In the Matter of Bielfeldt

The United States Department of the Treasury (Treasury) issued debt securities in three forms. First, there were Treasury bills, also known as T-bills. T-bills were debt instruments that paid no interest and were redeemed at their full amounts on the dates of their maturity, which was set at three months, six months, or one year after issuance. Because they bore no interest prior to maturity, T-bills were issued below face value. Second, there were Treasury notes, also known as T-notes. T-notes paid fixed amounts of interest semiannually. T-notes were redeemed at their face values on their maturity dates, which were set at two, three, four, five, or 10 years from the dates of issuance. T-notes were typically issued at or near their face values. Third, there were Treasury bonds, also known as T-bonds. T-bonds had maturity dates of 10 years or longer, at which time they were redeemed for their face values. T-bonds paid fixed rates of interest, payable semiannually, and were issued at or near their face values. The Federal Reserve Bank of New York (the Fed) held auctions to determine the interest rates payable on T-bonds. For all Treasury securities, trading generally began with Treasury auctions, at which bids were placed on either competitive or noncompetitive bases. Once issued, Treasury securities usually traded over the counter. Such trades could occur directly between buyers and sellers or alternatively through interdealer brokers. The bid price was the price at which a buyer was willing to purchase the security, and the ask price was the price at which a seller was willing to sell the security. A transaction took place when a buyer met an asking price or the seller met a bidding price. The Treasury market consisted of a number of primary dealers that the Fed agreed to deal with directly in the Treasuries market. To be recognized as a primary dealer, a firm had to maintain adequate capital, participate in every Treasury auction, file periodic reports with the Fed, and act as an effective market maker. Sometimes primary dealers traded Treasuries for their own accounts; this was known as proprietary trading. Other times, primary dealers traded Treasuries for their customers. Whether the primary dealer was trading for his own account or for his customers, the transactions often took place with another primary dealer serving as the counterparty. Interdealer brokers acted as firms that effectuated trades between buyers and sellers, including when those buyers or sellers were primary dealers.