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UBS cooperating in U.S. probe of Treasury securities market

October 31, 2006|From Reuters and Bloomberg News

Swiss bank UBS is cooperating in a U.S. regulatory probe of possible manipulation of Treasury debt prices, a sign that authorities are actively examining bond traders.

The development comes a week before major bond dealers meet with federal officials to discuss authorities' recent warnings about market manipulation. Bond traders said it also signals that regulators are taking the matter more seriously than some had believed.

A UBS spokesman on Monday confirmed that the bank was cooperating with authorities after the Wall Street Journal reported that the Securities and Exchange Commission was looking into whether UBS had engaged in improper activities in the Treasury securities market.

Treasury officials in May and September said attempts to profit from temporary hoarding of certain U.S. government securities had increased and that specific instances had been referred to enforcement agencies.

Ease of trading of Treasury securities is essential to the government's effort to obtain the lowest borrowing costs over time, said Woody Jay, a managing partner at hedge fund manager Rock Ridge Advisors.

"Part of that liquidity is certainly created by the ability to borrow and lend securities" reliably and in high volume, said Jay, a former head of liquid markets trading at Lehman Bros. "To the extent they feel that there are situations ... that would cause liquidity to leave, they're concerned about it."

Deputy Assistant Treasury Secretary James A. Clouse has said that questionable trading practices could raise government borrowing costs by driving some investors out of the Treasury market.

The New York Federal Reserve Bank has called a meeting for Monday with the 22 primary Treasury bond dealers to discuss securities lending practices.

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