The Justice Department has begun an examination of trading in the U.S. Treasury market, following the outlines of its successful cases against Wall Street’s illegal practices in foreign currencies and other businesses, said three people familiar with the inquiry.
The government is also continuing to look into possible collusion in gold and silver markets and in trading around certain oil benchmarks, the people said.
Though the latest inquiry into Treasury trading is in its earliest stages, investigators are said to be probing whether information is being shared improperly by financial institutions. Some of the world’s biggest banks and their subsidiaries pleaded guilty after traders were shown to be using chat rooms, which functioned as cartels, to coordinate positions on foreign-exchange markets. These practices violated federal antitrust laws. Some of the same banks were among those that settled fraud and antitrust investigations into manipulating key interest rates.
After the most recent flurry of guilty pleas -- from firms including JPMorgan Chase & Co., Citigroup Inc., Royal Bank of Scotland Group Plc, Barclays Plc, Deutsche Bank AG and UBS Group AG -- banks are in no position to be anything other than cooperative with investigators.
Wall Street’s collective sigh of relief at wrapping up those long-running investigations could be quickly replaced by concern about the possibility of even stiffer penalties if errant behavior surfaces in more markets. Prosecutors have expressed frustration over the difficulty of changing the culture at financial institutions.
“At this point, whatever the facts are regarding this, the government is in a strong position thinking that where there’s smoke, there’s fire,” said Jill Fisch, a professor at University of Pennsylvania Law School. “It’s not just one investigation after another, it’s one scandal after another.”
Peter Carr, a Justice Department spokesman, declined to comment. The New York Post reported June 8 that prosecutors are turning their attention to the U.S. Treasury market.
The instruments are a benchmark for borrowers and savers worldwide, helping determine the cost of credit cards and home loans. The largest government-bond market, it’s a haven for investors. China, Japan, Saudi Arabia and other countries convert trillions of dollars of cash into Treasuries every year. Despite its size and importance, the market is lightly regulated.
Various financial regulators oversee parts of the $12.5 trillion Treasury market, but not the whole. The Treasury Department has the authority to write rules, though not to enforce them. That responsibility can fall to the Securities and Exchange Commission when U.S. authorities are alerted to unusual trading behavior. The Federal Reserve Bank of New York monitors the market in relation to its decisions on monetary and fiscal stability policy.
It remains unclear where in the Treasury markets prosecutors aim to find wrongdoing, or if any specific allegations against Wall Street banks prompted the inquiries.
On Oct. 15, U.S. Treasuries went for a wild ride, enduring the biggest yield swings in a quarter century. The turbulence left investors wondering whether electronic trading was now undermining what’s considered one of the most stable markets.
Executives from three of the biggest market-making firms in U.S. Treasuries, who asked not to be identified, last year told Bloomberg News that a lack of cohesive regulation and technology to monitor high-frequency traders is making the Treasury market more dangerous for everyone. They cited a need for an investigation of spoofing -- in which an order is placed but quickly withdrawn to manipulate pricing.
The Treasury Market Practices Group, an advisory committee backed by the New York Fed, finalized additions to its best practices guidelines Wednesday. For example, on a list of trading practices to avoid, it now includes “those that give a false impression of market price, depth or liquidity.”
It also added an updated recommendation “that market participants who employ trading strategies that involve high-trading volume or quoting activity should be mindful of whether a sudden change in these strategies could adversely affect market liquidity and should seek to avoid changes likely to cause such disruption,” the TMPG wrote in a statement.
Its members include executives from Morgan Stanley, Goldman Sachs Group Inc., JPMorgan, Citadel LLC, BlackRock Inc. and ICAP Plc.
The Commodity Futures Trading Commission included an example of a trader’s attempt to manipulate the U.S. Treasury market in its settlement last month with Barclays. As part of that complaint, regulators published e-mails and conversations between Barclays traders and brokers that showed attempts to rig ISDAfix rates. Barclays, which neither admitted nor denied the CFTC’s findings, said the ISDAfix investigation was industrywide.