WASHINGTON -- Congressional investigators are trying to find out if primary dealers on Wall Street colluded to protest the new Treasury bidding rules by shunning last week's three-year note auction.
The House Energy and Commerce Subcommittee on Telecommunications and Finance, chaired by Rep. Edward Markey, D-Mass., has sent letters to all 39 dealers asking them to detail their bidding strategy and related activities in connection with the sale. Responses to the panel are due today.
The three-year auction held Nov. 5 went badly, rattling the bond market. Treasury got only $21.7 billion of bids for the $14 billion offering, the lowest total volume in bids for a three-year note auction in 13 years. The average yield came out at 6.00%, which was higher than expected.
"Indications are that the low bid total may well reflect some type of 'protest' by primary dealers against the Treasury Department's new auction rules," Mr. Markey said in his letter to the dealers.
The Massachusetts Democrat asked each dealer to state the size of the firms's bid for the auction and to compare that with the firm's average bid over the last year in Treasury auctions, and with the firm's "market share in the government securities market."
Each dealer was asked to described the factors contributing to the decision on the size of the firm's bid and explain whether the bid was in any way "a protest, coordinated or otherwise," against the new auction rules.
Dealer were asked to summarize any contacts between employees of the firm with other primary dealers between the time of the quarterly refunding announcement on Oct. 30 and Nov. 5.
In addition, the dealers were asked to summarize all contacts with Treasury over the new auction procedures.
Treasury adopted the new rules after the Solomon Brothers Inc. bidding scandal erupted and brought losses to several dealers and complaints in Congress that the old procedures encouraged a closed market dominated by large firms.
Dealers said yesterday they planned to comply with Mr. Markey's request, but denied that any collusion or protest had occurred at the note auction.
An officer of one primary dealership questioned why Rep. Markey bothered asking dealers.
"The government has all this information," he said. "All they have to do is call the Fed and ask them for copies of all the tenders." Tenders are the formal bids for Treasury securities dealers submit to the Federal Reserve at auctions.
The officer said it was natural that participants bid cautiously as they tried to assess the effects of the rule changes.
On Oct. 25, the Treasury said starting with the three-year sale all broker-dealers registered with the Securities and Exchange Commission could submit bids for customers at Treasury auctions. Previously only primary dealers and depository institutions could do so.
The Treasury also increased the limit on noncompetitive bids to $5 million from $1 million.
"I think people were tentative," the officer said. Government regulators "are changing the rules and because they don't get the kinds of results they want, they're blaming the industry."
Mel Swanborn, head of the Treasury desk at Yamaichi International (America) Inc., said there were a number of other factors adding to the uncertainty at the three-year sale.
In addition to concerns about the rule changes, "there was uncertainty in the marketplace because the Fed had not eased, which was widely expected at the time," Mr. Swanborn said.
The market assumed that if the Federal Reserve did not act before the three-year sale, it would wait until the week's cycle of refunding auctions was over. Instead, the Fed surprised everyone by easing the discount rate and the funds rate the day allowing the three-year auction.
"There is a third factor, which is that dealers are not talking to each other to nearly the extent that they did before," Mr. Swanborn said. "Less direct communication between dealers increases the uncertainty factor and makes it more difficult to be precise" in bidding at auctions.
Mr. Swanborn said his firm felt the rule changers ultimately will benefit the Treasury market.
