Regulation of the U.S. Government Securities Market

Gao ID: 127376 July 9, 1985

Testimony was given concerning regulation of the U.S. Government securities market. GAO discussed: (1) issues concerning market instability and fraud; (2) the Treasury's unique role in debt management and monetary policy that already exist in the regulatory structure of the market; and (3) the present system of primary dealers and other aspects of market operations. GAO noted that, despite the regulatory coverage involved in supervising participants in the market, many Treasury securities dealers operate outside of federal regulatory, supervisory, or oversight mechanisms. GAO found that: (1) costs resulting from regulatory changes that reduce market liquidity, stifle innovation, or increase participant expenses would be reflected in higher interest payments and federal outlays; (2) a single dealer failure can have serious repercussions on other financial institutions because of the growing interrelationships among participants in the financial services industry; and (3) the Federal Reserve and the Treasury have been able to influence market behavior when problems have arisen. GAO also noted that: (1) the lack of federal authority to investigate potentially fraudulent situations among unregulated dealers was probably the most significant weakness of the present system; and (2) under appropriate legislation, the Federal Reserve System would have the power to set rules that affect all participants in government securities. GAO has held that: (1) it is essential that a mechanism be developed in which every firm operating in the market is subject to an effective fraud investigation and disciplinary procedure; (2) there are regulations in place that, if effectively enforced, might have prevented certain situations concerning fraud; (3) the primary dealer system and its operational aspects must be examined when deciding on the shape of a new regulatory framework; and (4) market stability is not just affected by failures due to lack of regulation but by other factors as well.

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