On October 20, 2015, SEC Chair Mary Jo White gave the keynote address at the “Evolving Structure of the U.S. Treasury Market” conference organized by the U.S. Department of Treasury and the Federal Reserve Bank of New York. The conference and speech follow this summer’s Joint Staff Report analyzing the significant volatility that the U.S. Treasury market experienced on October 15, 2014. The Joint Staff Report was a cooperative effort of the Department of Treasury, the Federal Reserve, the SEC and CFTC, and was the subject of a previous post on this blog (Regulators Fail To Identify Cause Of Abnormal US Treasury Trading on October 15, 2014).

The Chair’s speech, like the Joint Staff Report, emphasizes the growth in high speed electronic trading in the market for Treasury instruments, which mirrors the substantial increase in electronic trading in equities, pubic debt and commodities and derivatives markets. In light of this evolving market structure, the Chair called for a broad re-examination of regulations applicable to trading in Treasury instruments and for thoughtful consideration by the joint regulatory working group charged with this effort as to whether any of the regulatory responses to the growth of electronic trading in other markets might also be applied to trading in Treasury instruments. In particular, Chair White addressed the following:

  • Operational Integrity. The Chair noted that operational integrity of electronic markets is an “essential foundation” of electronic markets and regulations that require good practices by market participants can help prevent disruptive events. For equities, regulators have adopted steps in this area including the SEC’s Market Access Rule, the Regulation Systems Compliance and Integrity (SCI) rule, FINRA’s recent proposal to require registration of persons involved in the design of trading algorithms, and recommendations being developed by the SEC and CFTC that would enhance regulators’ information about how firms design and use algorithms. The Chair then asked the working group to consider whether these or other controls may be required to ensure that the Treasury market continues to function smoothly.
  • Volatility Moderators. The SEC and self-regulatory organizations have adopted circuit breakers, both for the market in general and for individual equities, which address liquidity imbalances and help moderate short term or transitory volatility by triggering a short pause in trading when prices move too quickly. In addition, the SEC is developing a proposal for an “anti-disruptive trading rule,” to address the concern that the use of aggressive, destabilizing trading strategies in vulnerable market conditions may exacerbate price volatility. Here again, the Chair charged the working group to consider the extent to which these types of measures would be appropriate in the Treasury market.
  • Intermediary Registration and Regulation.  In non-Treasury markets, electronic trading venues other than exchanges, referred to as Alternative Trading Systems (“ATS”), are regulated by SEC Reg. ATS. Chair White noted that Reg. ATS does not cover electronic trading platforms that trade solely in government securities, even though these trading venues raise similar regulatory issues as the ATSs that are subject to regulation, and suggested that this issue be reassessed. In addition, the SEC is developing recommendations to expand the information about an ATS that is publicly available and the Chair suggested that regulators consider whether the primary trading platforms for the Treasury market provide sufficient information about their operation to market participants and regulators. The Chair also noted that a large portion of cash Treasury volume is traded by unregistered firms that are not subject to regulation, and suggested that regulators give serious consideration to re-evaluating this issue as well.
  • Public Price Transparency. Post-trade transparency, i.e. dissemination of price and volume of completed trades, is a core feature of the regulation of equities and corporate bond and municipal securities markets. Although the primary trading platforms provide post-trade transparency for the cash Treasury market, the Chair suggested that such post-trade transparency should be extended to the dealer-to-customer segment of the cash Treasury market.
  • Regulators’ Access to Data And Cooperation. The Chair referenced the SEC’s Consolidated Audit Trail initiative which will provide regulators with a comprehensive database of information on orders and executions. For regulators to understand market dynamics and to exercise their regulatory function, Chair White suggested comprehensive data collection regarding Treasury transactions, to be shared among different regulators and trading venues.

The substantial prevalence of electronic trading across multiple venues continues to present challenging regulatory questions across many different markets, and will continue to do so for the foreseeable future.