Events in the U.S. Treasury market (as well as the related repo market) over the past several years strongly suggest that the market for government securities suffers from inadequate levels of intermediation, liquidity, and transparency that in times of stress can dramatically decrease its ability to function properly and significantly increase risks to market participants.[1]  Commentators have suggested a number of possible reforms,[2] and, although I am skeptical of some of these suggestions, I agree that the Commission should be considering carefully how it might use its authority to make changes that could relieve some of these pressures and help ensure that the market continues to perform its vital functions in the U.S. and global economy.

Careful consideration of fundamental issues of market structure is particularly important in the government securities market.  It performs a central role in fiscal and monetary policy, as well as in our financial markets more broadly.  The market is enormous, with over $22 trillion in U.S. Treasuries outstanding as of December 2021 and with over $600 billion in average daily trading volume.[3]  Any efforts to reform this market must take into account the potentially cataclysmic risks of inadvertently making things worse through sloppy or rushed rulemaking that introduces uncertainty for market participants or that deprives the public and the Commission of the opportunity to devote careful attention to thinking through the full implications of the proposed rules.

The proposal we are considering today is certainly not sloppy, but at the same time it is too wide-ranging and, given its length, too unwieldy to facilitate careful consideration.  The document weighs in at a hefty 650 pages, contains over 220 separate comment requests (with many requests containing multiple questions), and addresses about a dozen significant issues, several of which affect trading venues of all types (including currently unregulated communication protocol systems).  And the release goes well beyond government securities, or even fixed-income securities; key parts of the proposal affect trading venues that make any type of security available for trading.

Notwithstanding the literal and figurative bulk of this release, the Commission has determined that it is appropriate to provide the public with 30 days to read, understand, consider, consult, identify, model, assess, and discuss these rules and how they are likely to affect trading venues for every type of security that is traded in our markets.  It would have been an irresponsible abdication of our role as the primary overseer of the U.S. capital markets to limit the public to a 30-day comment period on fundamental changes to the $22 trillion Treasury market; it is unconscionably reckless to do so for a proposal the effects of which will reverberate through all of the markets that we regulate, in ways that we cannot foresee.

I cannot comprehend why we insist on blindfolding ourselves, rather than embracing the notice-and-comment process that has been so valuable in unearthing issues for our consideration. Our self-imposed unrealistic time constraint will prevent us from thinking seriously about the possible effects—intended and otherwise—of our rules by refusing to give the public sufficient time to provide us with informed comment.  We face no emergency in these markets that compels us to limit comments to 30 days; indeed, the Commission’s precipitous rush to plow through the comment period—almost as if it were a mere formality in our process—presents a greater immediate risk to the market than any of the issues that have led to this recommendation.

I could have voted for this proposal had the Commission provided a period long enough to enable market participants and others to engage in a considered analysis of the proposed rules and their likely consequences.  Ninety days would have been a reasonable period, given the breadth of issues and the potential effects of the proposed rule.  Any shorter period would not be sufficient to give me the confidence that the Commission was receiving sufficient public analysis and comment to enable us to proceed to adoption in a manner consistent with our responsibilities to the market, to the law, or to the American people.

I regret this outcome.  Much of today’s proposal, in its broad outlines, seems reasonable.  The staff has spent a lot of time thinking about how we might make incremental changes to the government securities market, and it shows.  The proposed rules would bring venues that facilitate the trading of government securities and repos within our regulatory ambit, effectively forcing venues that make these securities available for trading to become ATSs.  These ATSs would need to file an amended version of Form ATS-N, which should help market participants better understand where and how they can trade these securities.  The rules would also subject the larger ATSs to the Fair Access Rule, which could ensure access to liquidity for a larger proportion of market participants.  Because more venues would be operating as ATSs, trades executed on these venues would be reported to TRACE, which should increase transparency in the market.  Although I do not agree with every policy line that the proposal draws or every deadline that it sets, I could have supported this proposal if it allowed for careful consideration and informed comment that would have helped me evaluate whether the changes staff is recommending would work in the real world.

The staff is also recommending an amendment to the definition of “exchange” in Exchange Act Rule 3b-16.  Unexpectedly for me—and perhaps for many in the market—this proposed amendment goes far beyond the scope of the concept release that was issued with the initial September 2020 proposal.  What the staff is recommending for our consideration today is an expansion in the definition of exchange that would apply to any trading venue, including so-called communication protocol systems, for any type of security, not just for government or fixed-income securities.  This change could deter innovation and dissuade new entrants from entering into the market for trading venues and execution services, but communication protocol services have become more sophisticated and now play a significant role in the trading of certain types of securities.  I could have supported a proposal that allowed for careful consideration and informed comment on how this change would affect innovation and competition in this space.

The staff is also recommending a wholesale revision to Form ATS-N that will require all NMS Stock ATSs with currently effective forms to file amendments to the Commission.  This part of the proposal would likely impose significant burdens and could lead to a replay of some of the difficulties that ATSs and our staff encountered when we adopted Form ATS-N just a few years ago.  Many of these changes flow from the proposed amendments to the definition of exchange and thus are understandable, but it is unclear whether it is reasonable to expect these ATSs to repeat this process so soon after expending considerable resources on filing these forms in the very recent past.  Nevertheless, I could have supported a proposal that allowed for careful consideration and informed comment on how these revisions would affect these venues.

A final message to those who operate any service that is designed to facilitate any communication between potential buyers and sellers of any type of security:  Read this release.  Even if you have nothing to do with government securities or even fixed-income, or with traditional securities, read this release.  Preferably as soon as it is published on the Commission’s website.  It covers a lot of ground, and you should not assume that it has nothing to do with you, because it probably does.

In closing, I would like to thank the staff in TM and DERA for the time—a lot of it—they spent on the phone with my counsel and with me, walking me through the many issues covered in the release and answering my many questions.  A special shout out to Tyler Raimo, who exhibited in our conversations his characteristic great patience and inexplicable good cheer.  I appreciate the team’s hard work on this document and know that you will engage with the public proactively to make the most of this exceedingly short comment period.

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