WASHINGTON -- The Treasury Department yesterday unveiled changes in government bond auction rules for primary dealers in an attempt to strengthen federal oversight of the market in the wake of the Salomon Brothers Inc. bidding scandal.

Treasury and Federal Reserve officials also disclosed that they are considering additional measures -- including the creation of an electronic auction system to handle bidding -- to ensure that dealers and investors in the secondary market do not lose confidence in the government bond market.

The idea behind the changes is to preclude any cutback in demand for government bonds, which could send federal borrowing costs soaring.

The new auction rules will require the 39 registered primary dealers to provide written verification of "large, winning bids" before settlement date, when successful bidders formally pay for the bills, notes, and bonds they are buying and take possession of them. Settlement typically occurs about a week after an auction.

The change is aimed at confirming the authenticity of large, winning bids, officials said.

Treasury officials announced the new rules as members of Congress continue to raise concerns about whether the Treasry market needs tougher regulations that go beyond the amendments to the Government Securities Act that are already under consideration.

Sen. Christopher Dodd, D-Conn., chairman of the Senate Banking Subcommittee on Securities, is lining up supporters for a bill offered Tuesday that would impose stiff penalties on traders and dealers who submit false auction bids at Treasury auctions. The measure was endorsed yesterday by Jerome Powell, Treasury's assistant secretary for domestic finance, as well as by the Public Securities Association.

The rule changes were announced amid evidence that other large financial institutions besides Salomon Brothers have been involved in improper bidding procedures. Richard Breeden, chairman of the Securities and Exchange Commission, confirmed that his agency has evidence that "a distressingly large" number of banks and securities firms have been inflating their order books to get bigger shares of issues from the Federal National Mortgage Association and other agencies that issue government-backed securities.

In addition, Fed officials said they were meeting with representatives of S.G. Warburg & Co., a primary dealer, to hear about that firm's role in connection with unauthorized bids submitted by Salomon.

Salomon Brothers has admitted to submitting unauthorized bids on well as other customers. In response, Treasury has suspended Salomon from trading for its customers, and the Federal Reserve Board of New York is reviewing the firm's status as a primary dealer.

A Treasury spokesman did not say when the new verification procedures for auction will be in place, other than that the department is working to get them done as quickly as possible. The size of the bids that will be covered by the rule also is not known, the spokesman said, but the change will presumably cover most winning bids by primary dealers.

Treasury also said it will begin releasing the government's estimate of quarterly borrowing needs two days prior to each quarterly refunding announcement, when the department outlines plans for the regular sale of three-year notes. 10-year bonds, and 30-year bonds.

The earlier disclosure of the borrowing estimate will mean that the primary dealers will no longer receive the information in advance of the public. The dealers have been getting the information through their representatives on the Treasury Borrowing Advisory Committee of the PSA. Members of the borrowing panel normally meet just before the refunding announcement to advise the government about market conditions.

In addition, Treasury and Fed officials who make up a working group on ways to automate government bond auctions will speed up their efforts in order to implement some initial form of computerized bidding early next year. The working group also will be expanded to include the Securities and Exchange Commission.

The Treasury spokesman did not provide further details of how the computerized bidding will work, other than that its aim is to make the market more efficient and enhance government supervision of the auctions. The current system of bidding, in which dealers submit their tenders on handwritten slips of paper to the Federal Reserve Bank of New York, is occasionally criticized for being outdated.

"For whatever reason, the Treasury has tended to protect the current primary dealer process from technological innovation," said Sen. Donald Riegle, D-Mich., chairman of the Senate Banking Committee. "I think it is time to re-think the whole market mechanism as it relates to the government securities market. To date the Treasury and the Federal Reserve Board have been thinking incrementally."

Sen. Riegle criticized what he called, "the cozy relationship between the primary dealers and their regulators," saying it should be abolished. While the claim is often made that U.S. financial markets are the most efficient, he said, "it is a sad commentary that this market can be so easily cornered with regulators standing on the sidelines."

Federal regulators who appeared before a hearing chaired by Sen. Dodd and attended by Sen. Riegle said they remain open to tougher auction rules but continue to urge against over-reacting to the events at Salomon Brothers. They also said they want to wait until results of investigations by the SEC, Treasury, the Fed, and the Justice Department, due to be completed in December, are released.

"Despite the ugliness of this episode, this market has worked unusually well for a long period of time," said E. Gerald Corrigan, president of the Federal Reserve Bank of New York. "You're not going to get any shyness from me when it comes to considering changes around here, but we've got to be careful."

"I don't believe the government securities market is broken in any fundamental sense," said Federal Reserve Board Vice Chairman David Mullins. "I do believe it can be repaired."

But some members of the sub-committee faulted federal regulators for not being tough enough on bond dealers and for allowing a system that enabled Salomon Brothers to acquire large amounts of securities. In the Feb. 21 auction of $9 billion in five-year notes, Salomon acquired 57% of the issue by submitting unauthorized bids on behalf of Warburg and the Quantum Fund.

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