Critics are disconcerted that regulators’ attempts at increasing transparency in the largest government bond market in the world have stalled under the administration of President Trump.
They say the Treasury market, covering outstanding debt of $14tn, remains opaque, which limits trading oversight and has led to an uneven playing field.
Twelve months ago rules were introduced that required many Wall Street firms to report Treasury trades to US regulators. It was a first step in officials’ attempts to improve regulation of the market.
The move was prompted by a wild swing in prices in October 2014 which shocked the market. It took months to collect the data needed to try to understand what had led to the unusual trading activity. Even then, the information was incomplete and conclusions were couched cautiously.
One thing became clear: the US Treasury needed more access to data.
The first rules came into effect in July with little fanfare but they were expected to be the beginning of reform, not the end. Antonio Weiss, ex-counsellor to Jack Lew, the former secretary of the US Treasury, put his weight behind public reporting of Treasury trades before he left office at the end of the Obama administration.
Such declarations of support for dissemination of trade data have not been forthcoming from officials under Mr Trump, throwing into doubt efforts at reform while the country is led by an administration more committed to deregulation than further rules.
“Ever since Washington went Republican, the urgency has come off and even if this will come, it’s going to take a lot longer,” says Kevin McPartland, head of market structure research at Greenwich Associates, the financial services consultancy. “The message from the White House is for less regulation not more, so new rules are only going to get more scrutiny, not less.”
A Treasury spokesman says: “We are currently reviewing on an inter-agency basis the potential market impact issues associated with public dissemination.”
Public reporting is common in other markets such as corporate bonds and equities but historically the Treasury market has been treated differently.
This is in part because the primary dealers — typically big banks such as JPMorgan or Barclays, responsible for underwriting the US government’s debt — were once responsible for standing in between most trades. They were already in regular conversation with the US Treasury, as well as other regulators, making rules requiring trade reporting less necessary.
Over time, however, new groups have entered the market. Non-bank, high-frequency traders such as Citadel Securities or Jump Trading, covered by a host of different regulations, have made it harder for officials to offer a consistent analysis of the Treasury market.
The US Treasury is putting together a follow-up report on regulation that it believes requires review — and could include recommendations for market transparency. The department faces a number of other priorities, such as tax reform proposals that continue to take up staff time and Treasury secretary Steven Mnuchin’s push to investigate the possibility of issuing longer maturity debt.
All this is being done with a reduced headcount at the Treasury. “There are still positions that are not filled,” says Mr McPartland. “And you would expect co-ordination with the other regulatory authorities who also have their own issues with staffing and budgets.”
Broadly speaking, both new entrants and entrenched dealers that have historically dominated the market support regulators having access to more data — which they now have under rules that came into effect in July. The next step — to provide more data to the public — has drawn a mixed response.
Banks have put up resistance, saying that disclosing trade details to the public will push their clients — investors such as asset managers and hedge funds — to trade in smaller sizes to avoid a trade being picked up by others wanting to move the market against them.
Some investors agree. “We are pretty comfortable with the state of things as they are now,” says Debbie Cunningham, chief investment officer for global money market funds at Federated, a large asset manager.
“If you are in the Treasury trading sector, there is a lot of information shared, trader to trader, desk to desk, that allows us to set parameters on where we buy and sell,” says Ms Cunningham. “We think we can gain advantages in trading by being astute and so we like things in their current state.”
For those who are not privy to that information, the opinion is different. Many entrants to the market rely on high-speed computer algorithms rather than tips over the telephone. That means they are more dependent on market data, not conversations with traders, to decide at what price to execute.
The US Treasury under President Obama acknowledged the concerns of banks and some investors but decided that, if properly implemented, disclosure of data would be beneficial. The department under Mr Trump is yet to take a side.