Wild Treasuries Trading Spurs Washington’s Transparency Push

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The historic swings that rocked the $12.7 trillion Treasury market in October are spurring U.S. authorities to consider expanding public reporting of trading activity to government bonds.

An assessment of publicly available information on Treasury market transactions and pricing is one recommendation in a 76-page report released Monday as the Treasury Department seeks to prevent excessive volatility. The yield on the 10-year Treasury note plunged as much as 0.37 percentage point Oct. 15, including a 0.16 percentage-point round trip in just 12 minutes. Bigger intraday changes have only happened three times since 1998, all driven by policy announcements, the report said.

Investment managers trade Treasuries through Wall Street banks known as dealers, both over the phone and electronically. Unlike in corporate debt and equity markets, trades done directly between dealers and clients aren’t reported publicly. U.S. authorities will study whether Wall Street should expand disclosure of Treasuries trading, according to the report.

“It’s the market for U.S. government debt -- how is there not more transparency in the trading and pricing we have today?” said Kevin McPartland, head of research for market structure and technology at Greenwich Associates, a Stamford, Connecticut-based financial-services consulting firm. “Of course, the next conversation that starts is about what impact that has on liquidity.”

Electronic Push

The report didn’t provide a timeline for moving forward with the transparency study.

Representatives from the Federal Reserve Bank of New York, the Federal Reserve Board, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Treasury declined to comment beyond the contents of the report.

“Public transparency surrounding trading activity in the U.S. Treasury market is critical to investor confidence and the liquidity of these markets,” the report said.

The review comes as investors say it’s getting tougher to trade U.S. government debt, in part because of capital restrictions after the credit crisis. The Fed said Wednesday that it doesn’t see signs of liquidity problems in U.S. bond markets.

Volatility Potential

Michael Spencer, chief executive officer of interdealer broker ICAP Plc, warned this week about the potential for more volatility in Treasuries. He attributed the price swings to the scaling back of trading by Wall Street banks known as primary dealers and an increase in electronic trading.

Treasury-trading platforms such as LiquidityEdge LLC and Direct Match LLC are cropping up to facilitate transactions. And in the $8 trillion corporate-bond market, at least 18 bond-trading systems have sprung up to help investors trade, including a platform run by Bloomberg News parent Bloomberg LP.

Corporate-bond transactions are reported within 15 minutes on a system run by the Financial Industry Regulatory Authority. In the U.S. stock market, all 11 exchanges and dozens of alternative platforms report trades almost immediately in public databases called securities information processors, or SIPs. Treasuries have no comparable platform for centralized trade reporting.

BlackRock, Pimco

Some of the largest investors in company debt say too much transparency can hinder their ability to trade large blocks. AllianceBernstein Holding LP, BlackRock Inc. and Pacific Investment Management Co. urged regulators in a May letter to consider loosening time requirements for disclosing large transactions because the information could tip off rivals.

Turnover of interest-rate-linked securities in other markets that publicly report trades has surged. Trading in interest-rate futures has climbed 81 percent in the past 10 years. This year, a record $335 billion of the contracts has changed hands on average each day, according to CME Group Inc. data. The comparable figure for Treasuries is $430 billion.

“If the time before reporting is appropriate, I don’t think it’s going to be a problem for liquidity,” John Briggs, head of strategy for the Americas at RBS Securities Inc. in Stamford, Connecticut, said by phone. But for Wall Street banks, “it might add another layer of burden for compliance.”

SEC Commissioner Luis Aguilar recommended changes to the way regulators approach the market on Tuesday while calling for more transparency. Aguilar, who is near the end of his term, suggested expanding rules from other markets to Treasury trading platforms, comprehensive trade reporting, and registering firms that trade Treasuries.

“The Treasury market, the largest and most liquid government securities market in the world, is now arguably the least transparent fixed income market in the U.S.,” Aguilar said in a statement.

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