An Overview of the Secondary Market for U.S. Treasury Securities in London and Tokyo

Abstract

Little statistical or descriptive information exists regarding the global nature of trading in U.S. Treasury securities. Yet the market for U.S. Treasury securities is one of the largest and most active securities markets in the world, and serves as an important mechanism for adjusting the risk sensitivity and liquidity of the portfolios of a variety of investors worldwide. This paper attempts to fill, at least partially, the existing gaps of information on global trading in U.S. Treasury securities by describing the institutional arrangements and market practices in the two largest offshore markets for these securities -- London and Tokyo. To obtain information for this paper, interviews were conducted with selected dealers, brokers, and institutional investors in late 1992 and early 1993, focusing on the institutional structure, size, and trading activity in these two market centers.From these interviews, it appears that the London and Tokyo markets for U.S. Treasury securities are much smaller in scale than the U.S. market. They are dominated by large U.S. primary dealers and inter-dealer brokers, but are more oriented toward customer trades than toward inter-dealer or financing transactions. Financing and settlement activity, for the most part, occurs in the United States. Convenience and business needs, rather than legal or regulatory factors seems to have influenced the development of the London and Tokyo markets for U.S. Treasury securities. This evolution, along with the existence of a substantial trading infrastructure, suggest that London and Tokyo could accommodate shifts in trading volume from New York if cost differences should favor these offshore markets. The potential for such shifts could have important implications for the development of regulatory and oversight policies aimed at the government securities market in the United States.

JEL Classification: G15