SEC Commissioner Gallagher Calls for Reforms for Equities and Fixed Income Markets
SEC Commissioner Daniel M. Gallagher delivered remarks at Georgetown University, calling for analysis and reforms in the equities and fixed income markets.
Commissioner Gallagher began by calling for a holistic review of equity market structure as soon as possible, with particular focus on the laws and regulations that underlie the structure.
He focused on three "big picture" items that the equity market structure review should include, beginning with Regulation NMS. "One of the many elements" of Reg. NMS that Commissioner Gallagher said should be reviewed is the "trade-through" rule, which he stated is a "prime example of a regulatory distortion of market competition." As an alternative to the trade-through rule, he proposed the clarification of the broker's duty of best execution, which does not always mean execution at the national best bid or offer.
Furthermore, Commissioner Gallagher stated, the SRO model must be reviewed, and regulators should revisit the question of whether or not national securities exchanges should still be SROs. He explained that the majority of equities exchanges outsource their regulatory obligations and market surveillance to FINRA, and that over 35 percent of securities transactions are not on exchanges, but rather ATSs. According to Commissioner Gallagher, questions must be explored regarding the appropriate balance of regulatory oversight between the government and the market participants themselves, and whether to distinguish between national securities exchanges and ATSs.
Additionally, Commissioner Gallagher said, securities information processors ("SIPs") must be reviewed. He explained that reliance on SIPs results in a single point of failure, as seen in August 2013, when a failure in the Nasdaq SIP led to the suspension of all trading in NASDAQ securities. According to Commissioner Gallagher, the advantages of a market approach that enables market participants to decide which data feeds to utilize should be considered.
Commissioner Gallagher then turned to the issue of building systemic risk in fixed income markets - an issue to which, he noted, members of FSOC seem oblivious. According to Commissioner Gallagher, the demand for fixed-income investments has grown faster than that for equities, leading to high-yield debt that is vulnerable to outflows, with only a small increase in interest rates.
To address fixed income market issues, Commissioner Gallagher suggested, the SEC should (i) require greater price transparency, (ii) address liquidity risks by facilitating electronic dealer-to-dealer and on-exchange transactions of these products, and (iii) commit resources to incentivize standardized primary offerings. He also suggested the possibility that issuers agree upon a standard set of terms for debt contracts that are similar to those of ISDA contracts for swaps. Commissioner Gallagher also mentioned that the SEC must "do something about the de facto monopoly forcing the use of CUSIPs in the fixed income markets," beginning with removing CUSIP references from SEC rules.
According to Commissioner Gallagher, if regulators fail to address issues in both the equities and fixed income markets, "we risk a disastrous liquidity crunch and the attendant negative impacts on our economy."