Ed. Note: This article first appeared in Bloomberg
The revolution in the United States Treasury market is in limbo.
Deep within an office park in Rockville, Maryland, a U.S. financial industry watchdog is hard at work trying to make the $13.9 trillion market easier to understand.
The fate of that effort is in the hands of a new Treasury secretary -- former Goldman Sachs Group Inc. executive Steven Mnuchin -- whose decision ultimately will determine whether Wall Street banks continue to dominate a market that helps set everything from credit card to mortgage rates.
More than two years of work is at stake, and some of the architects of the project are concerned the efforts to make government bond prices more transparent to all could die under the new administration, according to three former U.S. Treasury officials who asked not to be named because they no longer work there.
A department spokesman didn’t respond to email requests for comments on the new Treasury’s view on public data dissemination.
Since late 2014, Treasury officials have been investigating the structure of the secondary market for American sovereign debt, including ways to make more information accessible to investors.
A key step comes in July when the Financial Industry Regulatory Authority will begin collecting market data from participants. Whether that data leads to reforms that benefit the public is now an open question, according to the former officials.
"There’s a big fear that Mnuchin doesn’t care, that he and the administration don’t reform the market," said Jim Greco, a co-founder of Direct Match Holdings Inc., a Treasury-trading firm that’s struggled to break the banks’ death-grip on the market.
At Finra’s Rockville office, employees are creating a system to collect data on daily Treasury trading that at first will be shared only with regulators. The idea was that the next step could be that prices would be shared with the public, though Greco doubts that will happen.
The lack of information goes beyond public awareness. It leaves in place a system where Wall Street dealers have total knowledge of prices and trades while investors and market makers are in the dark about deals between banks and their customers -- which comprise half of all trading.
It also hinders the ability of regulators to craft coherent policies because they don’t fully understand how Treasuries trade.
They were clueless in October 2014 when yields moved by almost five standard deviations -- an event that should occur about one day every 5,000 years. Their examination of the so-called flash rally took months to complete, and their initial report ignored all the trades between banks and their customers.
The benchmark 10-year Treasury note yield was 2.47 percent on Monday, little changed from Friday.
Newer entrants to the market, like principal trading firms such as Virtu Financial and market-makers such as Citadel Securities LLC, have told the Treasury Department that greater transparency would promote more participation and heighten competition, as well as reduce trading costs.
"Implementing real-time public reporting for secondary market Treasury transactions will increase investor confidence by leveling the playing field and providing the information necessary for investors to better assess execution quality," Adam Cooper, the former chief legal officer for Citadel, said in an April letter, one of more than 50 sent to the Treasury after it requested the input as part of its first survey of the market’s structure since 1998.
"Greater transparency also enhances market resiliency," he said.
Official support for pushing the market toward greater transparency had been building during the previous administration.
Former U.S. Securities and Exchange Commission Chair Mary Jo White said at a Federal Reserve Bank of New York conference in October that regulators need “full access” to the data, and better public reporting is needed to make the market easier to understand for investors.
New York Fed researcher Michael Fleming, writing in January prior to Trump’s inauguration, detailed the upcoming data collection by Finra in a post on the bank’s blog and noted that “although initial collection efforts are focused on providing such data to the official sector, the public will likely have access in the future.”
Making Treasury trades public like stocks, bonds or futures would also benefit investors, he said.
Public reporting could “promote competition and efficiency, leading to lower transactions costs and improved risk management,” he wrote. Antonio Weiss, who served as counselor to former Treasury Secretary Jacob J. Lew, in October noted the benefits of public price reporting in the corporate bond market that started in 2002.
Investors now save about $1 billion a year from that change, Weiss said.
Even proponents such as White and Weiss acknowledge that there is a risk that too much transparency could make it more difficult to trade Treasuries. Wall Street banks like Citigroup Inc. also expressed that concern in letters to the Treasury Department last year.
"I am very much pro-transparency,” said Susan Estes, chief executive officer of OpenDoor Trading LLC, and a former head of Treasury trading at Morgan Stanley.
“But I do not support real-time, full-trade size, public reporting for Treasuries."
Buying and selling Treasuries that were issued sometimes years ago, rather than the most recent vintage, is already hard to do now and changes to the market as a whole could make it worse. "Regulators need to tread carefully to ensure their intended solution does not introduce unintended consequences," she said.
Market participants may have to wait awhile for signals from the new Treasury secretary. A leadership vacuum in the agency has already started to weigh on key areas of economic policy.
More than three weeks after Mnuchin was sworn in on Feb. 13, the administration hasn’t named a deputy secretary or any under secretaries for Treasury, including one for domestic finance, which has been leading the transparency project.
If the plan does go forward, it would bring the first significant change to Treasury trading in more than a decade, a period in which markets for virtually every other financial product have undergone massive transformations.
“It’s still one of the only financial markets in the U.S. that doesn’t have reporting requirements. That always seemed a bit odd to me,” said Kevin McPartland, head of market structure research at Greenwich Associates, a financial services consulting firm.
"The new administration has said explicitly that they will try to limit the number of new rules going forward, and I think this sort of falls right into that bucket where they are going to have to look very, very hard as to if this is worth it."
Mnuchin for now appears focused on delivering promised tax reforms. The Treasury secretary said this month he is working with the House and Senate to find a tax plan everyone can agree on, and hopes to have it signed by the president before Congress’s August recess. He’s also said his staff is investigating the possibility of selling ultra-long term bonds for the first time.
Trump has signaled an early priority in financial services is to review the Dodd-Frank Act, which will be a full-time undertaking for Treasury officials, Greco said. "That’s going to consume all the oxygen in the air," he said.