At Treasury Market Confab, Anxiety and Signs of More Oversight

  • SEC and CFTC warn new rules coming, especially for flash boys
  • Wall Street skeptical October 2014 volatility won't reoccur

For about 300 regulators, industry executives and academics who spend at least some of their waking hours thinking about the stability of the $13 trillion U.S. Treasury market, the New York Fed is the place to be this week.

They’re gathered to discuss the evolution of trading, and more importantly, how to prevent the jarring price swings that frayed nerves on Oct. 15, 2014, from happening again. On that day, yields fluctuated in a way that had only happened three other times since 1998 and unlike the earlier incidents, there was no obvious catalyst.

The Takeaways

Even market participants, such as high-frequency traders that now account for a big share of buying and selling, said they are amazed at how opaque the Treasury market is. Regulators will probably change that, but it might take a while.

Government officials speaking at the two-day conference that ends Wednesday dropped strong hints that they plan to tighten oversight of Treasuries, with a number of potential rules focusing on the flash boys.

Antonio Weiss, an adviser to Treasury Secretary Jacob J. Lew, said agencies in the coming weeks will publish a so-called request for information, a first step toward imposing new rules. Regulators want public feedback on how transparent the market should be and whether the data available to government officials could be improved, Weiss said.

The Commodity Futures Trading Commission plans to propose a series of measures as early as next month, said Timothy Massad, the agency’s chairman.

CFTC rules under consideration include a requirement that the computer algorithms used by electronic traders be tested to ensure they can be shut off during a market emergency. Massad said the agency also is looking at ways to curb incidents in which a single high-speed firm ends up on both sides of a trade, a situation that occurred frequently last October. Proposing a new regulation is the start of what’s typically a months long process of soliciting public feedback and then rewriting the rules.

Securities and Exchange Commission Chair Mary Jo White said her agency’s efforts to reduce “aggressive, destabilizing trading” for stocks could be useful for regulators assessing how to limit Treasury market volatility. Regulators should consider ramping up oversight of the platforms where Treasuries are traded and try to curb orders to buy and sell that can disrupt markets that are already stressed, she said. White also supports the release of more post-trade data.

Splintered Oversight

Even with the tough talk from regulators, boosting oversight of the benchmark for global debt markets is easier said than done.

Regulation of Treasuries is splintered between the SEC, CFTC, Treasury, Federal Reserve and New York Fed. Though the agencies have been working together in recent months, they don’t always get along. Each has its own interests and turf to protect. Even if they eventually agree on new rules, the regulators still have to contend with some industry opposition.

There also isn’t a consensus between Washington and Wall Street over where the biggest issues lie. Finance executives have repeatedly argued that rules passed after the 2008 financial crisis have sucked up liquidity in debt markets by forcing banks to reduce their trading and hoard high-quality assets like Treasuries. Lew and Weiss have pushed back, saying regulations passed under the Dodd-Frank Act didn’t play a significant role in what happened to Treasuries last October.

Deepest, Most Liquid

While officials including White, Weiss and Fed Governor Jerome Powell are giving public remarks at this week’s conference, industry executives are speaking on panels that don’t allow them to be quoted or cited by name.

Executives and academics generally supported the idea of making more information public. High-speed traders, whom regulators say may have exacerbated the market swings last October, defended their role in providing liquidity. Asset managers at the conference pushed back against the idea that there’s much of a problem, saying that although the market has changed, it’s still the world’s deepest and most liquid.

During a question-and-answer session, one conference attendee said some industry panelists sounded too confident in their own abilities and not focused enough on potential risks, just like Wall Street bankers were before 2008. Overall, the consensus is that despite all the brain power working on the issue, nothing they do will stop another Oct. 15 episode from occurring. For now, regulators seem determined to try.

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