FROM THE OFFICE OF PUBLIC AFFAIRS

Today, I would like to follow-up on a speech Under Secretary Fisher gave last January to the BMA Legal and Compliance Conference when he highlighted the importance of the auction process to our efforts to reduce our cost of borrowing over time.  Improvements in this process, whether in terms of speed, consistency, and/or transparency, are likely to generate long-term savings to the taxpayer by reducing the uncertainty that market participants face and Treasury pays for in each auction.  Today I would like to review the efforts we have made over the past year and our goals for the near future. 
 
No other debt market compares to the size and scope of the U.S. Treasury market.  Last year we auctioned $3.8 trillion of securities over 188 auctions, with awards of $2.5 trillion going to primary dealers. In the auctions, we receive bids from a large and diverse pool that technically includes every person and enterprise with a bank account. Taking the 26-week bill as an example, we typically receive 110 commercial competitive bids, 430 commercial noncompetitive bids, and 21,500 individual submissions through Treasury-Direct.  Bids are submitted through systems of varying degrees of sophistication and antiquity:  Fedline, TAAPS, mail, telegraph and, possibly, pony express. 

Despite the number of auctions, submitters, and systems, we have come a long way toward meeting one of our major efforts to improve the efficiency of the primary market, that of consistent, two-minute auctions.  Since Under Secretary Fisher first outlined the mission of two-minute auctions last year, average auction release times have dropped from an average of ten to four minutes. These improvements represent no small accomplishment given the age of the software, the varying level of sophistication of the systems at work, and the number of bids received. We want to thank you, the primary dealers, other market participants, the Bureau of Public Debt, the Federal Reserve Bank of New York and the press, for working together in the auction process to make such considerable progress.  We believe that by continuing this work together we will reduce auction release times further until the goal of the two-minute auction is met.  We ask that you continue to support our ongoing efforts to develop better long-term solutions, and we are always interested in your ideas.

What is even more gratifying to us is that the more recent reductions in auction release times have been accompanied by a reduction in bidding errors.  Any system that requires virtually simultaneous actions by many people at multiple firms is prone to mistakes from time to time.  Of the 188 auctions last year, technical factors delayed only 17 auctions.   We will do better and I am confident that we are on the right track in making a first rate auction process even better.

One small way we are trying to prevent bidding problems is by providing market participants laminated cards with detailed instructions printed what should be done in the event of a system problem.  We want to make sure that your bids are in the auction; the cards are meant to prompt you to think about how you would respond to last-minute technical problems.  We encourage you to keep these cards handy and develop your processes to detect and address system failures.  An unfortunate reality is that human, electronic, or operational errors occur; however, we must find ways to be prepared to deal with them.  We invite more of your suggestions on how we can continue the long-term process of improving Treasury auctions.

While we have made good progress in consistently reducing auction times and bidding errors, I have been less satisfied with the transparency of the information we provide to you, the auction participants, on overall participation in our auctions.  By providing a transparent auction process, we can ensure the continued efficiency of the primary market.  We must continue to protect the anonymity of all participants in our auctions, but we think we can do more to improve the depth of information we provide.  No one has suggested that we provide too much information about auction participation, but some of you have on occasion requested more detailed participation information to make the auction process even more transparent.

In response, we have been slicing and dicing the auction participation data to determine what additional metrics would be useful to auction participants but also would not compromise the confidentiality of bidders.  Currently we make available to the public the amount of competitive bids, the amount of non-competitive bids, and the amount of bids by the Federal Reserve System and statistics on the distribution of awards.  In past quarterly releases, we have also released comparative information on auction participation in long-term nominal and inflation-indexed securities. 

We think these releases have not thoroughly communicated information about the demand for our securities.  We hope to increase the market’s awareness of auction participation by enhancing the information we release following an auction to include some type of breakdown of awards to primary dealers, other direct bidders, and indirectly submitted bids.  We hope that all auction participants will consider whether this information will be beneficial and help in making the auction process more transparent and efficient. 

While there are a lot of ways for us to breakdown the auction data and to categorize participants, I think a useful and relevant starting point is to begin by highlighting the important role the primary dealers play in the auction process.

 I am sure it will not surprise you to know that the size and scope of the primary dealer participation is substantial. Looking at 2002 auction data, the primary dealers received awards for approximately 82% of the auction amount for bills, and 71% of the coupon offerings.  I would like to say explicitly what these numbers tell us:  the primary dealers are very important to us. 

The large and stable participation of primary dealers is critical to Treasury in meeting its objective of lowest cost financing over time.  Treasury benefits from the continuous provision of primary and secondary market liquidity by primary dealers.  That said, we acknowledge that there must be incentives for primary dealers to participate in auctions and we believe we should do more to promote the role of primary dealers as underwriters in Treasury auctions. 

Not only are your firms providing support for the auction process, we also appreciate and are encouraged by the way in which you continue to support the auction process through submission of your customer activity.  Many of you bring a large and consistent customer base to both the bill and note auctions.  In 2002, your customers took down 15 percent in bill auctions and 25% in the note auctions.  

Lastly, we realize that the role of market makers goes beyond what we can slice out of auction data.  The unparalleled liquidity of the Treasury market is in no small part due to the primary dealers.  On a daily basis approximately $350 billion in Treasuries change hands 

While we recognize and appreciate the primary sources of participation in our auctions - you, the primary dealer community, - as the public debt issuer, we also have an obligation to the American taxpayer to make our auctions easily accessible and open to anyone who wishes to participate.  We not only want to make the primary market as broad and deep as possible, but we want to make every effort to sell our securities at the highest possible price.  We believe it is important to continue to welcome participation outside of the primary dealer community, recognizing though that direct bidding remains a small part of overall auction participation.

We hope this information increased your awareness of auction participation.  As part of our obligation to obtain lowest cost financing over time, we believe Treasury must consistently provide an auction process that is attractive for market participants, including you the primary dealers.  We think it is important to maintain ongoing conversations with market participants about the auction process, Treasury issuance, and secondary market trading, in order for the US Treasury market to remain the broadest, deepest financial market in the world.  We hope you continue to take time to suggest information or processes that would be beneficial to you as auction participants, and, if you have any thoughts about this; do not hesitate to let us know.

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