Statements to the Congress - policy statements by members of the Board of Governors Federal Reserve System - Transcript

Federal Reserve Bulletin, Dec, 1991

The other four proposals on which you requested the Board's views appear to represent responses to the Salomon Brothers episode and thus fall into the category of proposals that, in the Board's view, are better considered as part of a comprehensive review of the market. Although the Board is not prepared to express a definitive view, I would like to share some preliminary reactions to these proposals.

Perhaps the strongest potential concerns are associated with the proposed system of reporting by large traders in the government securities market. Additional recordkeeping and reporting by brokers and dealers may well be worthwhile. But imposing this burden with respect to all large traders may not be necessary and could well involve significant costs.

Although a system for large-trader reporting may be appropriate for the stock market, the market for government securities is very different. The need for large-trader reporting must be rigorously determined, based upon the findings of the Board's study of this episode, because of the possibly considerable costs associated with this reporting burden. These costs include the direct cost incurred by market participants in producing and maintaining reports. More important, such a reporting system could cause some investors to withdraw from a Treasury market in which their finances and trading strategies may be revealed. Because reduced investor demand could translate into higher interest rates required to finance Treasury debt, the Board must carefully assess this potential increase in taxpayer cost. Indeed, equally efficacious but much less costly alternatives to a large-trader reporting system may exist. The stakes are high; the consequences of mistakes are severe; and the Board believes that careful study is required before proceeding with proposals in this area.

Concerning the proposals for requiring internal controls and extending SEC authority to prevent fraudulent and manipulative acts and practices, I expects that the Board's review of the market and its regulation will shed light on the need for such legislation. Certainly, securities firms must have adequate internal procedures to prevent wrongdoing by their employees, and adequate provisions to prevent fraud in this market are needed. However, a determination on whether these two provisions would represent significant, cost-effective, additions that are appropriate in this regard should, in the Board's view, await the results of further study.

The Salomon Brothers episode highlighted some vulnerabilities in the government securities market; it also presented the Board with an opportunity not only to solve the specific problems but also to initiate a comprehensive study for designing and implementing fundamental improvements in market practices, structure, and regulation. I fully expect that the Board will be able to use this opportunity to enhance the integrity and efficiency of this important market.

(1) The attachments to this statement are available on request from Publications Services, Board of Governors of the Federal Reserve System, Washington, D.C. 20551.