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If There’s An Opaque Trade That Banks Control, They’re Probably Gonna Manipulate It

The Justice Department wants to have a little chat with some banks about when-issued securities.
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Still just a glimmer in the would-be manipulator's eye. By JHerbstman [Public domain], via Wikimedia Commons

Still just a glimmer in the would-be manipulator's eye. By JHerbstman [Public domain], via Wikimedia Commons

Libor. You betcha. The currency markets? Oh yea. The mysterious-to-everyone-but-them when-issued securities on as-yet-unauctioned U.S. Treasuries? The Justice Department’s gonna find out.

UBS Group AG, BNP Paribas SA and the Royal Bank of Scotland Group Plcreceived subpoenas last month seeking information on the $14 trillion market, the people said. New York-based Morgan Stanley has also received a subpoena, one person said.

Should these not-quite-allegations-yet be borne out, however, you really have to ask: Can you blame them? There’s basically no public information on the things, which allow banks to sell debt they don’t quite own just yet, since it doesn’t quite exist just yet. They essentially control both markets: for the when-issued securities themselves, and then for the T-bills to meet their obligations under the when-issued securities. You may not be surprised to learn that the differential between the allegedly predictive when-issued market and the actual market it is supposed to be predicting generally goes in the banks’ favor.

When debt sells for less than when-issued prices indicate, traders say the auction “tailed.” Auctions tailed more than half the time in every type of security except for the 10-year note between 2010 and 2014, a Cleveland pension fund alleged in one of the lawsuits against the primary dealers. The chances that a supposedly predictive market would be so consistently off, in a direction that favors the people selling the security, is lower than 1 percent, the fund alleged.

UBS, BNP, RBS Get Subpoenas in U.S. Treasuries Probe [Bloomberg]


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