More light needs to be shone on vast U.S. Treasury market: Fed’s Dudley

By Jonathan Spicer and John McCrank

NEW YORK (Reuters) – Shining a brighter light on the $14-trillion market for U.S. Treasuries is a priority for regulators because public transparency makes for smoother trading and a stronger platform, a top Federal Reserve official said on Tuesday.

The comments by New York Fed President William Dudley could suggest that regulators are leaning toward releasing a vast pool of valuable trading data they have collected from broker-dealers since the summer.

That, in turn, could harm banks’ secrecy and help electronic trading firms and hedge funds hungry for an information edge.

“A continuing priority will be increasing data transparency to all market participants and to the public in a manner that supports, and does not harm, market liquidity and integrity,” Dudley said, kicking off a conference co-hosted by the New York Fed and the U.S. Treasury.

Dudley, who is set to step down from the U.S. central bank in mid-2018, said the world’s deepest financial market must adapt to the data needs of its participants.

Public disclosure of trading data should keep the Treasury market apace with more electronic and transparent markets like that of futures, he said, adding transparency will promote a “level playing field” and protect participants from abrupt price disruptions.

The so-called flash rally of 2014, in which prices swung wildly and buyers and sellers disappeared, prompted regulators to hold such annual conferences and conduct research to address fragilities in the increasingly electronic bond markets.

While market volatility has dropped to record lows this year, the data collection helped reveal a better picture of who does what behind the reams of Treasuries price-changes.

The so-called TRACE data includes patterns, or “flows,” which is extremely valuable market intelligence for super-fast electronic traders, leaving Wall Street wondering whether regulators will release it publicly.

Dealers say doing so even with a lag would hurt their business, and it is unclear whether Treasury Secretary Steven Mnuchin shares his predecessor Jack Lew’s support for publishing the data.

Mnuchin is set to speak at the New York Fed conference later on Tuesday.

Dudley, a close ally of Fed Chair Janet Yellen and a strong advocate of reforming culture on Wall Street, said work remains to ensure that the data collection covers all providers of “liquidity,” or the availability of buyers and sellers.

Investors and regulators need to understand “the relative size of transaction volumes by various players, the breadth and resiliency of platforms used to facilitate risk transfer, and the robustness of market infrastructure under contingent circumstances.”

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