Fed to Computerize Treasury Sales
Salomon Scandal Adds to Pressure for Streamlining
The Federal Reserve is readying a computerized system to replace an antiquated Treasury securities auction process that has come under increased scrutiny since the market-tampering scandal at Salomon Brothers Inc.
Seeking to streamline a process dating from 1917, which has relied on messengers who rush hand-written bids to a collection box in the lobby of the New York Federal Reserve Bank, the Public Securities Association is in the final stages of reviewing two complementary Fed bidding systems, according to Lee Olesky, assistant general counsel at the association.
Simplicity is the Key
"The most important component to a system in this market is simplicity," said Mr. Olesky. "Because bids often come in at the last few seconds, factors like number of key strokes and speed of information delivery are critical. At this stage, that's what we are looking at."
The new electronic systems are being developed by the Federal Reserve to meet Treasury Department specifications.
The first, called Standard FedLine, is designed for banks and is expected to be operational by the first quarter of 1992.
The second system, Fast FedLine, would handle the bulk of the dollar volume; it is to be up and running by next December.
Standard FedLine would primarily handle noncompetitive government security purchases, while Fast FedLine has been created for the more aggressive bidders at Treasury auctions.
These bidders include the 39 primary dealers - mostly large brokerage houses - that have been designated by the Federal Reserve Bank of New York as eligible counterparties for open-market operations. The Federal Reserve in turn acts as an agent for the Treasury at auctions.
Auction awards can be significant. Last year, more than $1.5 trillion of Treasury securities were issued, and with auction-day volumes exceeding $100 billion, risk exposure is a key concern in the dealer community.
Reducing Suspense
"Over time, automation should reduce the period between when bids are submitted and when the results are released," said Kenneth M. deRegt, managing director at Morgan Stanley & Co. and vice chairman of the securities association's dealers committee.
"We've all been in the position where, in the course of an hour - while we're waiting for the results - the world changes," said Mr. deRegt. "The market is affected, and we're not sure how to react. To the extent that the waiting time is narrowed, participation in the market will increase both in terms of who is going to play and to what degree."
Beyond Salomon Scandal
Auction players on the government side are equally interested in seeing what changes the new system would bring. Increased efficiency should reduce errors and improve market enforcement.
While the recent Salomon scandal has heightened interest in the new systems as a way to ensure integrity both in the market and in the public eye, that's only part of the story, observers said. The automation project has been in the works for more than a year and is far from a knee-jerk response to the Salomon investigation.
At the same time, the scandal has ensured that this particular technology project won't be forgotten or postponed.
"The Salomon episode caused us to step back and take a look at the marketplace, from top to bottom, in a way that hadn't been done for some time," said Jay Powell, assistant Treasury secretary for domestic finance. "Naturally, one of the first things that hit us was that the auction system wasn't yet automated."
Transition Period
How quickly Fast FedLine would be fully adopted once development was completed is open to question.
Although Fast FedLine would let primary dealers bid on screen and then change bids at the last minute, averting the need for runners, Mr. Olesky of the securities association reported that the old system wouldn't be dismantled right away. During the introduction of Fast FedLine, primary dealers would have the option to participate in the auction the old-fashioned way.
Ms. Sullivan is a freelance writer based in New York City.
