Tweet
Here's one for the front page...
http://www.bloomberg.com/apps/news?p...6Zg&refer=home
ov. 6 (Bloomberg) -- Regulators who police the U.S. Treasury market are preparing to warn Wall Street's top bond traders against manipulation for the first time in 15 years.
The heads of Treasury bond trading and compliance officers from the 22 primary dealers -- the banks and securities firms that trade government securities directly with the Fed -- were summoned to a meeting at 4 p.m. today by Dino Kos, executive vice president of the Federal Reserve Bank of New York.
The executives will be addressing concerns raised by the Interagency Working Group on Market Surveillance, a group set up after Salomon Inc. admitted to rigging five Treasury auctions in 1991. The group, made up of officials from the Treasury Department, Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission, is probing firms including UBS AG for allegedly hoarding securities to profit by boosting prices. Regulators are concerned because an average $528 billion of Treasuries trade each day and provide the benchmarks for borrowing costs around the world.
``This is really the first investigation of this kind since more market controls were put into place after Salomon,'' said Ernest Patrikis, a former Federal Reserve Bank of New York general counsel and now a partner at Pillsbury Winthrop Shaw Pittman LLP in New York. The Fed is ``clearly looking at this market under a more powerful telescope.''
Deputy Assistant Treasury Secretary James Clouse put the securities industry on notice in a Sept. 27 speech to the Bond Market Association in New York. Clouse said the Treasury was growing concerned because ``firms appeared to gain a significant degree of control'' over specific Treasuries and used that ``market power to their advantage.''
Compliance Officers Included
Clouse said such bids distorted prices in the market in which $4.3 trillion of Treasuries change hands. Yields on benchmark 10-year notes were little changed at 4.71 percent.
Six executives or former officials of firms called to the meeting said they couldn't recall a case where compliance officers were told to attend meetings with the regulators. They spoke on the condition that their names not be used because of the probe. Spokespeople for the agencies declined to comment.
Federal Reserve officials who suspect market manipulation have provided the SEC with information to investigate traders, said people involved in the matter. The SEC is probing whether banks including UBS violated securities laws, according to a person with direct knowledge of the probe. UBS said it's cooperating with authorities.
The SEC is checking a series of UBS trades from last February, the Wall Street Journal reported on Oct. 30, citing people familiar with the matter.
UBS Scrutiny
The regulators are examining if the market was manipulated because purchases of five-year notes could be financed at rates lower than 0.3 percent for seven days straight in February. That suggested holders hoarded the securities and took advantage of other investors who needed to obtain the securities.
Phillip Smith and Robert Fischetti, two UBS traders, are on leave pending separation agreements, due to their connection to the alleged activities, a person familiar with the matter said. Doug Morris, a New York-based spokesman for UBS, a unit of Zurich-based UBS AG, Europe's biggest bank by assets, declined to comment on the status of the traders.
Trading by Credit Suisse Group, Switzerland's second-largest bank, also is under scrutiny, the Wall Street Journal reported last week. Credit Suisse spokesman Andres Luther declined to comment.
The interagency group was set up in 1992 to police the Treasury market after Salomon, the parent of Salomon Brothers, admitted the previous year to manipulating five government bond auctions. The New York Fed provides market data and information to regulators at the Treasury and the SEC.
Gutfreund, Strauss, Meriwether
Salomon, then the biggest trader in Treasuries, paid $290 million in penalties and ousted former Chief Executive Officer John Gutfreund, President Thomas Strauss and bond chief John Meriwether. Paul Mozer, in charge of the firm's Treasury bond trading group, was sentenced to four months in jail.
The firm's biggest investor, Berkshire Hathaway Inc. Chairman Warren Buffett, became Salomon's interim chairman. The firm was sold to Travelers Group Inc. in 1997 for $9.17 billion. Travelers is now part of Citigroup Inc., the world's biggest financial services company.
While Salomon manipulated Treasury bond auctions, regulators are now investigating the market for repurchase agreements, or repos, where securities firms finance trading by lending their government bonds. Firms have borrowed and lent a total of $5.7 trillion of securities in the repo market, according to the Bond Market Association.
Market Manipulation
In a repo, a firm borrows money using Treasuries as collateral. The greater the demand for the securities, the lower the rate the owner can demand for loans. That means participants can manipulate the repo rate by limiting the bonds available for loans. Traders in the past 20 years have commonly used two strategies to profit from scarcity of securities, Clouse said in his Sept. 27 speech.
One involves gaining control over the cheapest security eligible to be delivered to holders of an expiring futures contract. By simultaneously holding the contract, a trader would be in a position to insist on receiving more expensive securities to settle the contract.
In September 2005, many investors found themselves unable to get the 4 3/8 percent note maturing in August 2012, then the cheapest to deliver against the Chicago Board of Trade's 10-year note futures contract that expired at the end of the month. That enabled holders to borrow cash against it at zero percent interest.
Disclosing Positions
The Treasury responded in that instance by ordering firms that held more than $2 billion of the security to disclose their positions as it investigated the so-called squeeze. Board of Trade rules limiting holdings of futures contracts in the last 10 days of its life took effect in December.
The other strategy involves lending a security at general market rates under a so-called ``tri-party'' arrangement that prohibits the borrower from re-lending them, Clouse said. The arrangement may create scarcity, enabling the remaining portion to be lent at below-market rates.
The Fed's target interest rate for overnight loans between banks at the time when the UBS trading is being examined was 4.50 percent. In March, owners of the newest two-year note were able to borrow against it at a rate of 0.5 percent or less at the 10 a.m. close of trading on five successive days.
Traders said there have been fewer such cases since Clouse's speech.
``They think there's a serious problem, they're angry about it, and they want it to stop without having to get into prosecutorial mode,'' said Robert Lunder, the former head of government bond trading at Bear Stearns Cos. in New York, one of the primary dealers. By summoning compliance officers, ``they might as well say, `Bring your CEO','' he said.
http://www.bloomberg.com/apps/news?p...6Zg&refer=home
ov. 6 (Bloomberg) -- Regulators who police the U.S. Treasury market are preparing to warn Wall Street's top bond traders against manipulation for the first time in 15 years.
The heads of Treasury bond trading and compliance officers from the 22 primary dealers -- the banks and securities firms that trade government securities directly with the Fed -- were summoned to a meeting at 4 p.m. today by Dino Kos, executive vice president of the Federal Reserve Bank of New York.
The executives will be addressing concerns raised by the Interagency Working Group on Market Surveillance, a group set up after Salomon Inc. admitted to rigging five Treasury auctions in 1991. The group, made up of officials from the Treasury Department, Federal Reserve, Securities and Exchange Commission and Commodity Futures Trading Commission, is probing firms including UBS AG for allegedly hoarding securities to profit by boosting prices. Regulators are concerned because an average $528 billion of Treasuries trade each day and provide the benchmarks for borrowing costs around the world.
``This is really the first investigation of this kind since more market controls were put into place after Salomon,'' said Ernest Patrikis, a former Federal Reserve Bank of New York general counsel and now a partner at Pillsbury Winthrop Shaw Pittman LLP in New York. The Fed is ``clearly looking at this market under a more powerful telescope.''
Deputy Assistant Treasury Secretary James Clouse put the securities industry on notice in a Sept. 27 speech to the Bond Market Association in New York. Clouse said the Treasury was growing concerned because ``firms appeared to gain a significant degree of control'' over specific Treasuries and used that ``market power to their advantage.''
Compliance Officers Included
Clouse said such bids distorted prices in the market in which $4.3 trillion of Treasuries change hands. Yields on benchmark 10-year notes were little changed at 4.71 percent.
Six executives or former officials of firms called to the meeting said they couldn't recall a case where compliance officers were told to attend meetings with the regulators. They spoke on the condition that their names not be used because of the probe. Spokespeople for the agencies declined to comment.
Federal Reserve officials who suspect market manipulation have provided the SEC with information to investigate traders, said people involved in the matter. The SEC is probing whether banks including UBS violated securities laws, according to a person with direct knowledge of the probe. UBS said it's cooperating with authorities.
The SEC is checking a series of UBS trades from last February, the Wall Street Journal reported on Oct. 30, citing people familiar with the matter.
UBS Scrutiny
The regulators are examining if the market was manipulated because purchases of five-year notes could be financed at rates lower than 0.3 percent for seven days straight in February. That suggested holders hoarded the securities and took advantage of other investors who needed to obtain the securities.
Phillip Smith and Robert Fischetti, two UBS traders, are on leave pending separation agreements, due to their connection to the alleged activities, a person familiar with the matter said. Doug Morris, a New York-based spokesman for UBS, a unit of Zurich-based UBS AG, Europe's biggest bank by assets, declined to comment on the status of the traders.
Trading by Credit Suisse Group, Switzerland's second-largest bank, also is under scrutiny, the Wall Street Journal reported last week. Credit Suisse spokesman Andres Luther declined to comment.
The interagency group was set up in 1992 to police the Treasury market after Salomon, the parent of Salomon Brothers, admitted the previous year to manipulating five government bond auctions. The New York Fed provides market data and information to regulators at the Treasury and the SEC.
Gutfreund, Strauss, Meriwether
Salomon, then the biggest trader in Treasuries, paid $290 million in penalties and ousted former Chief Executive Officer John Gutfreund, President Thomas Strauss and bond chief John Meriwether. Paul Mozer, in charge of the firm's Treasury bond trading group, was sentenced to four months in jail.
The firm's biggest investor, Berkshire Hathaway Inc. Chairman Warren Buffett, became Salomon's interim chairman. The firm was sold to Travelers Group Inc. in 1997 for $9.17 billion. Travelers is now part of Citigroup Inc., the world's biggest financial services company.
While Salomon manipulated Treasury bond auctions, regulators are now investigating the market for repurchase agreements, or repos, where securities firms finance trading by lending their government bonds. Firms have borrowed and lent a total of $5.7 trillion of securities in the repo market, according to the Bond Market Association.
Market Manipulation
In a repo, a firm borrows money using Treasuries as collateral. The greater the demand for the securities, the lower the rate the owner can demand for loans. That means participants can manipulate the repo rate by limiting the bonds available for loans. Traders in the past 20 years have commonly used two strategies to profit from scarcity of securities, Clouse said in his Sept. 27 speech.
One involves gaining control over the cheapest security eligible to be delivered to holders of an expiring futures contract. By simultaneously holding the contract, a trader would be in a position to insist on receiving more expensive securities to settle the contract.
In September 2005, many investors found themselves unable to get the 4 3/8 percent note maturing in August 2012, then the cheapest to deliver against the Chicago Board of Trade's 10-year note futures contract that expired at the end of the month. That enabled holders to borrow cash against it at zero percent interest.
Disclosing Positions
The Treasury responded in that instance by ordering firms that held more than $2 billion of the security to disclose their positions as it investigated the so-called squeeze. Board of Trade rules limiting holdings of futures contracts in the last 10 days of its life took effect in December.
The other strategy involves lending a security at general market rates under a so-called ``tri-party'' arrangement that prohibits the borrower from re-lending them, Clouse said. The arrangement may create scarcity, enabling the remaining portion to be lent at below-market rates.
The Fed's target interest rate for overnight loans between banks at the time when the UBS trading is being examined was 4.50 percent. In March, owners of the newest two-year note were able to borrow against it at a rate of 0.5 percent or less at the 10 a.m. close of trading on five successive days.
Traders said there have been fewer such cases since Clouse's speech.
``They think there's a serious problem, they're angry about it, and they want it to stop without having to get into prosecutorial mode,'' said Robert Lunder, the former head of government bond trading at Bear Stearns Cos. in New York, one of the primary dealers. By summoning compliance officers, ``they might as well say, `Bring your CEO','' he said.
Comment