On February 9, 2007, the Treasury Market Practices Group (TMPG), a private-sector group formed by the Federal Reserve Bank of New York, released a draft of recommended practices in the US government securities market. The document is intended to serve as a benchmark for the adequacy of market participants' operating procedures.
The first of four major principles in the proposed practices involves promoting market making and liquidity. More specifically, firms should engage in practices that support their market making obligations and avoid strategies that hinder market clearance. They should quote prices responsibly and promote price transparency in the inter-dealer brokers market. All firms should establish adequate oversight over all aspects of Treasury trading activity, including the cash, financing and related derivatives markets.
The TMPG also recommends that firms maintain a robust control environment to monitor questionable trading practices. Such an environment should include: establishing strong internal controls, integrating the compliance and legal functions into the firms' trading operations and having senior management remain responsible for compliance policies, granting requisite authority to compliance and legal personnel to raise concerns to senior management and maintaining policies that specify certain criteria for mandatory review of trading activities.
The third recommended principle concerns managing large positions with care. Such management should involve: avoiding trading strategies that create or exacerbate settlement fails, making a good faith effort to lend a significant holding of an issue trading "special" into the specials market, making a good faith effort to borrow and deliver securities when holding large short positions and avoiding "strategic fails," avoiding reversals in strategies that may adversely affect the liquidity or settlement of the issue and informing compliance and legal personnel when particularly large long or short positions are taken.
The final major principle involves promoting efficient market clearing. Policies should ensure that: trades are communicated to the back office as quickly as possible, trading and operations remain independent, delayed execution of a trade ("holding the box") is closely scrutinized, operations procedures are clear and precise in order to avoid market congestion and fails, incoming securities are processed in a timely manner and persistent fails are diligently addressed.
The TMPG solicited industry and public feedback for consideration prior to publishing final recommendations. The feedback period ended on March 14. The complete document is available here.