Treasury Requests Comment on Trade Reporting in Government Securities
Commentary by Steven Lofchie
Treasury issued a Request for Information ("RFI") as to whether it should require additional post-trade transparency of data regarding secondary market transactions of Treasury securities.
In the RFI, Treasury stated that "consideration is necessary given characteristics of the Treasury market structure that differ from other fixed-income markets, such as differences in market segmentation, overall volumes, individual trades sizes, types of market participants, and methods of execution." Treasury asked for comment regarding the timing by which any information would be made public.
Treasury also requested comment on whether additional transparency would negatively impact the market, noting that some participants believe additional transparency would diminish the willingness of intermediaries to take large positions, particularly for off-the-run Treasury securities. Treasury remarked that this could in turn "adversely affect market liquidity including, but not limited to, bid-ask spread and depth of market and ultimately Treasury's debt issuance costs."
Comments on the RFI must be received within 60 days of publication in the Federal Register.
Commentary
Recently, the SEC issued a proposal to expand the definition of "dealer" in securities. One of the primary if not the primary justifications that the SEC gave for this expansion of the registration requirement was that it would allow Treasury to collect more information as to transactions in government securities. In that proposal, the SEC indicated that Treasury would be unable to collect desired information without the expanded dealer-registration requirement. The Treasury RFI makes no mention at all of the SEC's proposal, even though it does refer (on page 7) to a number of recent FINRA actions. This would suggest either that Treasury is not aware of the SEC proposal or perhaps that Treasury does not support it.
The differences between the SEC's approach in its dealer proposal and Treasury's approach in its request for comment are substantive. Treasury does not indicate that there is any problem under existing law with its authority to collect more information. This would seem to weaken a very substantial contention made by the SEC in its proposal. In the same vein, the SEC dealer proposal is largely dismissive of the notion that imposing more rules will have a negative impact on the securities markets, including the market for Treasuries. (See, for example, pages 24-29 of the SEC release, describing the significant benefits to the Treasury market, with no indication of either the uncertainty of those benefits or of the consequent risks arising from the proposal.) By contrast, Treasury regards damage to the market as a meaningful question, asking whether additional forced transparency will "ultimately [raise] Treasury's debt issuance costs."
Further, the SEC and Treasury differ in how they acknowledge meaningful differences in the markets for different types of securities, and how those differences should impact the way in which those securities are regulated. For example, Treasury distinguishes between on- and off-the-run securities, between fixed and floating rate securities. The SEC proposal makes no such distinction, not only between different types of government securities but even between ordinary equities and digital assets.
In light of Treasury's RFI, it would seem that the logical next step for the SEC would be to withdraw the dealer proposal; the justification for it no longer stands. Further, it is reasonably explicit in Treasury's RFI, that the SEC failed to take into account the potential negative consequences of its rule proposal. (See generally Trade Organizations Oppose SEC Proposal to Expand "Dealer" Registration Requirement; see, e.g., Fried Frank letter on behalf of registered advisers to private funds (final page) ("As the largest issuer of securities in the U.S. government, even a small increase in the cost of capital to it may be a meaningful amount.").)