Treasury to market: Self-police or face new rules

WASHINGTON (Reuters) - Financial market participants must quickly implement voluntary measures to prevent abuses, reduce risk and boost transparency or face new rules requiring changes, a senior U.S. Treasury official said on Thursday.

"We need to see changes in market practices. It is that simple," Anthony Ryan, assistant secretary for financial markets, said in prepared remarks to a securities trade group conference.

Ryan said constructive ideas developed by the private sector should be implemented and followed through with tangible actions.

"Make no mistake about it, change will occur, one way or the other, and there is a great deal to be said when it originates within the private sector," Ryan told the Securities Industry and Financial Markets Association.

"If private sector market practices do not change and market discipline is not significantly strengthened, legislators and regulators will certainly move to address the weaknesses in the private sector's contribution to market discipline," he added.

As an example, he said, participants in the $4 trillion U.S. Treasury debt market should quickly implement industry-derived measures to prevent failed transactions. Widespread adoption of best practices measures would help prevent chronic failures to deliver promised securities, which tend to occur in low-interest-rate environments.

Among these are pledges to execute cash settlement of failed trades within 30 days and creation of a "fails monitoring committee."

"Over the past 12 weeks, we have seen rates drop quickly, the demand for Treasury securities skyrocket, and a rapid increase in fails to deliver in the Treasury market," Ryan said. "In a short time period we have entered an interest rate regime in which the cost associated with fails declined significantly -- and perversely, weakened the financial incentive to rectify a fail."

He warned that Treasury was closely watching these activities. "Treasury agrees that now is the time to act. We believe that private sector action now regarding the implementation of these mitigating initiatives is optimal and we will continue to monitor progress closely," he said.

Ryan also urged hedge funds to implement best practices guidance released last month that include greater disclosures to investors and public company-style performance reports, as well as broader recommendation from the President's Working Group on Financial Markets that call for changes to credit rating agency practices and improved risk assessments by investors and financial institutions.