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Regulators Issue Report on October Treasury Market Volatility

The U.S. Department of Treasury, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York, the SEC, and the CFTC released a joint report this week offering “preliminary and limited” findings regarding events that occurred in U.S. Treasury markets on October 15, 2014. That day, treasury markets experienced significant volatility with a 37-basis-point range in trading and 16-basis-point drop and subsequent rebound in a 12 minute span, all without an immediately apparent reason.  

While the report found no single cause underlying the events of October 15, “the analysis thus far does point to a number of findings which, in aggregate, help explain the conditions that likely contributed to the volatility.” The report explained that “in addition to other factors, changes in global risk sentiment and investor positions, a decline in order book depth, and changes in order flow and liquidity provision together provide important insight into the developments that day.”

The report offers several recommendations to improve understanding of the Treasury market structure, including:

  • further study of the evolution of the U.S. Treasury market and its implications for market structure and liquidity,
  • continued monitoring of trading and risk management practices across the U.S. Treasury market and a review of the current regulatory requirements applicable to the government securities market and its participants,
  • an assessment of the data available to the public and to the official sectors on U.S. Treasury cash securities markets, and
  • continued efforts to strengthen monitoring and surveillance and to promote interagency coordination related to the trading across the U.S. Treasury market.

A brief overview of the report, provided by Cadwalader, can be found here (including a more in depth analysis by Delta Strategy Group). For a counter analysis of the report charging that high frequency traders were the primary cause of the October 2014 issues in the treasury markets, see Zero Hedge.