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Disinfecting A $2 Trillion Market



When Salomon Brothers Inc. admitted last August that it had submitted illegal bids in the Treasury securities market, Washington echoed with calls to give the $2 trillion market a regulatory scrubdown. Outraged members of Congress were ready to load heavy rules onto the government's overworked borrowing machine, where an interest-rate increase of just 0.01 percentage points can cost taxpayers $250 million a year.

Fortunately, federal regulators have identified a better disinfectant for the market: the light of day. In a report released on Jan. 22, the Treasury Dept., Federal Reserve, and Securities & Exchange Commission recommend changes that will break the stranglehold that the 38 big primary dealers have on sales of Treasury securities. As Business Week has pointed out, the key is automating Treasury's antiquated paper-and-pencil auctions (BW--Oct. 21). Once bidding goes on-line, Treasury can experiment with open auctions to replace its current sealed-bid sales--eliminating the information bottleneck that forces Treasury buyers to bid through primary dealers such as Salomon.

Automation also will improve surveillance. Computerized bidding allows regulators to verify bids immediately and creates an audit trail to help ferret out rule violations. The new report also calls for backup regulations: Treasury wants the power to require dealers to report large positions and says it will move more actively to break future market squeezes. But those rules will stay on the shelf if the regulators follow through on their automation plans. If the price of admission to the Treasury auction is a computer terminal, the big dealers will never again have the opportunities that Salomon exploited in last year's scandal. An open and efficient market will be the taxpayer's best protection.

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