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SEC Chair Gensler Speaks on Market Structure

Thank you. It’s good to be here at the annual meeting of the Securities Industry and Financial Markets Association — what we all know as SIFMA. John [Rogers], I look forward to your questions.

As is customary, I will note that I am not speaking on behalf of the Commission or SEC staff.

The SEC has a three-part mission: protecting investors, facilitating capital formation, and maintaining that which is in the middle: fair, orderly, and efficient markets.

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]

Further, U.S. market participants rely on capital markets more than market participants in any other country.

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]

We can’t take our leadership in capital markets for granted, though. New financial technologies continue to change the face of finance for investors and issuers. More retail investors than ever are accessing our markets. Other countries are developing deep, competitive capital markets as well.

Today, before I take John’s questions, I thought I might share some thoughts on market structure. Because of rapidly changing technology and business models, I think we at the SEC need to look for opportunities to freshen up our rules to continue to maintain markets that are the envy in the world.

I’d like to discuss market structure in the context of the underlying principles of efficiency, competition, and transparency; market integrity; and resiliency. Albeit somewhat reordered, these three principles map to that middle arm of our mission to maintain efficient, fair, and orderly markets.

First, a few thoughts on the markets I’ll discuss:

The $22 trillion Treasury market[4] 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. They are how we, as a government and as taxpayers, raise money: We are the issuer. During the start of the Covid crisis, as well as in 2014 and 2019, we observed challenges in this market.

The $25-plus trillion non-Treasury fixed income markets are so critical to issuers. They include corporate bonds, a $10 trillion market; municipal bonds, a $4 trillion market; and asset-backed securities (which back mortgages, automobiles, and credit cards), a $13 trillion market.[5] They are nearly 2.5 times larger than the commercial bank lending of about $10.5 trillion in our economy.[6]

Our nearly $50 trillion equity markets[7] make up nearly half of our capital markets and a far greater proportion of the retail public’s investing.[8] The Commission has taken up work with respect to market data under former Chairman Jay Clayton. I think we can build upon those efforts. Over the past 16 years, since the Commission took up Regulation National Market Structure, technology has expanded by leaps and bounds.

Finally, the security-based swaps market, while not large compared to the fixed income and equity markets, was at the core of the 2008 financial crisis. This market remains relevant today, as the collapse in March of Archegos Capital Management reminded us.

Ultimately, promoting fair, orderly, and efficient markets can help reduce the cost of capital for issuers and increase the rate of returns for investors across each of these markets. This helps contribute to economic growth and is a competitive advantage for our nation.

Efficiency, Competition, and Transparency

Now, to the principles. First, let me turn to efficiency, competition, and transparency.

While efficiency is in our stated mission, transparency and competition are critical components underpinning that efficiency. Further, the word “competition” was embedded in our statutes 25 years ago.[9] In rulemaking, the Commission considers efficiency, competition, and capital formation, in addition to investor protection and the public interest.[10]

Fundamentally, finance is about the pricing and allocation of risk and money in our economy. Our capital markets sit in the middle — between those who want to lay off risk and those who want to bear it, between issuers seeking to raise capital and investors seeking to grow their nest eggs.

With literally trillions of dollars of money and risk flowing through our capital markets each day, it becomes ever more important to promote efficiency in the middle. It becomes ever more important that market participants there have sufficient competition and transparency to lower economic rents, or excess profits above market competition, that might otherwise accrue.

Efficiency is about transacting at a low cost; it’s about prices that capture all the available information; it’s about promoting transparency, before and after the trade, and competition.

This principle is something that humankind has understood since antiquity. If you bring vendors into a public square and they compete selling apples, it’s clear what the prices are, and the townspeople benefit from those competitive prices.

I’ve asked staff to consider ways that we can increase transparency and competition, facilitating efficiency across the entire capital markets, particularly across the four market sectors I just highlighted.

As one example, in the equity markets, I’ve asked staff to consider: how do we facilitate greater competition and efficiency on an order-by-order basis — when people send each order into the marketplace? I’ve asked staff to consider whether shrinking tick sizes, reevaluating what is included in the National Best Bid and Offer, enhancing disclosure, or leveling competition between trading venues and wholesalers could increase transparency and competition.

In the $25-plus trillion non-Treasury fixed income markets, I’ve asked staff to consider what reforms might be appropriate with respect to post-trade transparency and the trading platforms for corporate bonds, mortgage markets, asset-backed securities, and municipal bonds. Further, many professionals have access to some amount of pre-trade price information in the corporate bond market. I wonder if broadening the dissemination of that type of information might make this market more accessible, competitive, and liquid.

In the security-based swaps market, we have projects that will strengthen transparency to the official sector and to the public. Next Monday, security-based swaps dealers will have to start posting trades to swap data depositories, providing transparency to regulators. Then, data about these individual security-based swap transactions will be available to the public in February.

I’ve asked staff for recommendations on how the Commission can finalize mandates to stand up a security-based swaps execution facility regime consistent with the regime established by the Commodity Futures Trading Commission (CFTC) nearly a decade ago.

Moreover, I’ve asked staff to complete other unfinished Dodd-Frank mandates with respect to short selling and securities lending.[11]

Additionally, I’ve asked staff to think about potential rules around aggregate positions, authorized under Exchange Act Section 10B. As the collapse of Archegos showed, this may be an important reform to consider.

Market Integrity

Next, I’ll turn to market integrity. Again, this maps onto the “fairness” we seek in our markets, as fairness underpins integrity.

Market integrity is about access and fairness of the markets. It’s about working toward trading and price discovery processes that are free of fraud, manipulation, and other misconduct. It is embedded in so many of the rules over the decades. Every day, we at the SEC are trying to promote it, not only through our rules, but through our examinations and enforcement regimes; half of our staff works in those divisions.

Finance is about trust. Enhancing market integrity lowers the cost of capital by reducing the risk premium associated with unfairness, fraud, manipulation, and lack of trust. It also does so by promoting equal access, which facilitates greater competition among capital providers.

In the Treasury market, I’ve asked staff to reconsider the approach we released in 2020 that would bring certain Treasury trading platforms into the SEC’s regulatory regime and to make recommendations. As part of that work, I’ve asked staff to consider whether we could bring other key platforms in and whether we could introduce even more transparency and competition.

With regard to our equity markets, we recently heard from the public in response to a request for comment about potential conflicts of interest and digital engagement practices, particularly in the context of payment for order flow and in exchange rebates. There could be two potential rulemakings — one with respect to investment advisers, and another with regard to broker-dealers.

What’s more, after the 2008 crisis and everything that happened with credit default swaps, Congress mandated that we address anti-manipulation in security-based swaps. I’ve asked staff to draft a proposal for the Commission’s consideration related to those mandates under Section 9j of the Securities Exchange Act of 1934.

Resiliency

Finally, I’d like to turn to resiliency. I think the SEC has a responsibility to help protect for financial stability, which maps onto many parts of our statutes, but particularly onto the “orderly” part of our mission.

Our work, starting with our oversight of clearing agencies and broker-dealers in the 1930s, has been about lowering the risk that problems in the financial sector might spill out to the rest of the economy.

Enhancing resiliency and protecting for financial stability are at the heart of the work we’re doing in the Treasury market. We’re working closely with our colleagues at the Department of the Treasury, across the Federal Reserve System, and at the CFTC on projects in this market.

As I mentioned earlier, I’ve asked staff to reconsider some initiatives on Treasury trading platforms. I’ve also asked them 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, and how to bring about more central clearing in the Treasury cash and repo markets.

As it relates to the broader fixed income markets, I’ve asked staff to consider ways to increase resiliency in response to the challenges money market funds faced last year. Given significant growth in open-end funds and some lessons learned in spring 2020, I’ve also asked them to contemplate any appropriate measures to enhance the resiliency of that sector during times of stress.

With respect to the equity markets, we saw with January’s market events that retail investors were restricted from trading when some brokerage firms couldn’t meet their margin calls to clearinghouses. I’ve asked staff to make a proposal for the Commission’s consideration on shortening the settlement cycle. Given today’s technologies, I think certain functions could even take place on the same day, such as confirmations, allocations, and affirmations.

While I spoke about these principles in isolation, the reality, of course, is that these principles are interrelated. Together, they encompass the middle of our mission regarding the markets. Further, if we get that middle right, that benefits investors and capital formation.

Before we get to John’s questions, I have a request of the audience: As we make proposals, the Commission benefits from your comments and perspectives.

While our missions may vary, I imagine that we can all agree that we should maintain markets that are the best in the world.

I’ll leave it there. Thank you.

ENDNOTES

[1] See Securities Industry and Financial Markets Association, “2021 SIFMA Capital Markets Fact Book,” available at https://www.sifma.org/wp-content/uploads/2021/07/CM-Fact-Book-2021-SIFMA.pdf.

[3] Ibid.

[4] Statistics from Securities Industry and Financial Markets Association: https://www.sifma.org/resources/archive/research/statistics/

[5] Ibid.

[6] See Federal Reserve, “Assets and Liabilities of Commercial Banks in the United States,” Table 2, Line 9, available at https://www.federalreserve.gov/releases/h8/current/default.htm.

[9] See The National Securities Markets Improvement Act: https://www.congress.gov/104/plaws/publ290/PLAW-104publ290.pdf.

[10] “Whenever pursuant to this title the Commission is engaged in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, the Commission shall also consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation.” See Securities Act of 1933, Securities Exchange Act of 1934, Investment Advisers Act of 1940, and Investment Company Act of 1940.

[11] See Sections 929X and 984 of the Act: https://www.govinfo.gov/content/pkg/PLAW-111publ203/pdf/PLAW-111publ203.pdf.

These remarks were delivered on November 2, 2021, by Gary Gensler, chairman of the U.S. Securities and Exchange Commission, at the annual meeting of the Securities Industry and Financial Markets Association.

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