NEW YORK -- The New York Federal Reserve told the 22 primary dealers it conducts business with in the sale of U.S. government bonds to work with other major financial firms to strengthen integrity in the market, a source said on Monday.
The New York Fed met on Monday with the primary dealers to discuss trading practices following warnings this year from U.S. Treasury Department officials over a rise in attempts to manipulate the $600-billion-a-day Treasuries market.
A key focus of the gathering, attended by representatives from the U.S. Treasury Department and senior compliance officials of the dealer institutions, was getting the industry itself create a forum to develop a set of best practices, a source close to the discussions told Reuters.
"It was suggested the industry should consider ways to create a dialogue" to pursue best practices, the source said.
The New York Federal Reserve called for the meeting of primary dealers last month to discuss issues raised recently by U.S. Treasury officials.
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Primary dealers are the financial institutions that are approved to deal directly with the U.S. Federal Reserve in the sale of U.S. government debt. They underwrite new government debt, purchase the majority of Treasuries at auction and distribute them to their clients, thereby creating the market.
News last week of the involvement of Swiss bank UBS AG in a Securities and Exchange Commission probe unnerved traders. It was the first clear sign that authorities were examining their practices, an escalation from the verbal warnings by Treasury officials.
It was not clear who from the Treasury Department attended the meeting.
"The New York Fed highlighted the importance of integrating strong management oversight and compliance into day-to-day operations," the New York Fed said in a statement following the meeting.
In a speech before the Bond Market Association in September, James Clouse, Treasury deputy assistant secretary, said questionable practices had distorted prices in the cash, futures and repo markets.
He said there had been an increase in instances of companies trying to profit from controlling particular securities and said this could eventually drive investors away from the Treasuries market.
The New York Fed echoed this sentiment in its statement.
"It is essential to maintain market standards that promote efficiency and do not adversely affect the cost of borrowing for the U.S. government," the New York Fed said.
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