[Federal Register Volume 81, Number 14 (Friday, January 22, 2016)]
[Notices]
[Pages 3928-3934]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2016-01246]
[[Page 3927]]
Vol. 81
Friday,
No. 14
January 22, 2016
Part III
Department of the Treasury
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Notice Seeking Public Comment on the Evolution of the Treasury Market
Structure; Notice
Federal Register / Vol. 81, No. 14 / Friday, January 22, 2016 /
Notices
[[Page 3928]]
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DEPARTMENT OF THE TREASURY
[Docket No. TREAS-DO-2015-0013]
Notice Seeking Public Comment on the Evolution of the Treasury
Market Structure
AGENCY: Office of the Under Secretary for Domestic Finance, Department
of the Treasury.
ACTION: Notice and Request for Information.
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SUMMARY: The Department of the Treasury (``Treasury'') is seeking
public comment on structural changes in the U.S. Treasury market and
their implications for market functioning; trading and risk management
practices across the U.S. Treasury market; considerations with respect
to more comprehensive official sector access to Treasury market data;
and benefits and risks of increased public disclosure of Treasury
market activity.
DATES: Comments must be received no later than March 22, 2016.
ADDRESSES: Comments may be submitted through the Federal eRulemaking
Portal (www.regulations.gov). Please follow the instructions for
submitting comments through the Web site. You may download this
proposed rule from www.regulations.gov or www.treasurydirect.gov.
Please submit your comments, along with your full name and mailing
address. We will not accept comments by fax or email. All comments will
be posted to www.regulations.gov and on the TreasuryDirect Web site at
www.treasurydirect.gov.
Additional Instructions: In general, comments received, including
attachments and other supporting materials, are part of the public
record and are available to the public. Do not include any information
in your comment or supporting materials that you consider confidential
or inappropriate for public disclosure.
FOR FURTHER INFORMATION CONTACT: For general inquiries, submission
process questions or any additional information, please email
TreasuryMarket [email protected] or call (202) 622-2396. If you use a
telecommunications device for the deaf (TDD) or a text telephone (TTY),
call the Federal Relay Service (FRS), toll free, at 1-800-877-8339. All
responses to this Notice and Request for Information should be
submitted via http://regulations.gov to ensure consideration.
SUPPLEMENTARY INFORMATION: The U.S. Treasury market is the deepest and
most liquid market in the world.\1\ It plays a critical and unique role
in the global economy, serving as the primary means of financing the
U.S. federal government, a significant investment instrument and
hedging vehicle for global investors, a risk-free benchmark for other
financial instruments, and an important market for the implementation
of monetary policy by the Federal Reserve System.
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\1\ For purposes of this Request for Information (RFI), the U.S.
Treasury market comprises the secondary market trading of U.S.
Treasury securities, futures and options on U.S. Treasury securities
and futures, and securities financing transactions in which Treasury
securities are used as collateral.
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The structure of the Treasury market has evolved significantly over
the past two decades. In particular, technology advancements, and the
associated growth in high-speed electronic trading has contributed to
the growing presence of principal trading firms (PTFs),\2\ with these
firms now accounting for the majority of trading and standing quotes in
the order book in both futures and interdealer cash markets. By
contrast, bank-dealers \3\ still account for a majority of secondary
cash market trading overall (when including dealer-to-customer
trading), but they comprise well under half of the trading and quoting
activity in the inter-dealer cash markets. These changes in
intermediation and the provision of liquidity have coincided with
significant growth in the U.S. fixed-income market, an evolving
regulatory and macroeconomic landscape, and potential changes in the
demand for liquidity by many investors.
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\2\ For purposes of this RFI, a PTF is defined as an investor
with the following typical characteristics: Principal investor,
deploys proprietary automated trading strategies, low latency
typically key element of trading strategies, may be registered as
broker or dealer but does not have clients as in a typical broker or
dealer business model.
\3\ For purposes of this RFI, bank-dealer refers to a SEC-
registered broker-dealer that is owned by a bank. A non-bank dealer
is an independent SEC-registered broker-dealer that is not owned by
a bank. Primary dealers, as designated by the Federal Reserve Bank
of New York, are a subset of the bank-dealer category in the JSR.
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Trading in the Treasury cash market occurs across a diverse set of
venues and modes of execution. Historically, the Treasury cash market
has been bifurcated between the interdealer market, in which dealers
trade with one another, and the dealer-to-client market, in which
dealers trade with their customers (e.g. asset managers, pension funds,
insurance companies, corporations). In the Treasury cash market,
customers, also referred to as end users, have not historically traded
directly with other end users.\4\
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\4\ For purposes of this RFI, customer refers to an
institutional customer, to differentiate from a retail customer.
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Trading in the inter-dealer cash market has evolved significantly.
Originally, this market had been open almost exclusively to dealers,
who transacted with each other by telephone. In the early 2000s this
changed, with inter-dealer brokers launching electronic trading
platforms and later opening access to those platforms to non-dealers.
Trading on these platforms has become increasingly automated, with
transactions conducted using algorithmic and other trading strategies
involving little or no human intervention. Today, trading on the inter-
dealer platforms bears some resemblance to other highly liquid markets,
including equities and foreign exchange markets, where PTFs and dealers
transact in automated fashion, sometimes in large volumes and at high
speed.
In contrast, a significant portion of trading in the dealer-to-
customer market occurs on platforms that facilitate the matching of buy
and sell orders primarily through request for quote (RFQ) systems, not
central limit order books. These platforms are increasingly electronic,
but are generally not conducive to automated or high-frequency trading
strategies. Dealers also internalize a portion of their customer
flow.\5\ However, it is unclear the extent to which this occurs given
currently available data.
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\5\ For the purposes of this RFI, internalization refers to a
broker filling a customer order either from the firm's own inventory
or by matching the order with other customer order flow, instead of
routing the order to an inter-dealer market for execution.
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Treasury futures are required by law to be traded on a registered
exchange, and are traded primarily on the Chicago Board of Trade, part
of the CME Group (CME). Futures transactions traded on the CME are
centrally cleared at CME's clearinghouse. In the 1990s, futures trading
began to transition from manual to electronic processes for the
transmission of orders and information, and the execution of trades.
Electronic trading eventually became the dominant mode of execution in
the futures market. Now, more than 95 percent of all on-exchange
futures trading occur on electronic trade-matching platforms, and
market participants are increasingly employing automated systems for
the generation, transmission, management, and execution of orders.\6\
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\6\ See CFTC Proposed Rule: Regulation Automated Trading,
December 17, 2015: http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2015-30533a.pdf.
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[[Page 3929]]
Non-bank proprietary trading firms have long played a significant
role in the futures market. As the market has evolved to greater levels
of electronic trading, they have increasingly employed automated
trading strategies, and increasingly moved into the Treasury cash
market. Today, PTFs represent a majority of trading in Treasury futures
and inter-dealer cash markets.
On July 13, 2015, the staffs of the Treasury, the Board of
Governors of the Federal Reserve System (``Board''), the Federal
Reserve Bank of New York (``FRBNY''), the U.S. Securities and Exchange
Commission (``SEC''), and the U.S. Commodity Futures Trading Commission
(``CFTC'') (collectively, the ``Joint Staffs''), published the Joint
Staff Report: The U.S. Treasury Market on October 15, 2014
(``JSR'').\7\ The JSR analyzed the extraordinary volatility in the
Treasury market on the morning of October 15, 2014, and identified four
next steps for further work: (1) Further study of the evolution of the
U.S. Treasury market and the implications for market structure and
liquidity, (2) continued monitoring of trading and risk management
practices across the U.S. Treasury market and a review of the current
regulatory requirements applicable to the government securities market
and its participants, (3) an assessment of the data available to the
public and to the official sector on U.S. Treasury cash securities
markets, and (4) continued efforts to strengthen monitoring and
surveillance and promote inter-agency coordination related to the
trading across the U.S. Treasury market.
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\7\ Joint Staff Report: The U.S. Treasury Market on October 15,
2014: http://www.treasury.gov/press-center/press-releases/Documents/Joint_Staff_Report_Treasury_10-15-2015.pdf. The findings in the JSR
were based in part on transaction-level, non-public data that staff
obtained from the primary locations for price discovery in the
Treasury market, the Chicago Mercantile Exchange for futures and
BrokerTec and eSpeed for cash securities.
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Treasury is seeking public comment on several specific questions
that will inform the ongoing work related to the next steps identified
in the JSR. This RFI is intended, in part, to seek information and
viewpoints from a diverse group of stakeholders, including the general
public, buy and sell-side market participants, academics, and industry
groups regarding these and other structural changes in the Treasury
market, and their implications for the depth, liquidity, and
functioning of the market. This RFI is also intended to develop a
holistic view of trading and risk management practices across U.S.
Treasury futures and cash markets--including the various trading venues
and modes of execution present in the cash market--and it seeks input
on potential improvements in Treasury market policies, practices, and
conduct.
Given the market evolution, access to timely and comprehensive data
across related markets is increasingly important to fully assess new
developments, and analyze market events. Accordingly, we are interested
in the most efficient and effective ways for the official sector to
obtain additional market data and in ways to more effectively monitor
diverse but related markets. Finally, we are interested in the
potential benefits and costs of additional transparency with respect to
Treasury market trading activity and trading venue policies and
practices.
Treasury developed this RFI in consultation with the Joint Staffs.
The responses to this RFI will further enhance our understanding of the
changes underway in the Treasury market and will help to inform the
ongoing work related to the next steps identified in the JSR as well as
any policy responses. This is intended to be a comprehensive list of
questions. Depending on your role and/or interest in the Treasury
market, you may choose to answer only certain questions.
I. Further Study of the Evolution of the U.S. Treasury Market and the
Implications for Market Structure and Liquidity
Treasury is interested in the various factors driving the evolution
of the Treasury market discussed above, and their implications for
market functioning. These factors include changes in technology, the
growing prevalence of automated trading, changes in market making,
financial institutions' risk tolerance and business models, shifts in
buy and sell-side participation, post-crisis regulatory reforms, as
well as any other factors respondents to this RFI may identify. We are
also interested in the changing nature of liquidity and liquidity
provision in the U.S. Treasury market.
By some metrics, the liquidity and efficiency of trading in the
U.S. Treasury market are as robust as they have ever been. For example,
bid-ask spreads have remained steady at very low historical levels. But
the changes in market structure also raise questions about evolving
risks, such as whether an improvement in average liquidity conditions
may come at the cost of rare but severe bouts of volatility that
coincide with significant strains in liquidity. The changing nature of
liquidity also suggests that measures used to estimate liquidity may
need to be enhanced in order to broaden our understanding of the state
of the market, both during normal and stressed market conditions.
Questions for Public Comment
Treasury requests comment on the questions below. These questions
are intended to solicit views on the implications of changes to U.S.
Treasury market structure, including changes to financing markets
(i.e., the repurchase agreement market) using Treasury securities, for
liquidity provision, and market functioning. We also welcome any input
on the current market structure and how participants believe U.S.
Treasury market structure will evolve in the coming years.
1.1 Have there been changes in the nature of liquidity provision,
or demand for liquidity, in the U.S. Treasury market? If so, are these
trends different in the futures, dealer-to-customer, or interdealer
broker (``IDB'') market, or in the ``on-the-run'' and ``off-the-run''
sectors, or across different types of Treasury securities (e.g. bills,
nominal fixed rate coupon securities, nominal floating rate securities,
and inflation-indexed securities)? Which factors have been responsible
for any observed trends in liquidity provision and/or demand? In
addressing those questions, please consider the dealer-to-customer
market, trading on IDB platforms, and in the futures market, as
applicable, and please provide or refer to data and/or analysis that
support your conclusion. In addition, please consider the following
questions, as applicable:
a. How do you define liquidity? How do you define liquidity
provision?
b. Which measures are most indicative of the degree of liquidity?
How might these measures be refined or expanded, if you were not
limited by the availability of data?
c. How do different indicators provide information on different
aspects of liquidity, and in what ways?
d. Which measures best represent the resilience of liquidity, or
the relationships between liquidity and volatility?
e. To what extent are these measures of liquidity and the
resilience of liquidity different from measures used in other markets
that have witnessed similar market structure changes? What are the
idiosyncratic factors unique to Treasury cash markets that may cause
these measures to differ?
f. What changes, if any, have you observed in these measures over
recent years? Over recent months?
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g. What microstructure features of the U.S. Treasury futures and
cash markets, including both IDB venues and dealer-to-client markets,
have affected the functioning, liquidity, efficiency and participation
in these markets? What features have affected the functioning of the
Treasury market as a whole?
1.2 What changes, if any, have you made or observed in investment,
hedging, and trading practices in response to shifts in Treasury market
structure?
1.3 How does the way in which you transact in or provide liquidity
to the U.S. Treasury market change during periods of stress?
1.4 Looking forward, do you anticipate significant changes in the
structure of the U.S. Treasury market absent further regulatory
changes? What would be the key benefits and/or risks of these changes
in market structure? What key factors are likely to drive these
changes? What changes are you planning to your firm's investment and
trading policies, strategies, and practices?
1.5 What changes to the U.S. Treasury market structure, whether
through public or private sector initiatives, might be advisable given
the recent and expected future evolution? What role should the public
sector play in driving or facilitating these changes?
1.6 What are the benefits and risks from the increased speed with
which secondary market transactions take place? Do these benefits and
risks differ across individual products (e.g. on-the-run versus off-the
run securities)? How have market participants and trading venues
responded to, or facilitated, improvements in speed, and how, if at
all, should policy makers respond?
1.7 To what extent have changes in Treasury financing markets
affected liquidity in cash Treasury markets, and what is the best
evidence of those effects? Looking forward, do you anticipate major
changes in the Treasury financing markets and how would this impact the
functioning of the cash Treasury markets? How have firms modified their
trading strategies in response to, or in anticipation of, these
changes? What changes in Treasury financing markets could improve
market efficiency? What are the potential benefits and risks to the
Treasury market of increased access to central clearing of Treasury
repurchase agreement (``repo'') transactions?
1.8 What share of trading (in the case of dealers, your own
trading) is internalized? To what extent does it vary depending on
security type (e.g., on-the-run, off-the-run)? How has this changed
over time and how do you expect it to develop? What implications for
the Treasury market, if any, do you see as a result of these
developments?
II. Continued Monitoring of Trading and Risk Management Practices
Across the U.S. Treasury Market and a Review of the Current Regulatory
Requirements Applicable to the Government Securities Market and Its
Participants
The introduction and rapid growth of electronic and automated
trading protocols by many participants in the U.S. Treasury market over
the past two decades have brought benefits as well as challenges to
trading practices and risk and internal control systems. Risk controls
at firms and trading venues must be able to monitor order and trade
activity at the increased speeds made possible by this automation. In
recent years, many trading platforms and firms have updated their risk
management practices to better align them with a faster and more
complex trading environment. The public and private sectors have
collaborated to establish best practices for transacting in the modern
Treasury market. In particular, the Treasury Market Practices Group
(``TMPG'') recently updated its Best Practices for Treasury, Agency
Debt, and Agency Mortgage Backed Securities Market by incorporating
recommendations related to automated trading in TMPG covered
markets.\8\ The updated TMPG best practices recommended that all
Treasury market participants incorporate best practices in their
operations in order to promote trading integrity and to support an
efficient marketplace.
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\8\ Best Practices for Treasury, Agency Debt, and Agency
Mortgage-Backed Securities Markets: http://wcapps.ny.frb.org/tmpg/TPMG_June%202015_Best%20Practices.pdf.
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The trend toward increasingly automated trading, including
algorithmic trading strategies, is also being addressed by various
regulatory efforts underway, particularly by the SEC and the CFTC.
Among the next steps identified in the JSR is a review of the
regulatory requirements applicable to the government securities market
and its participants. The Government Securities Act (GSA) of 1986, as
amended, provides for the registration of government securities brokers
and dealers engaging in transactions in government securities and
requires Treasury to adopt rules with respect to financial
responsibility and related practices of government securities brokers
and dealers.\9\ The Treasury, SEC, and the federal bank regulators,
regulate government securities brokers and dealers in the Treasury
market. The CFTC regulates the futures markets, including the Treasury
futures markets, and many of its participants.
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\9\ See Public Law 99-571, October 28, 1986 and Public Law 103-
202, December 17, 1993.
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In order to prevent fraudulent and manipulative acts and practices
and to promote just and equitable principles of trade, the GSA also
authorizes the appropriate regulatory agencies (the SEC and federal
bank regulators) to issue regulations, in consultation with Treasury,
with respect to transactions in government securities for the entities
they regulate.\10\ The enforcement authority for these rules sits with
the SEC, the Financial Industry Regulatory Authority (``FINRA'') or the
appropriate federal bank regulator. Based on the current statutory
scheme, there are several differences in the regulatory requirements
applicable to the government securities market as compared to other
U.S. securities, commodities and derivatives markets that may be worthy
of examination.\11\
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\10\ Ibid.
\11\ There are differences in the current regulatory
requirements applicable to the government securities market as
compared to other U.S. securities, commodities and derivatives
markets. For example, SEC rules applicable to alternative trading
systems do not apply to alternative trading systems through which
only government securities are traded (although such venues may
voluntarily adopt such standards). Real time public reporting rules
applicable to transactions in other securities and derivatives do
not apply to transactions in Treasury securities. Large non-broker
and non-dealer participants in the government securities market are
not required to register (unlike large swap market participants).
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Questions for Public Comment
We request comment on the questions below. We are interested in
what further steps the public and private sectors can take to address
any outstanding risks, including operational risks to market
functioning and risks to market integrity. We are also interested in
the extent to which rules and practices applicable in other markets may
be effective, in whole or in part, in improving the resilience of U.S.
Treasury markets.
2.1 Are the risk management controls currently in place at U.S.
Treasury cash and futures trading venues, as well as firms transacting
in those venues, properly calibrated to support the health of the U.S.
Treasury market? Why or why not? Please list the types of controls that
are employed, as well as planned changes or improvements. In addressing
these questions, please consider the dealer-to-customer market, trading
on IDB platforms, and the futures market, as applicable. In addition,
please consider the following questions:
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a. What policies and risk management practices at U.S. Treasury
cash and futures trading venues, as well as at firms transacting in
those venues, could be improved or developed to mitigate potential
risks associated with increased automation, speed, and order
complexity? Please consider the risks posed by trading, risk transfer,
and clearing and settlement.
b. To what extent should venue-level risk management practices be
uniform across Treasury cash and futures trading venues? For example,
should there be trading halts in the Treasury cash market and should
they be coordinated between Treasury cash and futures markets, and if
so, how? Should Treasury cash, futures, options, and/or swaps venues
coordinate intraday risk monitoring, and if so, at what frequency? If
there were trading halts, how should they be implemented for bilateral
trading activity in the Treasury cash market? What would be the primary
challenges in implementing such trading halts, particularly given that
trading in the U.S. Treasury cash market is over-the-counter, global in
nature, and conducted on a 24-hour basis? \12\
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\12\ Currently, under the GSA Treasury does not have the
statutory authority to suspend trading or establish limit up/limit
down thresholds for Treasury securities.
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c. To what extent should U.S. Treasury cash market platforms be
responsible for monitoring, identifying, and/or reporting suspicious
trading activity?
2.2 What internal risk controls are commonly employed by firms
using automated, including algorithmic, trading strategies in the
Treasury cash market? Are these different or similar to those used in
the Treasury futures markets, and what are the reasons for any
differences? How are such controls designed and triggered? How
frequently are they triggered? What internal process controls commonly
govern the implementation and modifications of trading algorithms?
2.3 What types of algorithmic trading strategies are commonly used
by participants in the U.S. Treasury market? What features do those
strategies have in common, and what features differ across strategies?
What are the potential benefits and risks to an effective U.S. Treasury
market functioning resulting from certain algorithmic trading
strategies, certain order types, and/or particular trading venue
policies or practices.
2.4 How are best practices used in evaluating, and updating, risk
management systems at a given firm? How does your firm make use of
TMPG's best practices (referenced above) for operations in the Treasury
cash market? How can best practice recommendations be utilized in order
to reinforce market integrity? What are the benefits and limitations of
best practice recommendations?
2.5 What are the benefits and risks associated with the current
structure for clearing and settling Treasury securities transactions in
the dealer-to-customer market and on IDB platforms, as applicable. For
example:
a. Are intraday margining practices in the Treasury cash market for
both cleared and non-cleared transactions currently sufficient to
protect against counterparty risk, especially in light of the speed at
which positions can be accumulated? What options are available to
improve margining practices? Should the maximum potential intraday
exposure of firms be calibrated relative to their level of capital? If
so, how should it be calibrated? Are alternative measures of potential
exposure more meaningful for automated trading strategies, and if so,
which type of measures?
b. Currently, there are no statutory requirements that require
participants to centrally clear cash Treasury transactions. Should such
a requirement apply to any participants, particularly those with large
trading activity or large positions? Would the secondary market for
cash Treasury securities benefit from broader participation in
centralized clearing? Why or why not?
2.6 Many of the standards applicable to U.S. securities,
commodities, and derivatives markets are not applicable to the U.S.
Treasury cash market. Which differences, if any, should be addressed
and how should standards be aligned? How will these affect the cost of
accessing or participating in these markets, as well as of transacting
in these markets? Would there be any implications to U.S. federal
government borrowing costs? In addressing these questions, please
consider the dealer-to-customer market, trading on IDB platforms, and
the futures market, as applicable. In addition, please consider the
following:
a. What implications would a registration requirement for firms
conducting certain types of automated trading, or certain volume of
trading, in the U.S. Treasury market have on market structure and
efficiency, investor protection, and oversight?
b. Should firms that conduct certain types of automated trading, or
certain volume of trading, in the U.S. Treasury market be subject to
capital requirements, examinations and supervision, conduct rules, and/
or other standards? What would be the implications of each?
2.7 Should self-trading be expressly prohibited in the cash
Treasuries market? \13\ Does self-trading provide any benefits to the
markets? Are there risk management tools, either at trading firms or at
trading platforms, which can effectively reduce levels of self-trading
and improve trading efficiencies?
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\13\ For purposes of this RFI, self-trading is defined as a
transaction in which the same legal entity takes both sides of the
trade so that no change in beneficial ownership results.
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III. An Assessment of the Data Available to the Official Sector on U.S.
Treasury Cash Securities Markets
The analysis presented in the JSR was based on cash and futures
transactions and order book information, with the cash data provided by
the IDB platforms and the futures data obtained through the CFTC as
part of its oversight of the CME. Transaction data for the U.S.
Treasury futures market is provided daily to the CFTC, and order book
data is available to the CFTC upon request. This transaction data
includes time, volume, price, and counterparty information. The
official sector does not currently receive any regular reporting of
Treasury cash market transactions. The JSR did not include any analysis
of dealer-to-customer data, although certain dealer-to-customer data
was subsequently obtained for the purpose of additional analysis of
October 15, 2014 and the control days analyzed in the JSR.
The need for more comprehensive official sector access to data,
particularly with respect to U.S. Treasury cash market activity, is
clear. Given the benefits of enhanced transparency among all official
sector stakeholders into trading activity across both the cash and
futures markets, we are interested in views regarding the most
efficient and effective way to collect, aggregate, and appropriately
monitor U.S. Treasury cash and futures markets data. We are also
interested in the additional infrastructure that would be necessary for
market participants to begin reporting comprehensive U.S. Treasury
market transaction data to the official sector, especially given the
diversity of trading venues in the Treasury cash markets. Finally, we
are interested in views on how to utilize transmission protocols, data
standards, and identifiers to facilitate data integration, and to
support continued coordination among the Joint Staffs.
Activity related to U.S. Treasury markets trading often extends
beyond
[[Page 3932]]
individual regulator boundaries; it encompasses not only the primary
and secondary cash securities markets, but repurchase agreement
markets, futures contracts which reference U.S. Treasuries, and U.S.
Treasury exchange-traded funds traded as equities. This diversity in
trading venues and participants often leaves any individual regulator
with only a partial view of U.S. Treasury market risk transfer and
price discovery. Data from across the U.S. Treasury cash and futures
markets is necessary to conduct comprehensive analysis or surveillance
of these markets, which are tightly integrated and across which market
participants conduct trading activity. As firms are able to access
multiple markets over very short time frames, these markets become ever
more interconnected, resulting in significantly faster risk and
information transmission. These trends call for continued cooperation
among the official sector to ensure that the monitoring of market
activity and liquidity is as effective and coordinated as possible.
The Inter-Agency Working Group for Treasury Market Surveillance
(``IAWG'') was formed to improve monitoring and surveillance, and
strengthen interagency coordination with respect to the U.S. Treasury
markets following the Salomon Brothers auction bidding scandal in 1992,
and today consists of the Joint Staffs.\14\ Since its inception, it has
been useful in providing a regular forum for the participating entities
to collaborate on issues related to U.S. Treasury market structure,
functioning, and participation, such as the events of October 15, 2014.
To facilitate the continued monitoring of U.S. Treasury market
activity, the Joint Staffs are working to complete a standing
information sharing agreement.
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\14\ The IAWG was formed in 1992 by the Treasury, the SEC, and
the Board, to strengthen monitoring, surveillance and interagency
coordination in respect to the Treasury market. Its initial efforts
were focused on developing a framework for enhanced market
surveillance for Treasury Securities. See U.S. Department of the
Treasury, Securities and Exchange Commission, and Board of Governors
of the Federal Reserve System, Joint Report on the Government
Securities Market (U.S. Government Printing Office, January 22,
1992), at xii-xiv. http://www.treasury.gov/resource-center/fin-mkts/Documents/gsr92rpt.pdf. See also The U.S. Department of the
Treasury, Securities and Exchange Commission, and Board of Governors
of the Federal Reserve System, Joint Study on the Government
Securities Market (U.S. Government Printing Office, March 1998),
http://www.treasurydirect.gov/instit/statreg/gsareg/gsareg_gsr98rpt.pdf. See also Official Surveillance and Oversight of
the Government Securities Market, William J. McDonough, FRBNY
Quarterly Review, Spring 1992-93.
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Questions for Public Comment
We request comment on the questions below. The questions in this
section of the RFI seek information about which U.S. Treasury market
data the official sector should have regular and ongoing access to. We
are also interested in views regarding the potential for additional
coordination across futures and cash markets, as well as interest rate
swaps and options. These questions relate to the provision of U.S.
Treasury market data to the official sector. Accordingly, while there
may be considerations regarding data dissemination to the public that
may be relevant to the answers to the questions posed in this section,
those considerations should not factor into the answer to these
questions (unless otherwise noted), but should be addressed, to the
extent applicable, in Section IV.
3.1 To what extent can trading practices in U.S. Treasury cash and
futures markets be effectively monitored using only transaction and/or
order data from one, not both, of those markets? Is it necessary for
regulators to have visibility across all U.S. Treasury cash and
derivative markets in order to more effectively monitor and oversee
trading behavior in any one market? What aspects of U.S. Treasury
market monitoring require data collection across cash and derivatives
markets?
3.2 What frequency and type of additional data reporting to the
official sector is necessary for it to effectively monitor functioning
of the U.S. Treasury markets, including cash, futures, and financing
markets? What level of data granularity is necessary for sufficient
monitoring to be performed (e.g., transaction data, inventories or
positions, order book data, and other additional data) across venues?
a. Should all transactions in securities issued by Treasury be
subject to reporting or should reporting be limited to secondary market
transactions, on-the-run benchmark issues, or some other subset of
securities?
b. Should repurchase agreement transactions be reportable?
3.3 What criteria should be used to determine who should report to
the official sector? Should both counterparties (buyer and seller) be
required to report a trade or is one-sided reporting preferable? Should
reporting requirements depend on the platform or execution method?
Should only a subset of participants, such as brokers, dealers, futures
commission merchants (FCMs) and commercial bank dealers be required to
report transactions? Should other parties to a transaction, such as
banks and PTFs, be required to report? Should trades executed on
automated trading venues be reported by those venues and not the
individual brokers, dealers, FCMs, bank dealers, etc. transacting on
such venues?
3.4 Should transaction reporting include identifiers for categories
of end investors? What are the costs and benefits of this approach?
What alternatives should be considered to permit monitoring of
positions and market activity?
3.5 For those instruments subject to official sector reporting
requirements:
a. Should all transactions be subject to the same reporting time
requirement? Are the answers different for different types of
transactions or instruments?
b. Should cross market transactions have special indicators to link
the different legs of the transactions?
c. Are there specific trades and/or trading strategies that should
be considered for additional identification to ensure that regulatory
organizations can accurately interpret the data (similar to Dollar
Rolls or Stipulations on deliverable collateral in mortgage to-be-
announced trading)?
d. Are there other industry practices and/or special situation
information that should be considered for reporting?
e. Should trade allocations be reported? Are there any special
pricing issues that should be considered (e.g. mark ups, commissions,
ATS fees) or is dollar price adequate for determining the price of the
trade?
f. Should settlement date and/or other settlement terms be
reportable?
g. Are there any special considerations/conditions for determining
the time that a trade is executed? Does this differ across trade types
or venues?
h. Should transactions executed on an ATS and/or in response to an
electronic RFQ be identified as such? Should the specific ATS and/or
RFQ platform be identified as part of the transaction report? Are there
unique characteristics of such transactions that should be identified?
Should the order type giving rise to a particular execution be
captured? Are there any other unique methods of transacting in the
Treasury market that should be identified?
i. Should transaction counterparties be identified uniquely or
categorized by counterparty type? If the latter, what counterparty
types should be identified? Are there generally accepted definitions
for these categories of counterparties?
j. For transactions that are already subject to reporting
requirements to the official sector, are there particular data
standards or identifiers that should be used for the reporting of
transactions in
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the Treasury cash market to aid harmonization? What transmission
protocols, data standards and identifiers should be utilized to enhance
authorities' ability to integrate data, share information and cooperate
on analysis, for both existing and new data reporting?
k. Should the identification of registered market participants be
``normalized'' across U.S. Treasury cash and futures transactions such
that there is a consistent and unique moniker used to identify each
individually registered entity?
3.6 For those securities subject to official sector reporting
requirements:
a. Should quotes and/or orders be reported? If so, should special
consideration be made for certain types of quotes and/or orders (e.g.,
electronically submitted orders versus voice orders versus RFQ)? Are
there any special considerations when defining an order and/or quote?
How will these special considerations affect the ability of the
official sector to analyze activity in the Treasury cash markets?
b. Should transactions, quotes, and/or orders be reported on a real
time basis? If not, what should be the reporting standard? How should
orders that are executed over multiple days be handled? Are there other
special considerations when defining the time of an order?
c. Are there additional elements that are important for regulators
to understand beyond the categories of quote/order originator, price,
size and time of the order (e.g., inventory or position data)? Should
the type of an order or any special order instructions be collected?
Should all order changes be reported? Is the answer different for
electronically submitted versus voice submitted orders?
d. Should the submitter of a quote and/or order be identified
uniquely or categorized by counterparty type? If the latter, what
counterparty types should be identified? Are there generally accepted
definitions for these categories of counterparties?
3.7 Is it appropriate to have transactions, orders, and quotes time
stamped at a certain clock precision (e.g., microsecond) level? Are the
answers to these questions different for different types of
transactions (e.g., electronic or voice) or different products (e.g.,
Treasury bills, notes, bonds, on-the-runs, off-the-runs, cash, or
futures)? Would the answer be different for trade reporting, quote
reporting, or order reporting? Would the answer be different for
different categories of market participants?
3.8 Do commercial bank dealers and broker-dealers have technology
infrastructures and order/execution handling in place to report trades
on a continuous basis?
3.9 As the official sector begins to collect additional data on the
cash U.S. Treasury market, what operational or market factors should be
assessed? Are there particular negative consequences from the
implementation of data collection? If so, what are they and why do they
arise?
a. The official sector may consider different methods for receiving
transaction data from Treasury markets. For instance, it may rely on
existing reporting regimes, or it may seek to build an alternative
reporting system. If the latter, what alternative reporting system
should be used? What are the costs and benefits with these different
approaches? Would one approach impose fewer burdens on reporters than
others? If so, why and by how much?
b. Would one approach impose fewer burdens on smaller reporters
than another? If so, why and by how much?
c. Is the answer different for trades, orders, quotes, or execution
methods?
3.10 What additional infrastructure would be necessary for market
participants to begin reporting comprehensive U.S. Treasury market
transaction data? Should reporting requirements be phased in? If yes,
how and why? Does phasing affect the cost of implementation for market
participants? What transmission protocols, data standards and
identifiers should be utilized to minimize reporting burdens?
3.11 Will the requirement to report transactions in the Treasury
markets affect competition in this market? Who would be affected and
how? What data or empirical evidence support this position?
IV. An Assessment of the Data Available to the Public on U.S. Treasury
Cash Securities Markets
The extent of publicly available information for U.S. Treasury
markets, including that related to market prices, trading volumes,
market participant inventories, and trends in market risk and
liquidity, is substantially more limited than for many other major
asset classes. For example, there are no public reporting requirements
for transaction or order book information with respect to transactions
in Treasury securities. In addition to obtaining the appropriate data
for the official sector, we are committed to continuing to
appropriately enhance the information made public about the U.S.
Treasury market.
Making appropriate data available to the public more broadly
regarding trading activity in the U.S. Treasury market could support
investor confidence and the liquidity of these markets. Greater price
transparency could improve efficiency, reduce transaction costs,
enhance fairness, improve risk management practices and encourage
participation by new entrants, who may otherwise be reluctant to engage
in a market where they have less information than their counterparties.
Greater operational transparency also may be desirable with respect to
the practices governing trading and access at the various trading
venues. Visibility into order types, access rules, and rulebooks may
encourage greater competition and a more level playing field for market
participants.
However, the U.S. Treasury cash market is not uniform. More
recently-issued on-the-run securities trade largely on electronic
platforms that match orders using a central limit order book. Seasoned,
or off-the-run, securities generally still rely on dealers to
intermediate transactions. Some types of transparency may inhibit the
willingness to engage in large so-called ``block'' trades by large
investors and intermediaries. This reluctance may be particularly true
in the less liquid parts of the U.S. Treasury market, where concerns
about moving prices or revealing positions are stronger. In markets
with more formal regulations pertaining to pre- and post-trade
transparency, the rules provide flexibility for block-sized trades. For
example, trades above a certain size could be executed away from
platforms with pre-trade transparency, and such trades could be
reported to the marketplace with some delay. Related rules also allow
for masking of the size of large transactions to help mitigate the
concern of higher market impact costs. The futures markets also require
that net positions greater than specified thresholds (for all market
participants and not just entities subject to registration
requirements) be reported to the market regulator.
Questions for Public Comment
We request comment on the questions below. We are interested in the
appropriate level and form of data about Treasury market activity that
should be made available to the public. This includes use of
transmission protocols, data standards and identifiers to facilitate
the public's ability to link and integrate data.
4.1 Is the publicly available information for U.S. Treasury market
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trading activity sufficiently transparent to foster an efficient,
healthy, and liquid market? What changes to public reporting would be
most advisable, if any, including the use of data standards and
identifiers?
4.2 What additional information should be made available to the
public in order to better assess liquidity conditions in the U.S.
Treasury market, and at what frequency? For instance, should there be
readily available transaction cost data that accounts for price
movements that occur from the initiation of a trade request on RFQ
platforms?
4.3 If additional public transparency is necessary at the
transaction level, what is the most appropriate level of transparency
for publicly available data on trading in the secondary market? Should
additional public transparency be phased in over time in any way?
Should all quotes and/or orders in the inter-dealer market be made
public, or just ``top of book''? What characteristics should be
reported (e.g., participant type, aggressor side, volume, price)?
Should the release of any or all of the data be in real time or
delayed? Should the available data differ depending on the age of the
security, size of the transaction or other characteristics of a
particular security or transaction?
4.4 Is there an existing public reporting model that would be
appropriate, in whole or in part, for the U.S. Treasury market (e.g.,
swap data repositories for swaps, or FINRA's Trade Reporting and
Compliance Engine (TRACE) for corporate bonds and agency mortgage-
backed securities), or would the Treasury market benefit from a new
model?
4.5 What additional information should be available to the public
about the operation of trading platforms or trade execution algorithms
on trading platforms (for inter-dealer as well as dealer-to-customer
platforms)? For example:
a. Should information about order types, agreed upon fee
arrangements, user agreements, and/or brokerage agreements be
disclosed?
b. Should the degree to which subscribers to the platform may limit
their interaction with or exposure to other subscribers be disclosed?
c. Should the degree and extent to which the sponsor of a platform
trades on the platform be disclosed?
David R. Pearl,
Office of the Executive Secretary.
[FR Doc. 2016-01246 Filed 1-21-16; 8:45 am]
BILLING CODE 4810-AS-P