WASHINGTON -- Treasury Department and Federal Reserve officials yesterday unveiled a modified proposal to establish single-price auctions of government debt.
One apparent aim of the modified auction plan, which a Fed official outlined during a daylong conference with top industry executives, is to counter criticism that primary dealers would not participate as actively in a single-price auction as they do in the current sealed-bid, multi-price debt sales.
In the plan's first stage, the Treasury would recieve automated, sealed bids from firms that specify the price and quantity for the particular issue being sold. The Treasury would then determine a single market-clearing price.
Then a second round would follow, with the treasury giving some bidders the chance to raise their bids in an open forum. Invitations to the second round would be doled out. with the highest bidders just below the first-round clearing price getting a chance to bid again.
The idea of the plan is to give marke participants a chance to react to the first round of bidding , while giving the Treasury a chance to sell its debt at the highest posible price.
Vincent Reinhart, chief of the banking and money market analysis section of the Fed, said the proposal would give the Treasury "a one-way bet on prices going up and not down."
The system would also reward aggressive bids by dealers, he said But critics of the single-price system have warned it would discourage underwriting by the dealers and would hurt market liquidity.
Senior Treasury officials said they intend to proceed cautiously with any new single price auction method for government securities. "The Treasury Department recognizes the importance of the stability and predictability in the Treasury market," said Treasury Secretary Nicholas Brady. "Change should not be made for the sake of change."
The Treasury does not seek changes that result in "regulatory overkill," Mr. Brady dded.
Market participants have expressed concern because, under the new system, the treasury would have to determine an initial opening price to start bidding. There have also been questions about dealer participation -- the liquidity issue -- ad whether the Treasury can handle an open bidding system quickly to minimize the risk of fluctuating market conditions.
Deborah Danker, the Treasury's deputy assistant secretary for federal finance, said she believes such issues "can be handled."
Ms. Danker also said she is a "strong supporter" of efforts by the Treasury and the fed to automate bidding procedures for dealers and other firms in the market. Eventually automation will increase the number of market participants and help support a single-price auction, Ms. Danker said.
"Dealers will still have a major role to play" in any new system by providing a convenient way for investors to get into the market she told those attending the conference.
But some major industry representative were skeptical of the proposed changes. Jon Corzine, a partner with Goldman Sachs & Co. and former head of the Public Securities Association's Treasury borrowing advisory committee, said a single price system will be very difficult to implement.
Myron Scholes, managing director of Salomon Brothers, said,"It is going to be very hard to test for superiority" because observers will not know what prices would have been under the old system.
Others said primary dealers are not as likely to underwrite large amounts of Treasury debt as the bidding process is expanded to include additional firms. "We are not likely to get the kind of enthusiastic bidding we need," as dealers see their business erode, said Steven Wunsch of AZX Securities.
Other industry representatives at the conference said they are willing to see the Treasury experiment with a single-price system . The PSA borrowing advisory committee has recommended testing the idea with the sale of three-year and five-year notes.
Kenneth DeRegt, managing director of Morgan Stanley International, said testing the single price auction "is certainly reasonable." A similar comment came from Stephen Thieke, president of J.P. Morgan Securities INC.