Treasury irked that somebody else may be rigging markets

From Reuters
Wednesday, September 27, 2006

http://today.reuters.com/news/articleinvesting.aspx?type=governmentFilin...

WASHINGTON -- U.S. financial regulators are concerned by an increase in instances of firms trying to profit from controlling a particular Treasury security, a Treasury official told a bond market group on Wednesday.

"We have observed instances in which firms appeared to gain a significant degree of control over highly sought after Treasury issues and seemed to use that market power to their advantage," Deputy Assistant Treasury Secretary James Clouse said in remarks prepared for delivery to the Bond Market Association in New York.

"In the process, prices in the cash, repo and futures markets appear to have been distorted to varying degrees," he said.

Clouse's remarks are the latest in warnings issued by Treasury officials this year that traders' efforts to manipulate markets may push up costs and drive away investors in Treasury security markets.

Clouse said the Treasury, the Federal Reserve, the Securities and Exchange Commission, the New York Federal Reserve Bank, and the Commodity Futures Trading Commission are conducting regular market surveillance of Treasury cash, repurchase, and futures markets.

"If the situation warrants, cases may be forwarded to the appropriate agency for enforcement action or criminal investigation," Clouse warned.

Clouse said regulators would keep a close watch on firms with large positions in specific issues. Regulators will also be alert for abnormally high profits on a security issue of which a firm holds a significant position, he said.

"There are generally no free lunches in a highly competitive and efficient financial market," Clouse said.

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