Mary Jo White, chair of the SEC, discussed the need for increased regulatory oversight of U.S. Treasury trading in a speech at the Evolving Structure of the U.S. Treasury Market Conference at the New York Federal Reserve Board yesterday.

In the speech, White detailed the rule proposed by FINRA in July of this year which would require its members, by June of 2017, to report transactions in U.S. Treasury securities through FINRA’s TRACE system, generally by the end of the day on which they were executed. The trading data would not be publicly distributed, but would instead be used to enhance regulators’ oversight of the trading market.

White also addressed the recent announcement this past Friday by the Federal Reserve Board that it intends to collect U.S. Treasury securities transaction data from banks, with the possibility that FINRA may act as agent on the Board’s behalf for such collection. By doing so, transactions by both broker-dealers and bank-dealers will be reported for a fuller collection of relevant data, which White favors to increase regulators’ ability to oversee the market.

White also spoke on the need to increase regulatory oversight and impose regulatory standards for intermediaries in the Treasury market, stating that there was a lack of critical standard compliance in the area that was present for equity trading platforms, namely Regulation SCI and Regulation ATS.

She then went on to assert a need to ensure potential dealers in treasury securities were registering as such. She pointed to a Joint Staff Report which she said made important observations concerning the nature and characteristics of the trading activity of the 10 most active principal trading firms.  She stated that the observations in the report suggested a course of conduct by firms that constituted traditional dealing activity – being engaged in the business of buying and selling securities for its own account.

The issue was whether firms were registering dealers as required, which would lead the firms to be subject to a regulatory regime requiring, among other things, net capital requirements ensuring the maintenance of sufficient liquid assets, examination of books and records, and specific anti-manipulation and anti-fraud provisions that went beyond the general restrictions imposed on all market participants.

White stated the she had asked SEC staff to consider clarifying how the conduct of these principal trading firms may trigger dealer registration requirements in the U.S. Treasury securities markets.  White argued that it was time for a regulatory convergence across equities and U.S. Treasury securities markets here, so that a firm engaged in the business of buying and selling securities for its own account should be registered as a dealer, whatever type of securities it deals in.

It is clear that regulators intend to make a push to greatly increase regulatory oversight of the Treasury market. We will keep you apprised of future developments in this area.

White’s speech can be found at the following link:

https://www.sec.gov/news/speech/white-keynote-us-treasury-market-conference-102416.html

Jeff Petersen is an attorney licensed in California and Illinois representing a wide variety of securities industry companies and professionals with regard to compliance and registration requirements. He can be reached in California at 858.792.3666 and in Illinois at 312.583.7488.