In most foreign jurisdictions, the central bank or monetary authority has the ability to conduct open market operations with a large number of banks that make markets in government securities and also have reserve accounts with the central bank, while the national treasury separately manages relationships with financial institutions to underwrite and distribute its debt issuance; these latter entities are termed “primary dealers” and are often the only entities having access to primary market auctions. In the United States, by contrast, a comparatively smaller number of firms simultaneously act as counterparties for the central bank’s domestic open market operations and as backstop underwriters and distributors for Treasury debt issuance; firms designated as “primary dealers” are required to act in both capacities. In fact, the United States is somewhat unique in that (i) being a “primary dealer” means that the firm is a counterparty for central bank monetary policy operations and has certain obligations with respect to primary national debt issuance and (ii) management of the primary dealer system resides with the central bank rather than the national treasury. This unique structure is a legacy of history. Beginning in World War I, the Treasury offered coupon-bearing securities on a fixed-price basis. Small banks and securities brokers commonly subscribed for their own and customers’ accounts, and there was little need for any formal or informal underwriting process. Market making in outstanding Treasury securities, however, was a capital-intensive process conducted mostly by nonbank dealers, though a few banks did have significant dealer operations.

The Treasury Market Practices Group (TMPG), a private sector group of market professionals sponsored by the New York Fed, has played an important role in these efforts. Building on analysis that started before October 15, 2014, the TMPG released earlier this year an updated set of best practice recommendations and a companion white paper discussing automated trading.3 As is typical of TMPG initiatives, the group’s work on automated trading was undertaken to support market liquidity amid these changes in the market ecosystem. Much work remains to calibrate an appropriate response to changes in market structure, and last month’s conference “The Evolving Structure of the U.S. Treasury Market” provided a valuable opportunity for the official and private sectors to engage in a healthy and open debate on a range of related topics.4 The conference, organized by the Treasury, the Federal Reserve Board, the New York Fed, the Securities and Exchange Commission, and the Commodity Futures Trading Commission, featured a review of the agencies’ July 2015 Joint Staff Report and highlighted a number of key issues, including the adequacy of the Treasury market data currently available to the public and to the official sector, the impact of the current regulatory environment on liquidity, and some potential operational risks posed by shifting market structure and trading behavior.5 The Treasury made clear at the conference that work in this area is ongoing when it disclosed plans for the agencies to issue in the near future a request for information on the next steps outlined in the Joint Staff Report.