U.S. Treasury Securities

The Market's Structure, Risks, and Regulation Gao ID: GGD-86-80BR August 20, 1986

Pursuant to a congressional request, GAO examined the operation of the Department of the Treasury's securities market to: (1) identify the risks and implications for the government; and (2) describe the regulatory structure in which the market operates, including the Federal Reserve System's oversight role.

GAO found that there are nine federal agencies involved in supervising and regulating market participants and operating systems. The Federal Reserve, as fiscal agent for the Treasury: (1) sells securities at auctions; (2) designates certain securities dealers and commercial banks as primary dealers; and (3) operates computerized systems for recording and transferring securities ownerships and for transferring funds. The government uses the securities to finance its current deficits and raise short-term funds for its daily cash management activities. Because the interest rate is the most important factor influencing Treasury securities price changes, major dealers trade extensively in both the secondary and derivative markets to control their overall losses when interest rates change. Market losses result from: (1) fluctuations in market prices; (2) brokers' and dealers' securities management; and (3) incomplete and costly information on dealer and market developments. Despite the extensive presence of the regulatory agencies, there are 200 to 300 dealers and brokers specializing in Treasury securities who are exempt from regulation. Congress is considering regulations which would: (1) seek to provide added protection to investors by reducing chances for fraud, ensuring that they are provided accurate financial information, and restricting poorly capitalized firms' operations; and (2) bring unregulated dealers within the basic framework of supervision and standards for integrity and capitalization.

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