Good morning, Chairman Brown, Ranking Member Toomey, and members of the Committee. I’m honored to appear before you today for the first time as Chair of the Securities and Exchange Commission. I’d like to thank you for your support in my confirmation this spring. As is customary, I will note that my views are my own, and I am not speaking on behalf of my fellow Commissioners or the staff.
We are blessed with the largest, most sophisticated, and most innovative capital markets in the world. The U.S. capital markets represent 38 percent of the globe’s capital markets.[1] This exceeds even our impact on the world’s gross domestic product, where we hold a 24 percent share.[2]
Furthermore, companies and investors use our capital markets more than market participants in other economies do. For example, debt capital markets account for 80 percent of financing for non-financial corporations in the U.S. In the rest of the world, by contrast, nearly 80 percent of lending to such firms comes from banks.[3]
Our capital markets continue to support American competitiveness on the world stage because of the strong investor protections we offer.
We keep our markets the best in the world through efficiency, transparency, and competition. These features lower the cost of capital for issuers, raise returns for investors, reduce economic rents, and democratize markets. That focus on competition is in every part of the SEC’s work, particularly with respect to market structure.
We can’t take our remarkable capital markets for granted, though. New financial technologies continue to change the face of finance for investors and businesses. More retail investors than ever are accessing our markets. Other countries are developing deep, competitive capital markets as well.
The SEC is a remarkable organization. In just under five months, I have gotten to know many of the dedicated 4,400 people across 12 offices. Our agency covers nearly every part of the $110 trillion capital markets. Those markets touch many Americans’ lives, whether they’re investing for their future, borrowing for a mortgage, taking out an auto loan, or taking a job with a company that’s tapping our capital markets. We engage with companies raising money and with the key parties that sit in between companies and investors, including accountants, auditors, and investment managers.
While just last month we authorized voluntary return to office, we’ve largely been remote for 18 months now. I cannot compliment the dedication of this staff enough for their service to the American public.
In this testimony, I will cover some of the broad themes from the SEC’s unified agenda,[4] before closing with a few words on our enforcement and examinations divisions.
Market Structure
Predictive Data Analytics
Issuers and Issuer Disclosure
Funds and Investment Management
Market Structure
I’ll start with market structure. In every generation, we have to look at how we can revisit our rule sets to better enhance efficiency and competition in our markets.
Markets work best when they are transparent and competitive. Issuers and investors alike benefit from that competition because it lowers the cost of capital.
I have asked staff to take a look at five market structure-based projects across our $110 trillion capital markets: the Treasury market, non-Treasury fixed income markets, equity markets, security-based swaps, and crypto asset markets.
Treasury Market
First, let me turn to the Treasury market. This $22 trillion market[5] is integral to our overall capital markets as well as to global markets. It is the base upon which so much of our capital markets are built. Treasuries are embedded in money market funds; myriad other markets and financial products are priced off of Treasuries; and they are an essential part of our central bank’s toolkit. They are called the “risk-free asset” not just here in the U.S. but globally. They are how we, as a government and as taxpayers, raise money: we are the issuer.
During the start of the Covid crisis, liquidity conditions in the Treasury market deteriorated significantly. This wasn’t the first time we observed challenges in this market, though. Back in October of 2014, there was the Treasury “Flash Crash.” In the fall of 2019, we had significant dislocations in Treasury funding markets, called the Treasury repo market.
I’ve asked staff to work with our colleagues at the Department of the Treasury and the Federal Reserve on how we can better enhance resiliency and competition in these markets.
To the extent that this market is more efficient, that could potentially save money for U.S. taxpayers and lower the cost of our debt. To the extent that this market is more resilient, it is less likely to add to systemic risks during times of stress.
We will seek to consider some of the recommendations that external groups, like the Group of Thirty [6] and Inter-Agency Working Group for Treasury Market Surveillance,[7] have offered around potential central clearing for both cash and repo Treasuries.
Further, I’ve asked staff to reconsider some initiatives on Treasury trading platforms, and also to consider how to level the playing field by ensuring that firms that significantly trade in this market are registered as dealers with the SEC.
Non-Treasury Fixed Income Market
Additionally, I’ve asked staff for recommendations on how we can bring greater efficiency and transparency to the non-Treasury fixed income markets — corporate bonds, a $11 trillion market; municipal bonds, a $4 trillion market; and asset-backed securities (which back mortgages, automobiles, and credit cards), a $13 trillion market.[8] This market is so critical to issuers. It is nearly 2.5 times larger than the commercial bank lending of about $10.5 trillion in our economy.[9]
Equity Market
Next, I’d like to discuss equity market structure.
Every so often, in response to new technologies, the SEC updates its rules around market structure. After the internet came along, buyers and sellers could meet in new trading venues. An earlier Commission created a new rule in the 1990s to facilitate that. In 2005, the Commission further addressed this fragmented structure under Regulation National Market Structure.
In the last 16 years, though, technology has expanded by leaps and bounds. It has changed how market makers interact, how trading platforms compete, how investors access those markets, and the economic incentives amongst these various market participants. Retail investors can trade over commission-free brokerage apps. Telecommunication has transformed the speed of high-frequency trading. That wasn’t the case even a few years ago.
Despite these new technologies and developments affecting the structure of equity markets, we are often relying on rules written in an earlier period. Rules mostly adopted 16 years ago do not fully reflect today’s technology.
I believe it’s appropriate to look at ways to freshen up the SEC’s rules to ensure that our equity markets reflect our mission and are as efficient and competitive as they could be.
I think it’s time we take a broad view about what the market structure should look like today. The Commission started this exercise with regard to market data under former Chairman Jay Clayton. I’ve asked staff for recommendations, particularly around two key questions:
First, how do we facilitate greater competition and efficiency on an order-by-order basis — when people send each order into the marketplace?
While there is fragmentation amongst trading platforms, past reforms and new technologies may have led to more segmented markets and higher concentration amongst market makers. Nearly half of the volume transacted is executed in “dark pools” or by wholesalers. One firm has publicly stated that it executes nearly half of all retail volume.[10] Further, I wonder whether this means that the consolidated tape — the so-called National Best Bid and Offer — fully reflects the full range of activity on exchanges.
Second, how do we address financial conflicts in the market? As I have stated previously, I believe payment for order flow and exchange rebates may present a number of conflicts of interest.
Around those two key principles, I’ve asked staff for recommendations as to how we can ensure a more level playing field, enhance competition, and improve resiliency in our markets.
Moreover, I believe shortening the standard settlement cycle could reduce costs and risks in our markets. I’ve directed the SEC staff to put together a draft proposal for the Commission’s review on this topic.
Security-Based Swaps
The security-based swaps market is not a large market compared to the fixed income and equity markets, but it was at the core of the 2008 financial crisis. More recently, total return swaps were at the heart of the failure of Archegos Capital Management, a family office.
This year, the SEC is implementing rules related to securities-based swaps. Security-based swap dealers and major security-based swap participants will begin registering with the Commission by Nov. 1.
Further, on Nov. 8, new post-trade transparency rules will go into effect, requiring transaction data to be reported to a swap data depository and thus available to the SEC and, under appropriate circumstances, other regulators. Then, beginning on Feb. 14, 2022, the swap data repositories will be required to disseminate data about individual transactions to the public, including the key economic terms, price, and notional value.
In addition, the Commission has yet to finish the rules for the registration and regulation of security-based swap execution facilities. I’ve asked staff for recommendations on how the Commission can finalize mandates to stand up the regime established under the Dodd-Frank Act and to consider whether it would be best to do this consistent with the regime established by the Commodity Futures Trading Commission for security-based swap execution facilities. The CFTC has had swap execution facility rules that have worked well since they were adopted nearly a decade ago.
Further, to allow the Commission and the public to see aggregate positions, Congress under Exchange Act Section 10B gave us authority to mandate disclosure for positions in security-based swaps and related securities. I’ve asked staff to think about potential rules for the Commission’s consideration under this authority. As the collapse of Archegos showed, this may be an important reform to consider.
Crypto Assets Market
Next, I’ll turn to a newer market structure issue: crypto assets.
Right now, large parts of the field of crypto are sitting astride of — not operating within — regulatory frameworks that protect investors and consumers, guard against illicit activity, and ensure for financial stability.
Currently, we just don’t have enough investor protection in crypto finance, issuance, trading, or lending. Frankly, at this time, it’s more like the Wild West or the old world of “buyer beware” that existed before the securities laws were enacted. This asset class is rife with fraud, scams, and abuse in certain applications. We can do better.
I have asked SEC staff, working with our fellow regulators, to work along two tracks:
One, how can we work with other financial regulators under current authorities to best bring investor protection to these markets?
Two, what gaps are there that, with Congress’s assistance, we might fill?
At the SEC, we have a number of projects that cross over both tracks:
The offer and sale of crypto tokens
Crypto trading and lending platforms
Stable value coins
Investment vehicles providing exposure to crypto assets or crypto derivatives
Custody of crypto assets
With respect to investor protection, we’re working with our sibling agency, the CFTC, as our two agencies each have relevant, and in some cases, overlapping jurisdiction in the crypto markets.
[…]
Read More…
