The market in U.S. government securities, hit by a number of highly publicized failures of dealers in recent years, needs new but limited federal regulation, Federal Reserve Chairman Paul A. Volcker told Congress yesterday.
Volcker said the Fed's preference would be for Congress to authorize creation of a self-regulatory organization, or SRO, whose work would be overseen by the Fed, the Treasury Department and the Securities and Exchange Commission. The SEC would have power to enforce the regulations.
However, the chairman said an alternative being worked out among the three government agencies giving the Treasury primary responsibility for regulating the government securities market is also "an acceptable alternative framework to an SRO."
Several members of the House Energy and Commerce subcommittee on telecommunications, consumer protection and finance, before which Volcker testified, expressed concern that the Treasury would not do an adequate job.
"Aren't you concerned, as we are, that perhaps Treasury lacks the necessary enthusiasm?" asked Rep. Matthew J. Rinaldo (N.J.), ranking Republican on the subcommittee.
Acting Assistant Treasury Secretary John J. Niehenke told the subcommittee last week that Treasury thinks no new rules are needed for the huge, largely unregulated market. Treasury is concerned that added regulations could increase the cost of financing the national debt, he said.
Volcker, in reply to Rinaldo, reiterated that having the Treasury do the job was "acceptable" to the Fed, with the proviso that the central bank would work closely with the Treasury in carrying out the task.
A call for added regulation mounted after E.S.M. Government Securities of Fort Lauderdale, Fla., and the New Jersey-based Bevill Bresler & Schulman group of companies collapsed earlier this year. The failure of the two government securities firms cost investors millions of dollars, and in the E.S.M. case, precipitated a crisis in privately insured thrift institutions in Ohio.
Volcker said the Fed had believed that no new regulations were needed but that the recent wave of failures of "fringe" dealers had had such widespread repercussions that the Fed's board had changed its mind. "We have concluded that legislative authority providing for registration, appropriate record-keeping and inspection of those representing to deal in government and federally sponsored agency securities is desirable, and certain minimal regulatory authority should be provided with respect to certain trading practices," he said.
In the area of "trading practices," the Fed chairman identified as two areas in need of regulation margin requirements -- rules for how much of the cost must be put up at the time of a securities purchase -- and trading in securities when their sale has been announced by Treasury but before their actual issue.
Volcker said that he would want the Fed to continue its close watch on the 36 so-called primary dealers, or firms whose transactions account for most of the volume in the market. These are the dealers with which the Fed itself deals when it buys and sells government securities on its own behalf or on that of others such as foreign central banks.
The subcommittee is expected to begin to mark up a bill soon after the July 4 recess, according to a subcommittee staff member.