Market Functioning and Monitoring

We have continued our efforts to help facilitate the orderly and fair market function, including in coordination with our colleagues at the Federal Reserve and Treasury.[1]

Market activity has remained active in June and thus far in July, but has declined from the peaks in late February and March.  By way of just a few examples:

• On the last day of February 2020, we observed the second most shares traded ever, 19.3 billion shares.  In June, the average remained quite high by historical standards at 13.3 billion shares per day.  By comparison, in June of 2019, the average daily volume was close to half that size, 7.1 billion shares per day.
• Equity volatility has also remained elevated.  The ‘VIX’ Index provides an options market-based measure of expected future volatility.  At the beginning of January 2020, the VIX value was 12.5.  On March 16, it closed at an all-time high of 82.7.  During the month of June, the VIX closed between 24.5 and 40.8.

Despite these elevated volumes and volatility, consistent with my comments at our last meeting, the “pipes and plumbing” of our securities markets continue to function largely as designed.  Notably, we have observed no systemically adverse operational issues with respect to our key securities market infrastructure.  Again, I thank the Federal Reserve, the Treasury and the Congress for their extraordinary, prompt and necessary efforts to support our markets.

To be clear, there were and are issues that require attention.  In March, the Commission and staff granted an array of targeted regulatory relief to allow market participants to continue to function and focus on substance—e.g., transaction execution and investor protection—as they adjusted their operations to address health and safety imperatives.  Much of this relief is no longer necessary, but in some cases—e.g., in accommodating telephonic meetings and other remote activities—remains appropriate.  We will continue to closely monitor the capital markets—and take action, including providing further regulatory relief and guidance, as appropriate.[2]

COVID-19 Market Monitoring Group

As I mentioned in our May meeting, we formalized in April an internal, interdisciplinary COVID-19 Market Monitoring Group.[3]  The group manages and coordinates our efforts to (1) monitor and respond to the effects of COVID-19 on markets, and (2) assist other regulators and public sector officials in their activities.

As illustrative examples of this work, I will summarize two of the group’s initiatives:

• First, we have been analyzing the potential risks and effects of investment strategies and mandates that include or are subject to mechanistic rules, guidelines or restrictions on holdings of assets—for instance, by reference to credit ratings and downgrades.  This is sometimes referred to as “procyclicality.”  We have prepared a note with some initial observations in this area.  We shared a draft of the note a few weeks ago with FSOC Deputies, and we plan to publish it shortly.
• Second, we have also been engaged in a longer-term effort to identify and analyze significant channels of risk exposure and risk transfer in the financial system—with an eye toward identifying areas of potential vulnerability.  Given our capital markets mandate, we generally are focused on capital markets instruments and flows and their interaction with the broader financial system.

Our analytical approach includes examining select portions of the capital markets and identifying which participants, activities and linkages act or function as the originators, transmitters, amplifiers, absorbers and ultimate holders of market risk.  As one example, one of the markets we initially focused on is the residential mortgage market, including mortgage REITs, Federal Home Loan Banks, and Fannie Mae and Freddie Mac.  We have been benefitting from discussions with staff from the FHFA and other agencies, as well as market professionals and industry experts.  We are in the midst of similar analyses of other key credit-oriented capital markets.

Our procedural approach is to invite discussion, comments and input—including from all of you and your colleagues.  The team anticipates that it will have something to share in the early part of the fall, and we look forward to briefing all of you on it.  Finally, I note that to date our work has dovetailed well with some of the similar efforts in the international realm, including among the Financial Stability Board’s Standing Committee on Assessment of Vulnerabilities (FSB SCAV) and the International Organization of Securities Commissions (IOSCO).

Thank you.

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