Friday, November 7, 2008

U.S. Treasury Opens Probe Seeking Improper Trading

(Bloomberg) The U.S. Treasury opened a probe to identify any improper trading in U.S. government securities by bond investors and dealers, following increases in trades that fail to settle.

The announcement today came after repeated warnings by the Treasury to bond dealers to fix settlement problems in the government securities market or face tougher regulation.

Treasury officials use such reviews, known as ``large position reports,'' to monitor trading and guard against market manipulation. The Treasury has conducted at least nine such reviews since 1997.

Today's Treasury statement asks for information on the 2 percent two-year-note maturing Sept. 30, 2010, and the 3 1/8 percent five-year note maturing Sept. 30, 2013.

``Entities with reportable positions in either of these notes equal to or exceeding the $2 billion threshold must submit a separate report for the security to the Federal Reserve Bank of New York'' before noon on Nov. 14, the Treasury said today in a statement released in Washington.

The large position reporting program was established in 1996 in the aftermath of the Salomon Brothers bond market scandal.

The confidential reports requested today are for positions held on Nov. 6 at the close of business. The CUSIP, or identification, number on the two-notes is 912828 JL 5, and the CUSIP number for the five-year notes is 912828 JM 3.

`Elevated Level'

``The request for information this morning pertains to the elevated level of fails to deliver in these particular securities for a prolonged period of time,'' Treasury spokeswoman Brookly McLaughlin said. ``This request is another way, beyond speaking with market participants, to ensure that Treasury understands current market conditions.''

At the Treasury's quarterly refunding statement on Nov. 5, Karthik Ramanathan, the Treasury's acting assistant secretary for financial markets, ``strongly'' urged the financial industry to make changes reducing the number of failed trades. Otherwise, regulators will step in, he said.

Failed trades, or ``fails,'' have been a problem since 2003, when supply shortages first collided with the technical effects of low interest-rate levels.

Failures to deliver or receive Treasuries in the repurchase-agreement, or repo, market for borrowing and lending securities fell 37 percent to $3.34 trillion in the week ended Oct. 29, from a record high the prior week of $5.311 trillion. That was the most since July 1990, as far back as the data goes on the Federal Reserve Bank of New York's Web site. Last week's decrease put total fails at the lowest since the week ended Sept. 17.

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