Wall Street Claim That Rules Imperil Trading Undercut by SECBy
Impact of regulations on liquidity unclear, SEC economists say
Industry has long complained about Dodd-Frank, Volcker Rule
U.S. Securities and Exchange Commission economists are throwing cold water on Wall Street’s persistent complaints that post-crisis regulations have made markets more susceptible to shocks.
The market dynamics of recent years weren’t necessarily caused by stricter rules imposed by U.S. and international regulators after the 2008 financial meltdown, the SEC’s Division of Economic and Risk Analysis said in a 300-plus page report to lawmakers released Tuesday. The report examines the extent to which measures such as the Volcker Rule and capital requirements associated with Basel III have impacted trading in a range of asset classes including equities, government and corporate bonds, as well as some derivatives.
The SEC economists said that their analysis didn’t find a decline in total issuance of securities after adoption of the 2010 Dodd-Frank Act. “It is difficult to disentangle the many contributing factors that influence” the sale of new securities, they wrote, adding that private market sales of debt and equities have “increased substantially” in recent years.
The findings in the report, which was ordered by Congress, will be unwelcome news for big financial firms that have been complaining about the rules since they were enacted. The industry has found sympathy among regulators appointed by President Donald Trump. Last month, the agencies that wrote the Volcker Rule -- which restricts banks from making bets with their own capital -- agreed to start revising it, people familiar with the matter have said. And in June, the Treasury Department released a report calling for easing many of the strictures that were imposed on Wall Street after the financial crisis.
The SEC staff based their findings on “a comprehensive assessment of a large body of recent research in addition to original analysis,” according to the report. The conclusions “may differ from those stated in the Treasury report” because of differences in methodology, the SEC staffers said.
The SEC study was ordered by Congress in December 2015. Lawmakers directed the agency to study how rules like Volcker and Basel III affected access to capital and market liquidity. SEC commissioners, led by Trump-picked Chairman Jay Clayton, didn’t weigh in on the findings or conclusions, according to the report.
When Wall Street firms criticize the impact of post-crisis rules, they frequently cite what transpired on Oct. 15, 2014. On that day, the yield of the benchmark 10-year Treasury note plunged and then shot back up within minutes. Yields had fluctuated that much only three previous times since 1998, and in each of those instances there was an obvious catalyst. This time there wasn’t.
In the ensuing months, JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon said that the event should serve as a “warning shot” to investors. Blackstone Group LP CEO Stephen Schwarzman even argued that regulations had made markets so unsafe that they could trigger another financial crisis.
The SEC economists said they found “no consistent empirical evidence” that regulations including the Volcker Rule damped trading in U.S. Treasuries.
After Trump signed an executive order in February directing agencies to examine whether rules should be dialed back, his top economic adviser, former Goldman Sachs Group Inc. President Gary Cohn, said regulations had “taken an enormous amount of liquidity out of the markets.”
There too, the SEC economists said they weren’t so sure, at least for corporate bonds. For instance, the agency’s report noted that banks retrenched from some trades after the crisis to cut market risk.
“Evidence suggests that in recent years dealers have been less likely to engage in risky principal transactions,” the report said. “With respect to the potential regulatory factors behind observed liquidity changes, there is a lack of agreement in research regarding the direction and magnitude of regulatory impacts.”