be based on the specifics of the bank client. This may be better than offering a generic exchange back-stop.

Of course, what would you expect given the falling rating on US debt and the problems with the debt ceiling and shutdown. Is the idea of protecting against systemic risk going too far?