The Justice Department has begun an examination of trading in the U.S. Treasury market, following the outlines of its successful cases against Wall Street's illegal practices in foreign currencies and other businesses, said three people familiar with the inquiry.
The government also is continuing to look into possible collusion in gold and silver markets and in trading around certain oil benchmarks, the people said.
Although the latest inquiry into Treasury trading is in its earliest stages, the agency is said to be investigating whether information is being shared improperly by financial institutions. Some of the world's biggest banks and their subsidiaries pleaded guilty after traders were shown to be using chat rooms, which functioned as cartels, to coordinate positions on foreign-exchange markets. The practices violated federal antitrust laws. Some of the same banks were among those that settled fraud and antitrust investigations into the manipulation of key interest rates.
Wall Street firms that wrapped up long-running investigations -- including JPMorgan Chase & Co., Citigroup Inc., Royal Bank of Scotland Group Plc, Barclays Plc, Deutsche Bank AG and UBS Group AG -- could face even stiffer penalties if errant behavior surfaces in more markets.
Prosecutors have expressed frustration over the difficulty of changing the culture at financial institutions.
"At this point, whatever the facts are regarding this, the government is in a strong position thinking that where there's smoke, there's fire," said Jill Fisch, a professor at University of Pennsylvania Law School. "It's not just one investigation after another; it's one scandal after another."
Peter Carr, a Justice Department spokesman, declined to comment. The New York Post reported Monday that prosecutors are turning their attention to the U.S. Treasury market.
The market is a benchmark for borrowers and savers worldwide, helping determine the rates on credit cards and home loans. It's the largest government-bond market and a haven for investors. China, Japan, Saudi Arabia and other countries convert trillions of dollars of cash into Treasuries every year. Despite its size and importance, the market is lightly regulated.
Various financial regulators oversee parts of the $12.5 trillion Treasury market but not the whole. The Treasury Department has the authority to write rules but not to enforce them. That responsibility can fall to the Securities and Exchange Commission when U.S. authorities are alerted to unusual trading behavior. The Federal Reserve Bank of New York monitors the market in relation to its decisions on monetary and fiscal stability policy.
It remains unclear where in the Treasury markets prosecutors are looking for wrongdoing, or whether any specific allegations against Wall Street banks prompted the inquiries.
On Oct. 15, U.S. Treasuries went for a wild ride, enduring the biggest yield swings in a quarter-century. The turbulence left investors wondering whether electronic trading was undermining what's considered one of the most stable markets.
Executives from three of the biggest market-making firms in U.S. Treasuries, who asked not to be identified, last year told Bloomberg News that a lack of cohesive regulation and technology to monitor high-frequency traders is making the Treasury market more dangerous for everyone. They cited a need for an investigation of spoofing -- in which an order is placed but quickly withdrawn to manipulate pricing.
The Treasury Market Practices Group, an advisory committee backed by the New York Fed, finalized additions to its best-practices guidelines Wednesday. On a list of trading practices to avoid, it now includes "those that give a false impression of market price, depth or liquidity."
It also added an updated recommendation "that market participants who employ trading strategies that involve high-trading volume or quoting activity should be mindful of whether a sudden change in these strategies could adversely affect market liquidity and should seek to avoid changes likely to cause such disruption," the Treasury Market Practices Group said in a statement.
Its members include executives from Morgan Stanley, Goldman Sachs Group Inc., JPMorgan, Citadel LLC, BlackRock Inc. and ICAP Plc.
Information for this article was contributed by Greg Farrell and Liz Capo McCormick of Bloomberg News.
Business on 06/11/2015