WASHINGTON -- The Treasury Department announced yesterday major rule changes in the auction process for U.S. government securities, including measures designed to open up sales to all registered broker-dealers who bid on behalf of customers.
The changes are in addition to measures announced Sept. 11 that were aimed at improving oversight of the Treasury bond marker in the wake of the Salomon Brothers Inc. scandal that prompted an ongoing federal inquiry into illicit bidding by the firm at several auctions.
Treasury Assistant Secretary for Domestic Finance Jerome Powell told reporters that officials hope the latest rule changes will "attract bidders and open up the market-place."
The move to allow broker-dealers to bid on behalf of customers will broaden participation in the Treasury market by allowing firms other than the 39 primary dealers and large banks that are now permitted. Critics in Congress have suggested the current procedures limit bidding to a club of select firms, giving them an inside track on profits.
The change will take effect with the Treasury auction of three-year notes scheduled for Nov. 5, which is the first leg of the government's quarterly refunding. Private analysts estimate the government will seek to sell approximately $38.5 billion in notes and bonds during the refunding, which rolls over existing debt and raises fresh cash.
In addition, Treasury said it is establishing a payment mechanism that will enable any bidder to participate in government security auctions without making a deposit at a Federal Reserve Bank or without making a payment guarantee.
Currently, only primary dealers and depository institutions are allowed to bid without a deposit or guarantee.
Treasury officials said they are working with the Federal Reserve to develop standard "autocharge" agreement that will allow auction participants without a funds account at a Federal Reserve bank to purchase securities. The agreements will be a written arrangement between a bidder and a bank that authorize the Fed to charge the bank automatically for any securities purchased by the bidder on the date they are issued.
Treasury also said it will raise the maximum amount of notes and bonds that a single noncompetitive bidder may receive at an auction from $1 million to $5 million. In a noncompetitive bid, a firm or individual agrees in advance to accept the securities sold at the average yield determined by the auction.
Typically, small firms and investors submit noncompetitive bids, and a Treasury statement said the change is designed to encourage more such bidding. It will be effective beginning with the three-year note auction on Nov. 5.
The noncompetitive award limit for Treasury bills remains at $1 million for each bidder.
Treasury also announced that it has has asked the board of directors of GOVPX, the government securities market information service coordinated by the Public Securities Association, to expand its product. Mr. Powell told reporters the department wants to service to include data on government-sponsored agency securities such as those issued by Fannie Mae or Freddie Mac and zero coupon bonds, as well as trading volume.
The move is an effort to "help increase the liquidity and depth of the market by attracting additional participants," a Treasury statement says.
In addition, Treasury said it will make the reports of the Public Securities Association Treasury Borrowing Advisory Committee available to the public four weeks after each committee meeting, instead of waiting until the end of the year.
The committee has come under criticism in Congress because it brings together representatives of the primary dealers with Treasury and Fed officials in consultations before each quarterly refunding. Critics say the meetings allow the sharing of market-sensitive information that gives the dealers an edge at the auctions.
Among the auction rule reforms announced in September, Treasury will begin releasing its quarterly borrowing estimates before the committee meetings, rather than after each meeting. The committee is scheduled to meet tomorrow, and the regular refunding announcement is due to be held Wednesday.
Earlier yesterday, a key House subcommittee conducted its third hearing on the reauthorization of the Government Securities Act of 1986 and issues raised by the Salomon Brothers scandal. Rep. Edward Markey, D-Mass., chairman of the House Energy and Commerce subcommittee on telecommunications and finance, summarized a broad legislative package he is pushing for congressional action before adjournment this year.
The bill would give the Securities and Exchange Commission authority to order additional recordkeeping and reporting from government securities brokers or dealers for purposes of market surveillance and monitoring of price and trading activity.
It also would authorize the agency, in consultation with the Federal Reserve Board and the Treasury Department, to identify and receive trade reporting information concerning large trading customers in government securities for purposes of market surveillance. The agency already has some authority in the equity and debt markets to obtain reports by large traders under the Market Reform Act of 1990.
The bill also would authorize the SEC to adopt rules preventing fraudulent activities in the government securities market.
The Markey legislation would lift the current legal restriction preventing the National Association of Securities Dealers from writing sales practices rules for government securities dealings, including rules government excessive mark-ups, excessive markups and suitability of securities for particular customers. It also would give banking regulators authority to write sales practice rules for non-NASD members.
The SEC, in consultation with the Fed and Treasury, would have authority to oversee the dissemination of government securities market price and trading information to the public. It would be patterned after current SEC authority to oversee prices in the equity market.