SEC Chair Gensler Previews Efforts to Further Regulate Fixed Income Markets
Commentary by Steven Lofchie
SEC Chair Gary Gensler previewed efforts to further regulate the "$50 trillion-plus U.S. bond markets." In an address at the City Week in London, Mr. Gensler asserted that the fixed income markets need (i) greater transparency, (ii) additional rules for electronic platforms and (iii) to increase financial resiliency.
Transparency
Mr. Gensler asserted that "[p]ost trade transparency promotes liquidity and helps investors [and] improves efficiency and competition in the markets." He said that the information reported to systems such as the Trade Reporting and Compliance Engine ("TRACE") is not reflective of current technological advances. Mr. Gensler suggested improvements in such systems, including (i) reducing the time to report transactions to TRACE by market participants, (ii) incorporating foreign sovereign bonds into TRACE, (iii) "allowing the investing public to see TRACE data on individual Treasury transactions" and (iv) having FINRA codify its existing dissemination protocols. Mr. Gensler quoted Adam Smith, saying that "the whole economy benefits when the price of information is lowered, or information is free."
Platforms
Mr. Gensler stated that forthcoming SEC rules would impact "increased use of electronic trading platforms in fixed income markets." He described (i) the expansion of the definition of "exchange" to cover more fixed income platforms, (ii) how "quotes and pre-trade price information might be more broadly accessible" and (iii) the amending of Rule 15c2-11 ("Initiation or resumption of quotations without specific information") of the Exchange Act in 2020 to better "prevent fraud, market manipulation, and deceitful practices."
Resiliency
Mr. Gensler highlighted that, in light of "uncertain geopolitical events," the SEC has begun work on "resiliency projects" related to Treasury and non-Treasury fixed income markets. He said such efforts include, among others: (i) a proposal to amend the rules governing money market funds in order to enhance resiliency in the short-term funding markets; (ii) shortening the settlement cycle for, among others, fixed income securities; (iii) recommendations by the SEC for strengthening central clearing in Treasuries; and (iv) expansion of activities that would cause "proprietary trading firms and others that engage in certain liquidity providing activities to register with the SEC as dealers."
Commentary
Adam Smith is not ordinarily associated with the concept that information should be free. Rather, he is more commonly associated with the "invisible hand," which is the concept that beneficial outcomes may arise from self-interested individual economic decision-making. Judging by the rate at which the SEC is churning out rule proposals, one would think that Mr. Gensler is not much of a fan of Adam Smith.
As to the concept that information should always be free, that is not a generally accepted truth. While economic regulation commonly recognizes social benefits in spreading information, it also commonly recognizes the costs of creating information and therefore the need to reward those who create it. That is why, for example, the U.S. Constitution provides for the "securing for limited times to authors and investors the exclusive right to their writings and discoveries."