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Automated Bond Traders May Have to Follow New Reporting Rules

A report issued by the Treasury Department, SEC, and other regulators explored the causes behind a surge in trading volatility last October. The regulators urge consideration of registration requirements for government bond traders who use automated systems.

Federal regulators may explore whether firms that use automated trading for U.S. Treasury securities should be placed under new registration and reporting requirements, according to a July 13, 2015report by the Treasury Department, SEC, and other agencies.

The reasons behind a surge in trading volatility on October 15, 2014, in the treasury market, in which the availability of some Treasury securities dried up and yields on the 10-year bond plummeted and rebounded within a 12 minute window remain unclear. The swing of 0.37 percentage points in yields on the 10-year Treasury was the fourth largest intraday trading range on record, and, unlike the other wide trading swings, was not tied to a single piece of market news, the authorities said in Joint Staff Report : The U.S. Treasury Market on October 15, 2014 .

Joining the Treasury Department and the SEC in issuing the report were the Federal Reserve, the Federal Reserve Bank of New York, and the CFTC. The document found no single cause of the crash, but instead pointed to the evolving structure of the Treasury market.

“In particular, the increased use of electronic trading and the shifting role of market intermediaries, especially in cash Treasuries, as well as changes in end investors, may have resulted in changes to how liquidity is provided and demanded, and to the characteristics of that liquidity,” the report said.

The regulators called for a broad review of regulatory requirements surrounding trading and risk management in the treasury market. Some of the recommendations involve studying whether to bring those regulations more closely in line with those governing U.S. capital markets.

The regulators urged consideration of a registration requirement for automated trading firms in the treasury market and trading venues for government securities. They also backed a wider review of regulation in the government bond market, among other recommendations.

The rise of algorithm-based trading, according to the report, has “raised questions about evolving risks.”

“Automated trading can occur at speeds that exceed the capacity of manual detection and intervention, posing a challenge to traditional risk management protocols, and forcing market participants, trading platforms and clearing firms to develop internal risk controls and processes to manage the potential for rapidly changing market and counterparty risk exposure,” the report said.

The language mirrors similar concerns by regulators over volatility created by automated trading in other securities markets. In November 2014, the SEC finalized technology safeguards for stock exchanges and clearinghouses in Release No. 34-73639, Regulation Systems Compliance and Integrity (SCI) .

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