Joint report on the government securities market

212 Pages·1992·6.4 MB·English

by  United States. Dept. of the Treasury

Joint Report
on
the
Government Market
Securities
Board of Governors
Department of Securities and ofthe
the Treasury Exchange Commission Federal Reserve System
^Sa
January 1992

TREASURY. DEPARTMENT LIBRARY
c. ^
Joint Report
on
the
Government Market
Securities
Board ofGovernors
Department of Securities and ofthe
the Treasury Exchange Commission Federal Reserve System
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January 1992
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ISBN 0-16-036093-5

DEPARTMENT OF THE TREASURY
WASHINGTON
January 22, 1992
The Honorable J. Danforth Quayle
President
United States Senate
Washington, D.C. 20510
Dear Mr. President:
We are pleased to transmit our report on the government
securities market, as promised in statements before Congressional
subcommittees last year.
The recent widely publicized events involving abuses in
the government securities market have prompted us to undertake a
thorough review of the market that the federal government relies
upon to meet its borrowing needs. The Federal Reserve Bank of
New York was a full participant in this review, and its views are
reflected here as well. Our recommendations for legislation and
changes in policies are contained in this report. We believe
that these reforms will improve the fairness and efficiency of
the market, to the benefit of taxpayers and investors alike.
We urge the Congress to move swiftly in enacting our
legislative recommendations.
We are also transmitting the report to the Speaker of
the House.
Sincerely,
kAcJ^
-^
Nicholas F Brady Richard C. Alan Greenspan
Secretary Chairman Chairman
Department of the Securities and Board of Governors
Treasury Exchange Commission of the Federal
Reserve System

DEPARTMENT OF THE TREASURY
WASHINGTON
January 22, 1992
The Honorable Thomas S. Foley
Speaker
House of Representatives
Washington, D.C. 20515
Dear Mr. Speaker:
We are pleased to transmit our report on the government
securities market, as promised in statements before Congressional
subcommittees last year.
The recent widely publicized events involving abuses in
the government securities market have prompted us to undertake a
thorough review of the market that the federal government relies
upon to meet its borrowing needs. The Federal Reserve Bank of
New York was a full participant in this review, and its views are
reflected here as well. Our recommendations for legislation and
changes in policies are contained in this report. We believe
that these reforms will improve the fairness and efficiency of
the market, to the benefit of taxpayers and investors alike.
We urge the Congress to move swiftly in enacting our
legislative recommendations.
We are also transmitting the report to the President of
the Senate.
Sincerely,
Nicholas F. Brady Richard C. Breeden Alan Greenspai
Secretary Chairman Chairman
Department of the Securities and Board of Governors
Treasury Exchange Commission of the Federal
Reserve System

TABLE OF CONTENTS
Page
OVERVIEW OF THE GOVERNMENT SECURITIES MARKET
ix
SUMMARY OF REFORMS
xiii
JOINT REPORT
1
APPENDIX A: Background on the Treasury Securities Market
1. Characteristics of the Primary Market A-1
2. Characteristics of the Secondary Market A-7
3. Regulation of the Treasury Market A-12
APPENDIX B: Treasury Securities Market Issues
1. Short Squeezes B-1
2. Debt Management Approaches to Alleviating Squeezes B-4
3. Treasury Auction Issues
A. Auction Technique B-17
B. International Comparison B-25
C. Auction Automation B-41
D. Auction Rule Enforcement B-48
E. Concentration of Auction Awards B-54
4. Hedge Funds B-64
vii
5. Government Securities Clearing Corporation B-71
6. Sales Practice Rules B-83
7. Information Access B-87
8. Reporting and Audit Trails B-92
APPENDIX C: The Events Involving Salomon Brothers and Alleged Government
Securities Market Abuses
1. The Events Involving Salomon Brothers C-1
2. Short Squeezes C-5
3. Improper Practices Relating to GSE Securities C-7
APPENDIX D: Background on the Government-Sponsored Enterprise
Securities Market D-1
APPENDIX E: The Primary Dealer System
1. Statement of the Federal Reserve Bank of New York E-1
2. Primary Dealers: Criteria and Procedures Applied to Firms
Interested in Becoming and Remaining Primary Dealers .... E-11
vin