NEW YORK -- Bond traders still puzzling over the U.S. Treasury Department's recent warnings on market manipulation may get an explanation at the New York Fed next month, but few expect the dealers under scrutiny to be named and shamed.
In an e-mail sent last Thursday, the New York Federal Reserve called for a Nov. 6 meeting with primary dealers to discuss issues the Treasury Department has raised about questionable trading practices.
Treasury officials and staff were also invited and are expected to attend.
The meeting comes after warnings made in recent months by James Clouse, Treasury deputy assistant secretary, and Treasury Undersecretary Randal Quarles, over a rise in instances of firms trying to profit from controlling particular Treasury securities. Both officials were mentioned in the e-mail.
However, since they have given few details on exactly what practices have caused the heightened concern, traders say the New York Fed is likely to use the meeting for clarification and information gathering, while also letting market participants know they are being watched.
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"To me it's all just good, solid, scary saber-rattling by the Fed," a head repo trader at a primary dealer in New York said of the meeting.
"I still think we're in the gentle coercion stage of the process ... They are going to rely on the heat and the pain of the scrutiny to let responsible managers do the right thing."
Another trader, asked if officials would name names at the meeting said: "I would highly doubt that."
A spokeswoman for the New York Fed would not comment.
COMPLIANCE
Clouse said last month that the Commodities Futures Trading Commission and the Securities and Exchange Commission were pursuing cases related to questionable practices in trading of Treasuries.
Some traders have welcomed the heightened concern, which they believe should contribute to smooth operation of the $600-billion-a-day Treasury market. But others said they want an explanation of the practices that have caught officials' attention.
Much of the focus has centered on the repo market, where traders sell securities and buy them back later for short-term financing needs or put up cash in order to gain access to bonds needed to cover market positions.
Clouse mentioned the repo market in his Sept. 27 speech before the New York-based Bond Market Association. But he said prices in the cash and futures markets also appeared to have been distorted to varying degrees.
The e-mail invitation by the New York Fed asked for attendance by managers responsible for trade in the cash and repo markets for Treasuries, as well as senior compliance officers who oversee regulatory issues within banks.
The inclusion of compliance officers in the Nov. 6 meeting means the Fed wants to make sure traders and those in charge of in-house oversight have the same understanding of the limits on them, dealers said.
Though it is likely to stop short of finger-pointing, some traders said it should be perceived as a warning.
"I think that's primarily related to the repo market," said a Treasuries trader at a primary dealer.
"The fact that they are placing some emphasis on it tells you that if you've been involved in something like that or something that might be perceived in that manner then you are probably less likely to do that in the future."
THE SQUEEZE
Traders had difficulty pinpointing the particular instances that might be the subject of authorities' focus.
They have noted that "squeezes" in the repo market have caused particular securities to become temporarily scarce, leading traders to pay a premium to get their hands on them.
In particular, two-, five- and 10-year Treasury debt securities all appeared to have been squeezed in recent months, though it is not clear why, dealers have said recently.
In September 2005, amid concerns over the way securities were trading, the Treasury called for reports from entities with large positions in 10-year notes maturing in 2012.
However, given that squeezes occur for a variety of reasons, many of which have nothing to do with manipulation, dealers say the Nov. 6 meeting will be about clarification.
"I don't believe it's all that big of a deal. There are issues that arise every once in a while in the course of business. This is one of them," said a trader at another primary dealer.
"They are not going to be naming names. They are just going to talk about making sure that the rules that are in place are carried out and if there is any other need for any further rules to make sure that happens."
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