Bond dealers urged to bolster market integrity

The New York Federal Reserve told the 22 primary dealers it conducts business with in the sale of U.S. government bonds to work with other major financial firms to strengthen integrity in the market, a source said Monday.

The New York Fed met Monday with the primary dealers to discuss trading practices after warnings this year from U.S. Treasury Department officials over a rise in attempts to manipulate the $600-billion-a-day Treasury-bill market.

A key focus of the gathering, attended by representatives of the Treasury Department and senior compliance officials of the dealer institutions, was getting the industry to create a forum to develop a set of best practices, a source close to the discussions told Reuters.

“It was suggested the industry should consider ways to create a dialogue” to pursue best practices, the source said.

Primary dealers are the financial institutions that are approved to deal directly with the Federal Reserve in the sale of U.S. government debt. They underwrite new government debt, purchase the majority of Treasuries at auction and distribute them to clients, thereby creating the market.

News last week of the involvement of Swiss bank UBS in a Securities and Exchange Commission probe unnerved traders. It was the first clear sign that authorities were examining their practices, an escalation from the verbal warnings by Treasury officials.

It was not clear who from the Treasury Department attended the meeting.

“The New York Fed highlighted the importance of integrating strong management oversight and compliance into day-to-day operations,” the New York Fed said in a statement after the meeting.

In a speech before the Bond Market Assn. in September, James Clouse, Treasury deputy assistant secretary, had said questionable practices had distorted prices in cash, futures and other markets.

He said there had been an increase in instances of companies trying to profit from controlling particular securities and said this could eventually drive investors away from the Treasuries market.

The New York Fed echoed this sentiment in its statement.

“It is essential to maintain market standards that promote efficiency and do not adversely affect the cost of borrowing for the U.S. government,” the New York Fed said.