Facts and Studies: Understanding the Impact of Regulation on Economic Growth

 

The United States capital markets are the deepest – most liquid markets in the world. They provide essential financing for new business development which leads to job creation and innovation and to infrastructure projects which are critical to future growth and productivity.

The reports in this compendium underpin the importance of U.S. capital markets in the U.S. and global economies and analyze the current state and interaction of market structure, regulation and economic growth. There is broad consensus that recent regulatory reforms, undertaken both domestically and internationally, have made markets more resilient. However, these reforms have a real cost to end-users, economic growth, jobs and productivity.

UNDERSTANDING THE US FIXED-INCOME MARKET

Market regulators must ensure that rules, both current and future, keep retail investors safe, while not adversely impacting fixed-income market efficiency. 

This report by Greenwich Associates provides an overview of the history of fixed-income markets; how they have evolved; the ways they fuel the real economy; and how they are regulated. The diverse U.S. fixed-income market plays an essential role in the U.S. economy, supporting a wide breadth of borrowers who depend on the ability to raise capital to finance investment. In recent years nearly every element of this market has received renewed focus and modernization. New and revised rules in fixed-income markets have had a major impact on market participants and market functioning, including the waning ability to trade bonds easily. This report concludes that as regulators consider new rules in an increasingly electronic and highly regulated marketplace, they should ensure that the cost of additional oversight does, in fact, improve market functioning for the end investor in a meaningful way.

How Hard is it to Trade by Size?

Note: Based on 58 fixed-income respondents in 2014 and 51 in 2015. 
Source: Greenwich Associates 2015 Trading Desk Optimization Study

ASSESSING IMPACT OF THE BASEL AGENDA

In recent years, there has been an unprecedented amount of change to global financial regulation; these rules could have an impact on end-users and the broader economy.

SIFMA’s global affiliate, the Global Financial Markets Association (GFMA), released a report commissioned from Oliver Wyman on the interaction, coherence, and overall calibration of post crisis regulatory reform measures agreed upon, or under active consideration, by the Basel Committee on Banking Supervision (BCBS). The report found that there is a broad consensus that Basel III has made the banking system more resilient. However, implementation of these rules is creating higher intermediation costs which are likely to be transmitted to users of the banking system and the broader economy. Regulation is also fundamentally changing the shape of banks’ balance sheets and business models as well as the structure of financial markets, with resulting changes in their liquidity, efficiency and effectiveness.

Complex Web of Regulations

TREASURY MARKET STRUCTURE

The U.S. Treasury market is unique and initiatives to improves its functioning must take into account its unique position and structure. 

Recent events in the U.S. Treasury market, like the “flash rally” of October 2014, have drawn attention to the critical importance of its efficient functioning. This paper, commissioned from Promontory Financial Group, examines the state of the U.S. Treasury market, including emerging issues and possible responses. The paper focuses on two broad themes: the extensive and wide-ranging roles of the U.S. Treasury market and the market characteristics needed to support participants’ needs. Findings suggest that measures adopted to ensure Treasury market quality should be calibrated to its unique structure and also take into account their potentially broad impact on overall market quality and functioning.

Size of US Sovereign Debt Markets as Compared to Other Sovereign Debt Markets

ELECTRONIC BOND TRADING

Changes in fixed-income market structure today reflect a significant focus on electronic trading as an emerging fixture in markets.

In an effort to provide greater transparency in the U.S. corporate bond and municipal fixed-income markets, SIFMA completed a survey of 18 electronic trading platforms. The survey report provides profiles of electronic bond trading platforms and includes information on the target markets, trading protocols, technology interfaces, planned enhancements and related capabilities of electronic trading platforms. This report delivers several key findings on the dynamic nature of fixed income markets, especially an enhanced focus on electronic trading.

 

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