Notice Seeking Public Comment on the Evolution of the Treasury Market Structure

SUMMARY: The Department of the Treasury ("Treasury") is seeking public comment on structural changes in the U.S. Treasury market and their implications for market functioning; trading and risk management practices across the U.S. Treasury market; considerations with respect to more comprehensive official sector access to Treasury market data; and benefits and risks of increased public disclosure of Treasury market activity.

DATES: Comments must be received no later than March 22, 2016.

ADDRESSES: Comments may be submitted through the Federal eRulemaking Portal (www.regulations.gov). Please follow the instructions for submitting comments through the Web site. You may download this proposed rule from www.regulations.gov or www.treasurydirect.gov. Please submit your comments, along with your full name and mailing address. We will not accept comments by fax or email. All comments will be posted to www.regulations.gov and on the TreasuryDirect Web site at www.treasurydirect.gov.

Additional Instructions: In general, comments received, including attachments and other supporting materials, are part of the public record and are available to the public. Do not include any information in your comment or supporting materials that you consider confidential or inappropriate for public disclosure.

FOR FURTHER INFORMATION CONTACT: For general inquiries, submission process questions or any additional information, please email TreasuryMarket RFI@treasury.gov or call (202) 622-2396. If you use a telecommunications device for the deaf (TDD) or a text telephone (TTY), call the Federal Relay Service (FRS), toll free, at 1-800-877-8339. All responses to this Notice and Request for Information should be submitted via http://regulations.gov to ensure consideration.

SUPPLEMENTARY INFORMATION: The U.S. Treasury market is the deepest and most liquid market in the world. /1/ It plays a critical and unique role in the global economy, serving as the primary means of financing the U.S. federal government, a significant investment instrument and hedging vehicle for global investors, a risk-free benchmark for other financial instruments, and an important market for the implementation of monetary policy by the Federal Reserve System.

FOOTNOTE 1 For purposes of this Request for Information (RFI), the U.S. Treasury market comprises the secondary market trading of U.S. Treasury securities, futures and options on U.S. Treasury securities and futures, and securities financing transactions in which Treasury securities are used as collateral. END FOOTNOTE

The structure of the Treasury market has evolved significantly over the past two decades. In particular, technology advancements, and the associated growth in high-speed electronic trading has contributed to the growing presence of principal trading firms (PTFs), /2/ with these firms now accounting for the majority of trading and standing quotes in the order book in both futures and interdealer cash markets. By contrast, bank-dealers /3/ still account for a majority of secondary cash market trading overall (when including dealer-to-customer trading), but they comprise well under half of the trading and quoting activity in the inter-dealer cash markets. These changes in intermediation and the provision of liquidity have coincided with significant growth in the U.S. fixed-income market, an evolving regulatory and macroeconomic landscape, and potential changes in the demand for liquidity by many investors.

FOOTNOTE 2 For purposes of this RFI, a PTF is defined as an investor with the following typical characteristics: Principal investor, deploys proprietary automated trading strategies, low latency typically key element of trading strategies, may be registered as broker or dealer but does not have clients as in a typical broker or dealer business model. END FOOTNOTE

FOOTNOTE 3 For purposes of this RFI, bank-dealer refers to a SEC-registered broker-dealer that is owned by a bank. A non-bank dealer is an independent SEC-registered broker-dealer that is not owned by a bank. Primary dealers, as designated by the Federal Reserve Bank of New York, are a subset of the bank-dealer category in the JSR. END FOOTNOTE

Trading in the Treasury cash market occurs across a diverse set of venues and modes of execution. Historically, the Treasury cash market has been bifurcated between the interdealer market, in which dealers trade with one another, and the dealer-to-client market, in which dealers trade with their customers (e.g. asset managers, pension funds, insurance companies, corporations). In the Treasury cash market, customers, also referred to as end users, have not historically traded directly with other end users. /4/

FOOTNOTE 4 For purposes of this RFI, customer refers to an institutional customer, to differentiate from a retail customer. END FOOTNOTE

Trading in the inter-dealer cash market has evolved significantly. Originally, this market had been open almost exclusively to dealers, who transacted with each other by telephone. In the early 2000s this changed, with inter-dealer brokers launching electronic trading platforms and later opening access to those platforms to non-dealers. Trading on these platforms has become increasingly automated, with transactions conducted using algorithmic and other trading strategies involving little or no human intervention. Today, trading on the inter-dealer platforms bears some resemblance to other highly liquid markets, including equities and foreign exchange markets, where PTFs and dealers transact in automated fashion, sometimes in large volumes and at high speed.

In contrast, a significant portion of trading in the dealer-to-customer market occurs on platforms that facilitate the matching of buy and sell orders primarily through request for quote (RFQ) systems, not central limit order books. These platforms are increasingly electronic, but are generally not conducive to automated or high-frequency trading strategies. Dealers also internalize a portion of their customer flow. /5/ However, it is unclear the extent to which this occurs given currently available data.

FOOTNOTE 5 For the purposes of this RFI, internalization refers to a broker filling a customer order either from the firm's own inventory or by matching the order with other customer order flow, instead of routing the order to an inter-dealer market for execution. END FOOTNOTE

Treasury futures are required by law to be traded on a registered exchange, and are traded primarily on the Chicago Board of Trade, part of the CME Group (CME). Futures transactions traded on the CME are centrally cleared at CME's clearinghouse. In the 1990s, futures trading began to transition from manual to electronic processes for the transmission of orders and information, and the execution of trades. Electronic trading eventually became the dominant mode of execution in the futures market. Now, more than 95 percent of all on-exchange futures trading occur on electronic trade-matching platforms, and market participants are increasingly employing automated systems for the generation, transmission, management, and execution of orders. /6/

FOOTNOTE 6 See CFTC Proposed Rule: Regulation Automated Trading, December 17, 2015: http://www.cftc.gov/idc/groups/public/@lrfederalregister/documents/file/2015-30533a.pdf. END FOOTNOTE

Non-bank proprietary trading firms have long played a significant role in the futures market. As the market has evolved to greater levels of electronic trading, they have increasingly employed automated trading strategies, and increasingly moved into the Treasury cash market. Today, PTFs represent a majority of trading in Treasury futures and inter-dealer cash markets.

On July 13, 2015, the staffs of the Treasury, the Board of Governors of the Federal Reserve System ("Board"), the Federal Reserve Bank of New York ("FRBNY"), the U.S. Securities and Exchange Commission ("SEC"), and the U.S. Commodity Futures Trading Commission ("CFTC") (collectively, the "Joint Staffs"), published the Joint Staff Report: The U.S. Treasury Market on October 15, 2014 ("JSR"). /7/ The JSR analyzed the extraordinary volatility in the Treasury market on the morning of October 15, 2014, and identified four next steps for further work: (1) Further study of the evolution of the U.S. Treasury market and the implications for market structure and liquidity, (2) continued monitoring of trading and risk management practices across the U.S. Treasury market and a review of the current regulatory requirements applicable to the government securities market and its participants, (3) an assessment of the data available to the public and to the official sector on U.S. Treasury cash securities markets, and (4) continued efforts to strengthen monitoring and surveillance and promote inter-agency coordination related to the trading across the U.S. Treasury market.

FOOTNOTE 7 Joint Staff Report: The U.S. Treasury Market on October 15, 2014: http://www.treasury.gov/press-center/press-releases/Documents/Joint_Staff_Report_Treasury_10-15-2015.pdf. The findings in the JSR were based in part on transaction-level, non-public data that staff obtained from the primary locations for price discovery in the Treasury market, the Chicago Mercantile Exchange for futures and BrokerTec and eSpeed for cash securities. END FOOTNOTE

Treasury is seeking public comment on several specific questions that will inform the ongoing work related to the next steps identified in the JSR. This RFI is intended, in part, to seek information and viewpoints from a diverse group of stakeholders, including the general public, buy and sell-side market participants, academics, and industry groups regarding these and other structural changes in the Treasury market, and their implications for the depth, liquidity, and functioning of the market. This RFI is also intended to develop a holistic view of trading and risk management practices across U.S. Treasury futures and cash markets--including the various trading venues and modes of execution present in the cash market--and it seeks input on potential improvements in Treasury market policies, practices, and conduct.

--This is a summary of a Federal Register article originally published on the page number listed below--

Notice and Request for Information.

Citation: "81 FR 3928"

Document Number: "Docket No. TREAS-DO-2015-0013"

Federal Register Page Number: "3928"

"Notices"