Swiss bank giants probed over US bond manipulation

Stephen Foley

The two giant Swiss investment banks, UBS and Credit Suisse, are under investigation over possible manipulation of the market in US government bonds.

One Credit Suisse bond trader said to be caught up in the investigation has recently left his position, and UBS said yesterday that it was co-operating with an investigation by the Securities and Exchange Commission, Wall Street’s regulatory body.

The SEC is understood to be considering trading in one particular issue of US Treasuries, which were suddenly in short supply in February this year.

There have been growing concerns about how the big bond trading desks at investment banks may be manipulating the $4 trillion (£2.1 trillion) market for Treasuries. In May, a Treasury Department official warned traders who establish especially large positions in any Treasury issues to “tread very carefully”.

And last week, James Clouse, the deputy assistant secretary for federal finance, said: “We have observed instances in which firms appeared to gain a significant degree of control over highly sought-after Treasury issues and seemed to use that market power to their advantage. In the process, prices in the cash, repo and futures markets appear to have been distorted to varying degrees.”

The SEC investigation into events in February is believed to have been sparked by a referral from the Treasury. UBS declined to comment beyond its statement that it was “co-operating”. Credit Suisse declined to make any comment. It would not confirm a newspaper report that one of its New York-based traders had become caught up in the investigation, but a Credit Suisse employee has confirmed that the trader was no longer with the company.

Trading volumes in the Treasury market over recent years have risen sharply in relation to the amounts of individual Treasury issues outstanding, which has allowed firms to acquire a controlling position in a particular issue more readily than would have happened in the past.

When a particular issue is in short supply, holders can profit from lending it as collateral for loans in the repo market, where Treasuries are effectively swapped for cash.