United States: SEC Commissioner Piwowar Outlines Regulatory Challenges For Fixed-Income Markets

In remarks before the FINRA 2016 Fixed Income Conference, SEC Commissioner Michael S. Piwowar described current thinking on bond market liquidity and recent regulatory developments in the corporate and municipal bond markets.

Commissioner Piwowar commended FINRA and the MSRB for coordinating guidance on best-execution requirements and for proposals that would require the disclosure of markups in riskless principal transactions. He noted: "a number of questions have arisen throughout this process regarding how to identify a reference price upon which to base the disclosure." He acknowledged that "implementing this type of disclosure is not an easy change for dealers." He also commended FINRA for a proposal that would require member firms to report U.S. Treasury cash market transactions to the Trade Reporting and Compliance Engine ("TRACE").

Commissioner Piwowar suggested that the following areas merited additional study:

• how to address the lack of pretrade price transparency in fixed-income markets through discretionary regulatory action;
• whether to repeal or amend the so-called "Tower Amendment" (Securities Exchange Act Section 15B(d)(1)), which prohibits the SEC from regulating issuers of municipal debt and "hovers in the background of all regulatory efforts in the municipal space";
• how buy- and sell-side market participants can dedicate resources to planning for future liquidity shocks while continuing to innovate in ways that promote greater liquidity;
• how academics can research the fixed-income market structure more effectively, particularly in research concerning "the impact of bond exchange-traded funds on liquidity in the underlying securities, the evolving role of the buy-side in the provision of liquidity, and the impact of regulatory and monetary policy decisions on the liquidity of fixed income markets";
• how the SEC can ensure the proper functioning of the securities markets even under stressed conditions, and how the SEC can ensure that regulations do not hobble innovators seeking new ways to enhance liquidity in these markets;
• how to keep self-regulating organizations – specifically, FINRA and the MSRB – from losing the "momentum they have gained from their recent regulatory actions"; and
• how prudential regulators might best conduct "an honest assessment of the cumulative impact of their post-crisis reforms, as well as a fair analysis of whether these regulations themselves may be creating or exacerbating market problems."

Commissioner Piwowar observed that bond market liquidity has become a "media sensation," and that commenters seem unable to reach a consensus on whether "the high cost of capital resulting from post-crisis bank regulation mean[s] that a single, large shock could cause the whole market to freeze up." Given that ominous possibility, he stressed the need for continuing efforts:

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