WASHINGTON, July 13 (Reuters) - The rules for the Treasury market should be reviewed, U.S. regulators said on Monday, as they released a much-anticipated first study into wild price swings on Oct. 15 in that market, an event many have blamed on overly tight regulation.
The data showed no single cause for one of the biggest price jumps since 1998 on a day when there were no significant policy announcements, the five regulatory agencies said.
The Treasury Department, the Federal Reserve Board and the Federal Reserve Bank of New York, the Securities and Exchange Commission and the Commodity Futures Trading Commission contributed to the report.
Market participants have blamed a tight new regulatory regime for Wall Street banks, introduced after the 2007-09 financial crisis, for a dearth of liquidity in the bond market where the banks play a dominant role.
The banks can no longer hold sufficient inventory of the securities to match buyers and sellers, they say.
On Oct. 15, the 10-year Treasury yield traded in a range of around 36 basis points, more than four standard deviations above normal and the largest swing since August 2011. The 10-year’s futures volume was the second highest on record.
While top regulators, such as Fed Governors Dan Tarullo and Treasury Secretary Jack Lew, have acknowledged that the matter was worth looking into, they have stopped short of blaming the 2010 Dodd-Frank law as the sole cause for the big gyrations.
The only notable news on Oct. 15 was U.S. retail sales data, but the price reaction was much larger than could have been expected, given there were few surprises, the report said.
Monday’s report looked in detail at the role of high-frequency traders, which have taken much of the blame for similar events in the stock market.
One conclusion was that these firms stayed in the market on Oct. 15 to provide liquidity.
“They ... continued to provide liquidity to the cash and futures order books, though at much reduced levels,” the report said.
“Bank-dealers ... provided less liquidity in the order books by widening their spreads and withdrawing for brief periods from the offer side of the book.”
Nevertheless, the report suggested looking into whether some of these automated trading firms operating in the Treasury market should be required to register.
Another recommendation was to develop best practices for market conduct, related to voice and automated trading. (Editing by Bernadette Baum)