Bond Association issues recommendations for auction contingency plans

The Bond Market Association (TBMA), a consortium of securities dealers worldwide, has offered recommendations for handling disruptions to the US Treasury auction process. The proper functioning of Treasury auctions is vital to the economy. The US Treasury, with the help of market players, is developing contingency plans to ensure that the auction process is reliable and resilient.

TBMA's recommendations focus heavily on crisis communication strategies to be employed in the event of a major market disruption.

TBMA proposed in a December 10th letter to the Treasury Department that, following an incident, the Treasury and Federal Reserve Bank of New York must quickly communicate with securities dealers to determine the scope of the disruption and implement appropriate plans.

The association recommends that the US government:

1. Deploy multiple tools for communicating during an event. TBMA specifically proposes that Treasury and the FRB-NY create a toll-free number for primary dealers and sponsor Government Emergency Telecommunications Service cards for senior traders;

2. Create, in close coordination with industry personnel, an emergency contact list of senior managers with the primary dealers; and

3. Make every reasonable effort to survey the major primary dealers during a crisis. If an auction must be delayed or postponed, TBMA suggests that the Treasury and FRB-NY adopt a formal communications policy distributed to all market participants.

TBMA emphasises flexibility, based on the following principles:
* Avoid cancellation: Treasury should make every effort to hold scheduled auctions in order to minimise market disruptions and reduce the Treasury's cost of funding.
* Allow bidding via backup sites: Treasury should encourage primary dealers to test backup sites and train staffers in overseas offices to trade electronically or via the telephone.
* Plan for a wide range of disruptions: although Treasury's current list of possible disruptions is broad, TBMA recommends expanding the list to include a catastrophic scenario in which the auction is not held and trading in secondary markets is suspended.

The US Treasury is responsible for borrowing money from the capital markets in order to fund the Federal government. Every week the Treasury holds an auction where it sells bonds to institutional and individual investors seeking low-risk, highly liquid securities. Any significant disruption to these auctions could have a serious impact on the financial markets and could impair the government's ability to pay off maturing debt and fund its operations. US government bonds are some of the most widely traded in the world and account for a significant portion of total outstanding debt.

Source: Zeichner Risk Assessment Newsletter. To subscribe to this weekly newsletter, click here.

•Date: 23rd December 2003 •Region: N.America •Type: Article •Topic: BC general
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