Federal prosecutors have subpoenaed several banks as part of a criminal investigation into possible manipulation of the U.S. Treasuries market, according to people familiar with the matter.
UBS Group, BNP Paribas and the Royal Bank of Scotland Group received subpoenas last month seeking information on the $14 trillion market, the people said. New York-based Morgan Stanley (MS) has also received a subpoena, one person said.
The Justice Department has been examining the U.S. Treasuries market for roughly two years. In November 2015, Goldman Sachs Group (GS) disclosed that U.S. authorities had sought information related to its trading of when-issued securities, which are among the least transparent instruments in the world's largest debt market.
When-issued securities act as placeholders for bills, notes or bonds before they're auctioned. The instruments change hands over the counter, with lifespans of just days. There's scant public information on trading volumes or the market's biggest players.
American depository receipts for BNP Paribas and UBS initially declined after Bloomberg reported on the subpoeanas and then recovered. RBS' were little changed.
Representatives for UBS, BNP, Morgan Stanley and the Justice Department declined to comment. RBS didn't respond to requests for comment. UBS has said in securities filings that it is “responding to investigations and requests for information from various authorities regarding U.S. Treasury securities and other government bond trading practices.”
The Justice Department in late 2015 asked about when-issued securities as part of broader requests for documents it sent to most or all of the roughly two dozen primary dealers in U.S. Treasuries, a person familiar with the matter told Bloomberg at the time. UBS, BNP Paribas and RBS are primary dealers in U.S. Treasuries. Authorities haven't accused any of the banks of wrongdoing.
Trading of these instruments is also the subject of several lawsuits against primary dealers filed since July 2015. In them investors allege that traders at global banks colluded to artificially inflate the price of the when-issued securities, which allow the banks to sell U.S. debt before they own it. Then they bought the debt at auctions for an artificially suppressed price, unfairly profiting at investors' expense, the lawsuits contend. The banks are scheduled to file motions to dismiss those lawsuits once the lead counsel for the plaintiffs is chosen.
When-issued securities have been a government-debt market fixture since the U.S. Treasury Department effectively authorized their use in 1975. Investors can buy them from a Wall Street bond dealer to guarantee they will be able to get their hands on a bond, bill or note once it's auctioned by the government.
Because they give a preview of auction demand, when-issued securities are an important indicator for primary dealers, which are essentially required to backstop U.S. government debt auctions by making “reasonable” bids for their share of each sale. The instruments help auctions run more efficiently, according to authorities including the Federal Reserve Bank of New York, which oversees the selection of primary dealers.
When prices move against dealers, trades of when-issued Treasuries can be unprofitable. On the other hand, a dealer that sells its customer a commitment to deliver U.S. debt at one price and then pays a lower price for that debt at auction can capture the difference when it delivers the Treasuries at the higher price.
When debt sells for less than when-issued prices indicate, traders say the auction “tailed.” Auctions tailed more than half the time in every type of security except for the 10-year note between 2010 and 2014, a Cleveland pension fund alleged in one of the lawsuits against the primary dealers. The chances that a supposedly predictive market would be so consistently off, in a direction that favors the people selling the security, is lower than 1%, the fund alleged.
The banks selling when-issued securities are often the same ones that receive billions of dollars' worth of client bids for those same auctions. That raises the concern — taken as a given in several of the recent suits — that information is being shared within and between banks.
Trader-to-trader communication is at the heart of recent federal antitrust probes into whether banks coordinated to manipulate interbank interest rates and align foreign-exchange trades. Those cases have resulted in billions of dollars in penalties, and in some cases guilty pleas. The investigation of the Treasuries market grew out those cases, people familiar with it have said.
Traders working at some primary dealers had the opportunity to learn about client auction bids ahead of time and in some cases talked online to counterparts at other banks, people familiar with these operations told Bloomberg News in June 2015. That report is cited in several of the lawsuits alleging collusion related to when-issued securities.