WASHINGTON - Federal Reserve officials remain divided over a controversial proposal in the House-approved version of a government securities bill that would require dealers to file reports with the Treasury Department when they take a large position in the market.
The split leaves the Federal Reserve Bank of New York generally supportive of a large-position rule, while the Federal Reserve Board remains opposed.
Fed officials confirmed the ongoing dispute on Friday after leading House backers of the legislation asked Treasury Secretary Lloyd Bensten to respond to a letter from Federal Reserve vice chairman David Mullins expressing concern that a new reporting requirement might damage the market.
Concern over Mounting Costs
Mr. Mullins, in an Oct. 8 letter to Rep. John Dingell, D-Mich., chairman of the Energy and Commerce Committee, warned that the provision might spur some market participants to scale back their positions or stop trading altogether, "leaving the Treasury fewer willing customers for its debt issues."
Treasury officials regularly seek to promote as much liquidity as possible in the government market to minimize federal borrowing costs.
Mr. Mullins complained that while the House bill would saddle market participants with additional record-keeping costs that might be manageable at first, it provides "no obstacle to prevent these costs from mounting over time."
But the New York Fed, which acts as the local point for policing the government market through its contacts with primary dealers, said in congressional testimony in March that it was "sympathetic" to a large-position reporting rule.
The statement came from J. William McDonough, an executive vice president and head of the New York Fed's trading desk at the time, who is now president of the bank.
A reporting rule "will further our efforts to develop a comprehensive view of the market," Mr. McDonough also told the House Energy and Commerce subcommittee on telecommunications and finance, headed by Rep. Edward Markey, D-Mass.
The controversy over a large-position reporting requirement surfaced in January 1992 in the joint government securities report issued by federal agencies after the Salomon Brothers bond scandal. At the time, the Securities and Exchange Commission and the Treasury agreed with the New York Fed.
The House-approved government securities bill must be reconciled in conference with a Senate version that does not contain a large-position reporting rule. The Senate bill is championed by Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking securities subcommittee.
It is not clear how a large-position rule would work, or to what extent it would affect market participants. The House bill would allow the Treasury to set a rule for primary dealers, hedge funds, institutional investors, and any other firms or individuals in the market.
But there is no definition yet of how much money would have to be on the table to trigger the rule.
Moreover, it is not known how quickly market participants would have to file reports, or what specific information would be required.
The rule would apply in the case of to-be-issued Treasury securities as well as recent issues.
The 40 primary dealers, which dominate daily trading in the government market and already, submit their tenders in a computerized auction system, are apparently the best equipped to comply with any new requirement.
"All of our positions are easily retrieved," said the head trader of one large primary dealership who did not wish to be identified. "If they required us to report the positions, it really wouldn't be that much of a hardship. Everything is on computers."
But the primary dealers already file daily reports with the New York Fed as part of the government's ongoing market surveillance program, the trader said. "I think it's unnecessary, and all they're doing is going through the motions because of what happened with the Salomon scandal."
Benefit to Smaller Players
Smaller dealers would benefit from a reporting rule, said Tony Crescenzi, head trader for Miller, Tabak, Hirsch & Co. "If there is a large position out there," he said, "I'd probably want to know about it, because at least I know I'm up against something significant that could have broader implications for the market."
A rule would not discourage bidding, Mr. Crescenzi said.
"It'll make the information flow a little more efficient, and it will help convey what is happening. I always think the more information the better, as far as keeping the market from trading in a volatile fashion," he said.