Georgetown University McDonough School of Business
Financial Markets Quality Conference 2016
Wednesday, October 12, 2016
Key Topics & Takeaways
- Fiduciary Rule: Piwowar called the Department of Labor’s fiduciary standard a “terrible, no-good, very bad rule,” explaining that it is so complex that no one can figure out what it says. He stated that the rule risks “going from sub-optimal advice to no advice at all.”
- Market Liquidity: Giancarlo said that while prudential regulators have spent significant effort asking how much capital should be held on bank balance sheets, they should also be considering how much capital must stay in markets to maintain healthy trading environments. He also said he is “disappointed” in the Financial Stability Oversight Council’s (FSOC) failure to do a more thorough analysis of trading market liquidity.
Fireside Chat with Michael Piwowar
When asked about the prospect of standardizing municipal bonds in order to increase their comparability and liquidity, Commissioner Michael Piwowar of the Securities and Exchange Commission (SEC) noted the differences of bond issuances, commenting that it seems “overly complex,” and that this makes bond trading more expensive for retail investors. He stated that he is “not sure” what the solution is, but that the SEC is looking at whether there are regulatory obstacles to greater standardization.
Piwowar said the SEC is working on a number of rules in the asset management space, including any potential issues of systemic risk, but that he does not believe there are any such issues. He noted the impending consideration of a final rule for liquidity risk management, and also added that the Commission is looking at derivatives usage and investment advisor transitions.
Piwowar called the Department of Labor’s (DOL) fiduciary standard a “terrible, no-good, very bad rule,” explaining that it is so complex that no one can figure out what it says. He noted that a similar rule in the U.K., the Retail Distribution Review, had priced 10 million households out of the market for retirement advice and that he was concerned the same might happen in the United States. He stated that the rule risks “going from sub-optimal advice to no advice at all.”
The reason for the drive to a fiduciary standard, Piwowar explained, comes from investor confusion about their standards of care. However, he said investors were generally happy with the care they receive and that it is unclear if the investor confusion has actually led to worse outcomes. He suggested that regulators could instead focus on improved disclosures and investor education about standards of care.
On the SEC’s tick-size pilot, Piwowar said he believes the pilot would benefit some, but not all issuers. He noted that though the tick-size pilot has been a point of discussion for some time, and finally conducting the pilot will at the least allow the SEC to move on to other proposals to improve market structure.
Piwowar noted that the pilot took time to launch because it was done under as NMS plan in which the exchanges designed the pilot. He suggested that future pilots might also be done through SEC rule changes that could move the process more quickly.
Impact of Regulations on Liquidity
Asked about the impact of capital regulations on fixed-income market liquidity, Piwowar stated that dealers are holding less inventory, and that more people are looking at standards from the Basel Committee and regulations such as the Volcker Rule as the reason. He said regulators should be considering whether the buy-side can fill-in for dealers in providing liquidity, or if something must be done to support dealer activity.
Panel Discussion: The Regulatory Policy Environment
Technology and Innovation
Asked about how regulators respond and adapt to innovation and technology, Steve Luparello, Director of the SEC’s Division of Trading and Markets, stated that markets have fundamentally changed with new technologies, and that the SEC is considering how its rules intersect with technology. As part of this, he said the SEC has been reviewing the possibility for greater transparency for alternative trading systems (ATS), order routing, and trading venues. He continued that regulators must be nimble in how they react to new technologies by staying educated on advances.
Commissioner Christopher Giancarlo of the Commodity Futures Trading Commission (CFTC) agreed that digitization is changing financial markets, with a significant share of trading driven by algorithms. He commented however, that while markets are digital, regulations remain “analog,” and regulators must rewrite some regulations for the new environment.
Flash Crashes and Liquidity
Talking about the cause of flash crashes, Giancarlo pointed out that there have been 12 major flash crashes since the passage of the Dodd-Frank Act, and commented that they are the result of the changing nature of liquidity in financial markets. He pointed to capital requirements for dealers that have reduced their ability to serve as market-makers, and an increasing reliance on non-inventory based liquidity provision.
Giancarlo said that while prudential regulators have spent a significant effort asking how much capital should be held on bank balance sheets, they should also be considering how much capital must stay in markets to maintain healthy trading environments. He also said he is “disappointed” in the Financial Stability Oversight Council’s (FSOC) failure to do a more thorough analysis of trading market liquidity.
Luparello expressed doubts that more regulator focus on trading liquidity would lead to a return to liquidity provision by dealers, arguing that technology has “democratized” markets and allow many new entrants. He argued that factors beyond regulation have impacted dealers’ decisions regarding market-making.
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