Washington, D.C., December 8, 2016 – SIFMA Managing Director Rob Toomey testified this morning on behalf of SIFMA before the House Committee on Financial Services Subcommittee on Capital Markets in a hearing entitled “The Impact of Regulations on Short-Term Financing.”

Excerpts are below, with the full testimony found here: http://www.sifma.org/issues/item.aspx?id=8589963711

“Policymakers have clearly stated that many of the post-crisis reforms were designed to solve for what they saw as too little capital, lax underwriting standards and excess market liquidity that was insufficient during periods of credit stress.   But recently, market participants and observers have raised concerns that the reforms may have resulted in reductions in market liquidity beyond what was intended, particularly for the high-quality liquid assets that underpin the financial system and our economy.”

“If market participants’ ability to access liquidity is impaired, particularly during stress periods, it will negatively impact functioning of financial markets with broad ramifications for the general economy.”

“Regulations that are risk-insensitive, and regulations that target the same risk multiple times through multiple rules, weigh particularly heavily on low-risk assets.”

Assessment of the Regulatory Framework Needed

“We are thus recommending an assessment of coherence and cumulative impacts, on a forward-looking basis, to identify cases where there may be unnecessary duplication or conflicts between specific regulatory requirements and broader policy goals. Such an assessment could identify opportunities to add liquidity back to the market without adversely affecting the safety and soundness of individual banks or of the overall financial system.”

Impact of Regulation on the Repo Market

“Repo markets provide the necessary grease that allows the U.S. capital markets to remain the most efficient and liquid in the world so that businesses, municipalities and the Federal government can access needed credit at the lowest cost over time.  A well-functioning repo market decreases the overall cost of borrowing and provides a mechanism for the efficient management of short-term cash and collateral requirements.”

Supplementary Leverage Ratio

“While the SLR is intended to be a backstop measure to risk-based requirements, for many institutions it may become the binding constraint.”

“The SLR has sharply increased the cost for use of a bank’s balance sheet in a traditional matched-book repo arrangement.”

Liquidity Coverage Ratio

“The Liquidity Coverage Ratio (LCR) has led to an additional stress on liquidity in the repo market by imposing requirements on subject institutions to have on hand sufficient high quality liquid assets (HQLA) to weather a short-term (30 days) liquidity stress event.  Thus, demands for HQLA, in particular, U.S. Treasury securities, will increase because of the LCR.”

Net Stable Funding Ratio

“The proposed NSFR would further unduly add costs to safe matched-book activities. Under the NSFR proposal, repos and reverse repos would be subject to asymmetric treatment…”

“Elimination of the asymmetrical treatment of the two legs of the matched transactions would alleviate this additional pressure on this low risk activity.”

Volcker Rule

“Finally, the Volcker Rule, with its limits on proprietary trading, exerts further liquidity pressure in the cash markets.  SIFMA has long held the position that the Volcker Rule was a solution in search of a problem and that it did not address issues identified in the financial crisis.”

“We believe the approach to market making adopted by the Final Rule is complex and may make it difficult for firms to distinguish between permitted and proscribed activities.  Thus, firms may limit their intermediary activities even more to ensure overall compliance with the prop trading restrictions.”

Conclusion

“We believe that given the experience and market data from the introduction of these new approaches, the time is right to provide a wholesale review of the impact and coherence of these requirements with a view towards moving towards a better balance of safety and soundness with efficiency, liquidity and capital availability.”

“As liquidity diminishes or becomes more brittle in these markets, higher costs of capital may be inevitable for both the government and Main Street.”

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SIFMA is the voice of the U.S. securities industry. We represent the broker-dealers, banks and asset managers whose nearly 1 million employees provide access to the capital markets, raising over $2.5 trillion for businesses and municipalities in the U.S., serving clients with over $20 trillion in assets and managing more than $67 trillion in assets for individual and institutional clients including mutual funds and retirement plans. SIFMA, with offices in New York and Washington, D.C., is the U.S. regional member of the Global Financial Markets Association (GFMA). For more information, visit http://www.sifma.org.