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GOVERNMENT BOND DEALERS EVALUATE WAYS TO AVOID SQUEEZES IN THE TREASURY SECURITIES MARKET

 GOVERNMENT BOND DEALERS EVALUATE WAYS TO AVOID SQUEEZES IN
 THE TREASURY SECURITIES MARKET
 NEW YORK, Jan. 8 /PRNewswire/ -- A broadly representative committee of government bond dealers said today that rules requiring all industry participants to report large positions would be more cost-effective in avoiding "squeezes" and "corners" in the huge market for U.S. Treasury securities than would rules requiring large traders to report all their transactions.
 The committee's views differ with a current proposal pending in Congress that would extend large trader reporting to the Treasury securities market. The committee also noted that the advisability of implementing a large position reporting rule should depend upon the costs involved -- including the costs of implementation and the potential reduction in investor demand for U.S. Treasury securities.
 The Public Securities Association Committee on Emerging Issues in the U.S. Treasury Securities Market, which includes primary and non- primary dealers, small and large national and regional firms, banks and brokerage firms, has sent an evaluation paper to the Treasury, Federal Reserve and members of Congress for their consideration of issues involved in the reauthorization of the Government Securities Act of 1986 and possible market changes in the wake of the recent scandal in the Treasury securities market. The committee is chaired by Stephen Thieke, president of J.P. Morgan Securities Inc.
 Among the conclusions and options identified by the committee are:
 1. Large position reporting would be more effective than large trader reporting in enabling regulators to identify concentrations of ownership in securities that can cause market dislocations. Large position reporting can be implemented on a more real-time, cost- effective basis and is more targeted toward the type of information that regulators are trying to identify. Conversely, large trader reporting would generate large quantities of data that are not necessarily related to the objective of identifying control positions in securities and which would be costly for the market to implement and costly for the regulators to analyze.
 2. In the event that a large position reporting rule is adopted, the committee believes that:
 -- Limiting large position reporting to the new issue market would provide regulators sufficient information to achieve their objectives without imposing the burdens of requiring reporting on all securities. Historically, market dislocations relating to Treasury securities have typically occurred in the new issue market.
 -- Information to be reported should include any position from which a person could exercise control over or materially influence the price of a security. For example, forward, futures and options positions, where the underlying obligation is a newly issued Treasury security, and repurchase, reverse repurchase and securities borrowed and lent transactions in the relevant securities should all be reported.
 -- The rule should apply to any entity which has a large position in a Treasury security, including those entities exercising investment discretion as well as those acting for their own account. The rule should apply to all dealers, not just to primary dealers; and dealers should not be responsible for reporting the large positions of their customers. However, governmental entities, both foreign and domestic, should be exempt from the rule.
 -- Any information provided to regulators under the rule should be exempt from the Freedom of Information Act. There are legitimate concerns about the disclosure of proprietary trading strategies. Therefore, ensuring the confidentiality of the information will help reduce the negative impact of any such rule.
 -- Given the size of the Treasury market, the threshold for reporting should be very large; certainly much larger than the levels being discussed for the equity market.
 3. Ultimately, the desirability of implementing a large position reporting rule will depend upon the costs involved. Requiring market participants to report their positions to U.S. regulators may discourage investor participation in the U.S. Treasury market. This result could be especially pronounced among foreign investors and at the initial implementation of a reporting rule. The potential reduction in investor demand for U.S. Treasury securities must be seriously considered in determining whether a large position reporting rule should be adopted. Further, the rule could cause smaller participants, both dealers and investors, to reduce their position sizes to avoid the costs of compliance with a reporting rule. In summary, the broader the rule, the greater the cost to regulators of implementation and enforcement, and these costs will be included in the cost of financing Treasury debt.
 The committee also noted that reporting rules are not the only means for detecting and possibly controlling the likelihood of corners or squeezes. It recognized that the objectives of avoiding or alleviating market dislocations could be achieved on the supply side without creating the disincentives inherent in any reporting system. For example, according to the report, the Treasury could correct market dislocations by adjusting the available supply of securities -- through the more aggressive use of auction reopenings or the adoption of a tap auction -- when fluctuations in the prices of securities signal a need.
 Previously, the committee developed and issued "An Evaluation of the Primary Dealer System" and a set of "guiding principles for evaluating policy and procedural changes in the Treasury securities market," which the members have applied in developing the evaluation paper. The Committee expects to issue an additional paper evaluating the auction process, its rights and responsibilities.
 PSA is the international trade association of banks and brokerage firms that trade, underwrite, and distribute U.S. government and federal agency securities, mortgage-backed securities, municipal securities, and money market instruments.
 -0- 1/8/92
 /NOTE TO EDITORS: A copy of the evaluation paper is available./
 /CONTACT: Caroline Benn or Joe Sims of the Public Securities Association, 212-809-7000 or 212-440-9400, or in Washington, 202-898-9390/ CO: Public Securities Association ST: New York IN: FIN SU: ECO


GK-CK -- NY072 -- 7697 01/08/92 10:45 EST
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Date:Jan 8, 1992
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