November 17, 2022

SEC Chair Highlights Initiatives to Improve Treasury Market Competitiveness and Resiliency

Steven Lofchie Commentary by Steven Lofchie

SEC Chair Gary Gensler called for greater transparency and resiliency in U.S. treasury markets to promote competition. He highlighted projects that the SEC has undertaken with Treasury and the Federal Reserve Bank of New York ("New York Fed") to improve markets.

In remarks before the U.S. Treasury Market Conference, Mr. Gensler emphasized Treasury's principals of sound cash management, lowest cost to taxpayers and efficient capital markets, arguing that they promote strong competition which "lowers costs of financing and helps American taxpayers save money" while expanding the market.

Mr. Gensler stated that as part of the projects initiated with Treasury and New York Fed, the SEC proposed rules to (i) monitor the registration status of government securities dealers, (ii) require platforms that provide marketplaces for treasury securities to register as broker-dealers and thus comply with Regulation ATS, (iii) expand the role of central and customer clearinghouses to mitigate the impacts of volatility and limit contagion and (iv) implement new reporting requirements for transactions to the Trade Reporting and Compliance Engine.

Mr. Gensler said that the SEC is working to identify ways to ensure treasury markets are prepared to handle disruptive events. He said that the agency can gain insight into improving resiliency by observing the recent "tremors" in the UK's sovereign debt markets.

Commentary

One way to assess Mr. Gensler's approach is to ask (i) what is the evidence that there is a lack of competition in the market for government securities; and (ii) why would increasing regulatory costs increase competition?

One might look to the effect of Dodd-Frank on the number of futures commission merchants. That number has continued to decline. See "Ranks of commodities brokers dwindle as U.S. futures industry evolves" (July 1, 2015); "Dwindling Numbers in the financial industry" (May 15, 2017); "November 2021 stats on customer funds held at US FCMs" (January 10, 2022).

In short, increased regulation drives out a lot of market participants thereby reducing competition. Further, the costs of increased regulation may turn out to be very high for a government that must borrow a lot of money at a very high interest rate.

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