TAAPS (Treasury Automated Auction Processing System) was created for Federal Reserve Bank (FED) in order to process bids and tenders for securities issued by the Treasury. The system receives requests from brokers and checks whether they comply with Uniform Offering Circular. Selling government securities is a process that allows the Treasury Department to find funds for financing the public debt. The treasury market started in US in 1929 and was developed over the years. Until 1993 all the operations were documented in paper form. Since 1993 the first version of TAAPS started (K.Cohen, 1966).
Individual investors cannot use TAAPS, as it is intended for institutional investors only. If individual wants to buy government securities, he has to find a broker. But banks, insurance companies, etc. can use TAAPS directly. Treasury Automated Auction Processing System (TAAPS) is a network system developed by the Federal Reserve Bank. It is connected with Fed banks, to process bids and tenders received for Treasury securities. Treasury securities trade through an auction process in the primary market. TAAPS receives tenders from brokers wishing to purchase marketable securities. Bid is saved and reviewed automatically by TAAPS to ensure it complies with the Treasury's Uniform Offering Circular (K. Garbade, 2005).
History of TAAPS
In 1929 Treasury auctions began with the auctioning of 3-Month Treasury Bills. From 1973 - 1976 the auction system expanded to include bills, notes, bonds, Treasury Inflation Protected Securities, or TIPS, and Floating Rate Notes, or FRNs. Until 1993, bids were received in paper form and processed manually. It was an extremely time-consuming and inefficient process. The TAAPS system created the efficient process needed to handle the growing volume of treasury securities trades (V. Sundararajan, 1997)
Auctioning with 'TAAPS'
Treasury Automated Auction Processing System (TAAPS) was developed to become the heart of the operational process for the auctioning of Treasury securities. The system is responsible for:
- Receiving bids
- Separating competitive and non-competitive bids
- Ranking of competitive bids by increasing yield or discount rate
- Preparing a summary of the auction results.
The U.S. Government sells securities through the Treasury Department and Federal Reserve Bank to raise money to fund the national public debt. Institutional investors, including investment funds, banks, broker or dealers, retirement funds and pensions, foreign accounts, insurance companies and other organizations may bid on Treasury securities through TAAPS or Treasury Direct. Individual investors do not have access to TAAPS and must use Treasury Direct or go through an organization with access to TAAPS (M. Sunner, 2007).
Using Treasury Automated Auction Processing System
To use the TAAPS system financial institutions must apply for an account. This application includes an agreement certifying that the institution is not engaging in fraud by trading treasury securities and certification of authority that the contacts listed on the application have the power to use TAAPS on behalf of the organization. Establishing a TAAPS account, institutions follow the published regular schedule of auctions of various Treasury securities. For each auction, the Treasury announces:
- the amount of the security selling
- the date of the auction
- the issue date of the security
- maturity date
- terms and conditions of the purchase.
Schedules of auctions also include any applicable eligibility rules and the close times for competitive and non-competitive bidding. Institutions, organization, and individuals submit bids, and at the closing times for those bids, TAAPS sorts out the bids and awards them to bidders according to a set of rules designed both to fund the Treasury at the lowest cost and to maintain a competitive financial market. Winning bids are determined, and the winners submit tenders and securities issued to the winners (K. Garbade, 2005).
- Cohen, K. J., Kramer, R. L., & Waugh, W. H. (1966). Regression yield curves for US government securities. Management Science, 13(4), B-168.
- Garbade, Kenneth; Ingber, Jeffrey The Treasury Auction Process: Objectives, Structure, and Recent Adaptations Current Issues in Economics and Finance, February 2005, Vol. 11, No. 2
- Sundararajan, Vasudevan (1997) Coordinating Public Debt and Monetary Management, p401
- Sunner, Michael William; Giannotti, Oliver (2007). US Treasury auction compliance: How 'dealer visits' are conducted, what is discussed and Treasury expectations for auction participation]. Journal of Securities Compliance Oct2007, Vol. 1 Issue 1, p84-98. 15p. 2 Charts.
Author: Krzysztof Kędys