SEC Commissioner Gallagher Remarks on Regulation of Debt Markets, Including E-Trading (with Lofchie Comment)

Commissioner Daniel M. Gallagher made a speech in which he discussed key issues in bond markets, a segment of the U.S. capital markets to which he says that the SEC traditionally has not devoted sufficient attention. He listed several issues that he believes warrant the SEC's attention, including price transparency, liquidity, capital regulation, and mark-ups. Notably, he acknowledged that there could be trade-offs in these areas; e.g., it is possible that more trade transparency and higher capital regulations reduce liquidity. In this regard, he reported anecdotal evidence of reduced liquidity in the bond markets.

A portion of his speech was then devoted to electronic trading and he said, without expressing a view on the topic, that "there has even been renewed discussion about moving bond trading on a centralized electronic exchange."

In his concluding paragraph, Commissioner Gallagher stated that devoting more attention and resources to the bond markets does not necessarily imply the need for more regulation. He said that there is a risk that regulators will, by default, try to impose the equities markets oversight paradigm onto the bonds market. Instead, he said that the Commission's regulatory approach toward the bond markets must continue to be based on recognizing and understanding the fundamental differences between bonds and equities, without assuming that what is good for one will automatically be good for the other.

Lofchie Comment: Taking up Commissioner Gallagher's comment that not all markets should be regulated in the same manner, the paradigm case of assuming that equity market structures will work for all types of trading is the Dodd-Frank system of regulating swaps, which takes as it as a given that the exchange trading model is the preferred model for swaps trading. If it is not obvious that exchange trading is the preferred model for debt securities (or at least for most debt securities), it is likewise not obvious that it is the preferred mode for all swaps. In any case, the regulatory questions faced by both the SEC and the CFTC are in many cases quite similar: for what products should exchange trading be a preferred or mandatory means of trading? The CFTC begins with the assumption (driven in part by legislative mandate, in part by the fact that it has not previously regulated an OTC market) that exchange trading is the gold-standard; while the SEC does not (given its long experience in regulating OTC products).

View speech in full here (links externally to SEC website).