During the spring and
summer of 2005, a significant and persistent misvaluation was observed for the
pricing of cash market 10-year U.S. Treasury notes and their associated 10-year
U.S. Treasury note futures contracts. Based on long-standing concerns regarding
the potential for manipulation in the Treasury market, regulators focussed
their attention on trading irregularities in the cash market February 2012
10-year Treasury note, and eventually imposed new restraints on trading
practices in the Treasury futures markets. Based on a detailed study of this
episode, we find that the source of the market disruption was not linked to
market manipulation, but instead was driven by structural shifts in the
Treasury futures market, along with several related, but coincidental factors.
This study provides additional evidence that financial derivatives markets
relying on physical delivery for settlement are prone to episodes of market
instability and distortion.
