NEW YORK (Reuters) - Two years after the most abrupt bond-trading disruption in recent memory, U.S. regulators appealed on Monday for a clearer view of trading in the vast Treasury market so to better understand what causes such shocks and to understand looming risks.
The $13.6-trillion market for U.S. government debt is the world’s deepest, drawing investors globally to its ultra-safe assets that serve to backstop other more risky activities. But the mostly electronic market shocked traders and supervisors alike when on Oct. 15, 2014 bond prices swung wildly within minutes for no apparently reason.
William Dudley, president of the Federal Reserve Bank of New York, which acts as the government’s eyes and ears on Wall Street, cited not only this “flash rally” but also this month’s plunge in the British pound - which happened “seemingly without a major catalyst,” he said.
Information is “not widely available” in Treasury and foreign exchange markets, Dudley said. “It is challenging for the official sector, market participants, and members of the public to effectively analyze these markets, understand the sources and risks of flash events, and evaluate how liquidity is changing.”
While banks and investors worry that too much public information about trading could reveal their strategies and intentions and lead to less efficiency, regulators - who often must appeal to these firms for the data - need this information to decide whether new rules are needed to make the market more sound.
Regulators like the Fed, Dudley said, need “improved access to transaction-level data” in order for the Treasury market to keep doing its job as a benchmark for financial assets worldwide, source for short-term collateral, conduit for U.S. monetary policy, and venue for financing government spending.
Dudley was speaking at a conference at the New York Fed involving top officials from the Securities and Exchange Commission, the Treasury Department, and other agencies, as well as top bank and market executives.
Last week, the SEC approved the Financial Industry Regulatory Authority’s proposal to require its members to report their trades of U.S. Treasuries.
“Treasury remains committed to close and careful review of the data before making any determinations,” Antonio Weiss, counselor to the U.S. Treasury secretary, told the conference. “But we believe the debate should shift from whether to seek increased transparency to how, when, and on what basis.”
Weiss outlined three strategies on public disclosure on trades: time delays, size limits, and phase-in. “Transparency is not all or nothing; and one size may not fit all segments of the Treasury market,” he said.
There is no clear evidence from studies cited at the conference that more disclosure on trading in the corporate bond market would hurt the Treasury market.
Reporting by Richard Leong and Jonathan Spicer; Editing by Chizu Nomiyama