Best practices are intended to serve as guidelines for market participants to organize their operations in a manner that fosters strong controls and reinforces overall market integrity. Rather than functioning as binding rules or regulatory guidance, best practices encourage the adoption of principles, processes, and procedures that affirm existing notions of sound market conduct in the Treasury, agency debt, and agency mortgage-backed securities markets. While voluntary, best practices apply to the full range of market participants active in these markets, from dealers and banks to buy-side firms, investors, investment advisors, financial market utilities, custodians, and others, regardless of their size. Broad adherence across this spectrum of market participants is essential for market-wide adoption.
Best Practices are meant to function as a living body of guidelines, evolving as market structures, technologies, and risks change over time. Rather than remaining fixed, best practices are reviewed and updated periodically to ensure they continue to reflect current market conditions and emerging concerns. This adaptability allows the TMPG to respond quickly to new developments, offering timely, relevant guidelines to market participants navigating an evolving landscape. The TMPG’s best practices to date focus on five core areas:
The smooth and efficient functioning of the Treasury, agency debt, and agency MBS markets relies on the integrity, honesty, good faith, and mutual trust shown by all participants. An efficient market fosters liquidity, which helps all market participants find buyers and sellers more effectively. It is important that all market participants promote market liquidity.
Appropriate handling of confidential information is important to promote the integrity and efficiency of the Treasury, agency debt, and agency MBS markets. The misuse of confidential information adversely affects the integrity of the market by undermining trust and confidence and, moreover, may constitute illegal activity. Nevertheless, there are legitimate reasons for appropriately sharing and using confidential information in certain circumstances.
Market participants that are active in financial markets are familiar with the importance of establishing and maintaining a rigorous internal control environment. Indeed, the variety of legal and reputational risks that a market participant’s Treasury, agency debt, and agency MBS trading and settlement operations are subject to suggests that a vigorous, well-informed, and assertive internal control program is essential. An internal control program should include the active engagement of the business, audit, legal, risk, operations, finance, and compliance functions.
Although large long or short positions are not necessarily problematic, these positions should be managed responsibly to avoid market disruptions. From time to time, a market participant may amass a particularly large long or short position in a specific Treasury, agency debt,or agency MBS issue or product. A market participant should manage that position with heightened vigilance, mindful of the need to support market liquidity. In particular, large short or long positions in the floating supply of an issue should be given close scrutiny because of the uncertainty of the tradable float. Market participants with large short positions or active shorting strategies have similar responsibilities to support the liquidity and smooth functioning of the market to those with large long positions.
Smooth and predictable settlement and clearing are crucial for preserving the liquidity and efficiency of the Treasury, agency debt, and agency MBS markets. Settlement fails prevent the market from clearing efficiently and can damage the market’s liquidity and function. While some settlement fails are inevitable, market participants should take care that their internal policies promote practices that support efficient and timely clearing and that avoid unnecessary market congestion. Market participants should avoid practices that intentionally inhibit the efficient clearing of the market.
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