Statement by Peter D. Sternlight, Executive Vice President, Federal Reserve Bank of New York, before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, April 28, 1992

Federal Reserve Bulletin, June 1992 | Go to article overview

Statement by Peter D. Sternlight, Executive Vice President, Federal Reserve Bank of New York, before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, April 28, 1992


Statement by Peter D. Sternlight, Executive Vice President, Federal Reserve Bank of New York, before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, April 28, 1992

It is a pleasure for me to respond to your committee's invitation to testify today on matters related to the U.S. government securities market. As an official of the Federal Reserve Bank of New York, which is significantly involved in processing Treasury auctions, I thought it would be useful to focus my statement on the current status of automating Treasury auctions. I would also be happy to give my views, from my vantage point at the Federal Reserve Bank of New York, on other matters the committee may wish to raise.

Automation of Treasury auctions is a highpriority matter for the Treasury and the Federal Reserve. Planning work in this regard was under way before the events of last August, but our timetable has been expedited in the wake of the events of the past year--notably the revelation of certain abusive practices by individuals at Salomon Brothers pertaining to Treasury auction rules.

The work on auction automation may be thought of as a several-staged approach. The first phase, which has been developed by the Federal Reserve Bank of Kansas City, encompasses a system that provides for the electronic submission of bids placed throughout the country, mainly by noncompetitive bidders, using the Federal Reserve's standard "Fedline" terminal. Fedline is the standard terminal that is currently in use to connect the Federal Reserve Banks with depository institutions for a variety of operational purposes. Although this system can facilitate the submission of electronic bids, it is not designed to handle the last-minute rush of large competitive bids that, in fact, make up the bulk of the dollar volume of auction bidding. Moreover, Fedline does not have an automated backup system. Designed mainly for noncompetitive bidders, many of which bid through relatively small financial institutions, the system is expected to serve its intended purpose very well. In the aggregate, of course, noncompetitive bids, though individually small, can add up to sizable amounts and can be a significant factor in auctions. MOreover, some large institutions in the New York Federal Reserve District have expressed interest in using this new electronic system to submit noncompetitive bids on behalf of customers. The first phase is expected to be available countrywide by about the middle of this year.

When this first phase is completed, more than 9,000 depository institutions that have Fedline terminals connected to their Reserve Banks will be able to enhance their terminals and submit bids electronically. Other bidders, including nonbank securities brokers and dealers, will also be able to install Fedline terminals and submit bids electronically. This will be a significant step in broadening public access to the auctions across the nation. But I should note again that the first phase is limited because it could not handle--and was never designed to handle--the last-minute flurry of large competitive bids; nor does it have a reliable automated backup system.

Phase 2 of the automation process comprises a system designed specifically to meet the more demanding needs, including backup capabilities, of large competitive bidders, The system is being designed by the Federal Reserve Bank of New York, in accordance with Treasury specifications, and the project is on track for completion by about the end of this year. This system will be able to handle the last-minute rush of competitive bids with a very high degree of reliability and backup recoverability in the event of adverse circumstances. The system will also assist Treasury and Federal Reserve staff in monitoring auctions and enforcing the Treasury's rules.

Bidders under this system will also make use of the Fedline terminal but with enhanced software that upgrades it to a so-called "Fast Fedline terminal. …

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Statement by Peter D. Sternlight, Executive Vice President, Federal Reserve Bank of New York, before the Subcommittee on Domestic Monetary Policy of the Committee on Banking, Finance and Urban Affairs, U.S. House of Representatives, April 28, 1992
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