U.S. opens up securities auctions Move is response to Salomon scandal

October 26, 1991|By New York Times News Service

WASHINGTON -- In its latest response to the scandal at Salomon Brothers Inc., the government announced yesterday that the auctions that raise money to finance the nation's debt would be open to all brokers rather than just Wall Street's largest banks and investment houses.

The decision is intended to encourage greater participation in the auctions and weaken the role of the 39 "primary dealers" who have long been given special treatment for acting as middlemen between the government and the secondary market of institutions and customers that buy and sell Treasury instruments.

Most analysts and market participants said that the changes would have their most significant impact once traders were able to execute bids electronically, rather than using the current method of having runners drop slips of paper with bids at the Federal Reserve.

A new computer system, GOVPX, is being developed, and the Treasury Department urged yesterday that it be expanded "to help increase the liquidity and depth of the market."

"There's been a perception that some insiders have enjoyed a competitive advantage," Jerome H. Powell, an assistant Treasury secretary, said in an interview yesterday afternoon. "This is an attempt to level the playing field for the full range of participants."

The first test of whether the new rules will make a difference will come on Nov. 5, with the auction for three-year notes. Under the changes, any registered broker will be able to bid competitively in the auctions on behalf of themselves or their customers.

The bidders will not have to meet the existing requirement of posting a deposit in advance of the auctions, but they must sign a special agreement approved by a Federal Reserve Bank that authorizes charging the bidders' account at the Fed when the securities are issued.

Individuals have long been able to buy Treasury instruments directly from the Federal Reserve, but only at the average price and yield of all submitted bids and with a maximum of $1 million.

Yesterday's changes primarily open the market for the competitive bids, but in a concession to smaller banks, pension funds, municipalities and other institutional investors, the $1 million limit on non-competitive bids was raised to $5 million.

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