Citadel, Virtu Tell SEC Treasuries Plan Won’t Go Far Enough

  • Public dissemination, real-time reporting are topics of debate
  • Feedback comes in responses to SEC request for comment

Citadel LLC, KCG Holdings Inc. and Virtu Financial Inc. are among firms with a message for the U.S. Securities and Exchange Commission: Regulators’ plan to shed more light on dealings in the $13.4 trillion Treasuries market needs to be more comprehensive.

The high-speed trading firms’ feedback came in response to the SEC’s request for comment on a proposal by the Financial Industry Regulatory Authority that would require its members to report Treasuries trades for officials to use. The plan is part of an attempt to improve transparency in the world’s biggest bond market following an episode of unusual volatility in October 2014.

For the companies, Finra should go further than its current plan to collect trading data through its bond-price reporting system, known as Trace. Suggestions from the three include having firms report trading statistics immediately, moving toward releasing the data to the public and capturing more market participants, not just Finra members.

“The key to making meaningful improvements to Treasury market structure is not only making data available to regulators but also enhancing transparency for all Treasury market participants,” John McCarthy, general counsel of Jersey City, New Jersey-based KCG, said in the firm’s letter to the SEC. The proposal “should be amended to require real-time reporting and immediate public dissemination of collected data.”

Dozen Letters

The firms were among a dozen respondents to the SEC’s request by Monday’s deadline, joining submissions from lobbying groups for Wall Street, primary dealer Credit Suisse, Fidelity Investments and an 80-year-old individual investor from New York.

While they generally agree on the need to reduce opacity in the Treasury market, they don’t all see eye to eye on the path forward. For example, both the group representing bond dealers and Fidelity said in their letters that public reporting may harm liquidity.

The effort by the SEC, which oversees Finra, comes amid a sweeping review of the U.S. government bond market’s structure after the bout of volatility on Oct. 15, 2014 -- a 12-minute crash and rebound in yields with no apparent trigger -- generated scrutiny of transparency and liquidity in Treasuries trading.

Regulatory Push

Finra joins a group of regulators working on the issue: the SEC, the Treasury Department, the Commodity Futures Trading Commission, the Federal Reserve Board of Governors and the New York Fed.

Finra doesn’t comment on pending rule proposals, said Ray Pellecchia, a spokesman in New York. The group writes and enforces rules governing almost 4,000 securities firms.

As it stands, the change on which the SEC requested comment would require only brokers, banks and some automated trading firms -- those who are Finra members -- to report through Trace. The call for transactions to be reported for the most part on the same day would contrast with the near-immediate submission of data for other types of debt deals. The plan also calls for regulators such as the Treasury Department to use the data for audit-trail purposes, rather than releasing it to the public.

“Finra should seek to implement a reporting engine for U.S. Treasury transactions that can accommodate both official sector reporting and any eventual public reporting,” wrote Adam Cooper, chief legal officer for Chicago-based Citadel. The letter suggests modifying the proposal “to also require transaction-by-transaction reporting to the official sector, with reporting to occur within a certain number of minutes or hours.”

John Shay, a senior vice president at Virtu in New York, called in his letter for the data collection to be “comprehensive and immediate with very few exceptions.”

Limited Scope

For Fidelity, the proposal’s limited scope -- applying only to Finra members -- is a reason to hold off on implementing it. The asset manager cited an informal estimate by market participants that Finra members account for no more than 65 percent of Treasuries cash trading dollar volume.

The agencies working on the Treasuries market overhaul have already said they’re figuring out how to capture trades by non-Finra members.

“Given this work, we question why it is necessary to impose a trade reporting requirement on only Finra members at this time,” wrote Marc Bryant, Fidelity’s general counsel.

The lack of transparency in the benchmark market for global borrowing contrasts with trading in stocks, derivatives and corporate debt, for which the size and price of many transactions are reported publicly within minutes.

“I encourage the SEC to move forward with this important correction to so many years of fostering the largest Dark Pool in the U.S., ironically the U.S. Treasury market,” Jane Carson, the individual investor from New York, said in her letter.

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