[House Hearing, 115 Congress]
[From the U.S. Government Publishing Office]


                        A REVIEW OF FIXED INCOME
                            MARKET STRUCTURE

=======================================================================

                                 HEARING

                               BEFORE THE

                    SUBCOMMITTEE ON CAPITAL MARKETS,
                       SECURITIES, AND INVESTMENT

                                 OF THE

                    COMMITTEE ON FINANCIAL SERVICES

                     U.S. HOUSE OF REPRESENTATIVES

                     ONE HUNDRED FIFTEENTH CONGRESS

                             FIRST SESSION

                               __________

                             JULY 14, 2017

                               __________

       Printed for the use of the Committee on Financial Services

                           Serial No. 115-30
                           
                           
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                 HOUSE COMMITTEE ON FINANCIAL SERVICES

                    JEB HENSARLING, Texas, Chairman

PATRICK T. McHENRY, North Carolina,  MAXINE WATERS, California, Ranking 
    Vice Chairman                        Member
PETER T. KING, New York              CAROLYN B. MALONEY, New York
EDWARD R. ROYCE, California          NYDIA M. VELAZQUEZ, New York
FRANK D. LUCAS, Oklahoma             BRAD SHERMAN, California
STEVAN PEARCE, New Mexico            GREGORY W. MEEKS, New York
BILL POSEY, Florida                  MICHAEL E. CAPUANO, Massachusetts
BLAINE LUETKEMEYER, Missouri         WM. LACY CLAY, Missouri
BILL HUIZENGA, Michigan              STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  AL GREEN, Texas
RANDY HULTGREN, Illinois             EMANUEL CLEAVER, Missouri
DENNIS A. ROSS, Florida              GWEN MOORE, Wisconsin
ROBERT PITTENGER, North Carolina     KEITH ELLISON, Minnesota
ANN WAGNER, Missouri                 ED PERLMUTTER, Colorado
ANDY BARR, Kentucky                  JAMES A. HIMES, Connecticut
KEITH J. ROTHFUS, Pennsylvania       BILL FOSTER, Illinois
LUKE MESSER, Indiana                 DANIEL T. KILDEE, Michigan
SCOTT TIPTON, Colorado               JOHN K. DELANEY, Maryland
ROGER WILLIAMS, Texas                KYRSTEN SINEMA, Arizona
BRUCE POLIQUIN, Maine                JOYCE BEATTY, Ohio
MIA LOVE, Utah                       DENNY HECK, Washington
FRENCH HILL, Arkansas                JUAN VARGAS, California
TOM EMMER, Minnesota                 JOSH GOTTHEIMER, New Jersey
LEE M. ZELDIN, New York              VICENTE GONZALEZ, Texas
DAVID A. TROTT, Michigan             CHARLIE CRIST, Florida
BARRY LOUDERMILK, Georgia            RUBEN KIHUEN, Nevada
ALEXANDER X. MOONEY, West Virginia
THOMAS MacARTHUR, New Jersey
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
DAVID KUSTOFF, Tennessee
CLAUDIA TENNEY, New York
TREY HOLLINGSWORTH, Indiana

                  Kirsten Sutton Mork, Staff Director
      Subcommittee on Capital Markets, Securities, and Investment

                   BILL HUIZENGA, Michigan, Chairman

RANDY HULTGREN, Illinois, Vice       CAROLYN B. MALONEY, New York, 
    Chairman                             Ranking Member
PETER T. KING, New York              BRAD SHERMAN, California
PATRICK T. McHENRY, North Carolina   STEPHEN F. LYNCH, Massachusetts
SEAN P. DUFFY, Wisconsin             DAVID SCOTT, Georgia
STEVE STIVERS, Ohio                  JAMES A. HIMES, Connecticut
ANN WAGNER, Missouri                 KEITH ELLISON, Minnesota
LUKE MESSER, Indiana                 BILL FOSTER, Illinois
BRUCE POLIQUIN, Maine                GREGORY W. MEEKS, New York
FRENCH HILL, Arkansas                KYRSTEN SINEMA, Arizona
TOM EMMER, Minnesota                 JUAN VARGAS, California
ALEXANDER X. MOONEY, West Virginia   JOSH GOTTHEIMER, New Jersey
THOMAS MacARTHUR, New Jersey         VICENTE GONZALEZ, Texas
WARREN DAVIDSON, Ohio
TED BUDD, North Carolina
TREY HOLLINGSWORTH, Indiana
                            
                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on:
    July 14, 2017................................................     1
Appendix:
    July 14, 2017................................................    31

                               WITNESSES
                         Friday, July 14, 2017

Andresen, Matthew F., Founder and CEO, Headlands Technologies, 
  LLC............................................................     5
Crane, Jonah, former Deputy Assistant Secretary for the Financial 
  Stability Oversight Council (FSOC), U.S. Department of the 
  Treasury.......................................................    10
Sedgwick, Alexander, Vice President and Head of Fixed Income 
  Market Structure and Electronic Trading, T. Rowe Price.........     8
Shay, John, Senior Vice President and Global Head of Fixed Income 
  and Commodities, Nasdaq........................................     6
Snook, Randolph, Executive Vice President, Securities Industry 
  and Financial Markets Association (SIFMA)......................    11

                                APPENDIX

Prepared statements:
    Andresen, Matthew F..........................................    32
    Crane, Jonah.................................................    43
    Sedgwick, Alexander..........................................    52
    Shay, John...................................................    65
    Snook, Randolph..............................................    82

              Additional Material Submitted for the Record

Huizenga, Hon. Bill:
    SIFMA chart entitled, ``Figure 1. Issuance in the U.S. Bond 
      Markets, May 2017 (in $ billions)''........................   112
    Letter from the Depository Trust & Clearing Corporation, 
      dated July 18, 2017........................................   113

 
                        A REVIEW OF FIXED INCOME
                            MARKET STRUCTURE

                              ----------                              


                         Friday, July 14, 2017

             U.S. House of Representatives,
                   Subcommittee on Capital Markets,
                        Securities, and Investment,
                           Committee on Financial Services,
                                                   Washington, D.C.
    The subcommittee met, pursuant to notice, at 9:20 a.m., in 
room 2128, Rayburn House Office Building, Hon. Bill Huizenga 
[chairman of the subcommittee] presiding.
    Members present: Representatives Huizenga, Hultgren, 
Messer, Poliquin, Hill, Emmer, Mooney, Davidson, Budd, 
Hollingsworth; Maloney, Lynch, Himes, Foster, Sinema, and 
Vargas.
    Ex officio present: Representative Hensarling.
    Chairman Huizenga. The Subcommittee on Capital Markets, 
Securities, and Investment will come to order. And we are very, 
very pleased that we have this great panel ahead of us here.
    Without objection, the Chair is authorized to declare a 
recess of the subcommittee at any time.
    Today's hearing is entitled, ``A Review of Fixed Income 
Market Structure.'' And as I had said to the witnesses, there 
is Floor activity that is happening right now, so you may see a 
few Members ducking in and out as they have to go down to the 
Floor, addressing issues there, or to another meeting, and we 
will just have to see how we are playing out here with our 
timing for votes and those kinds of things.
    But I deeply appreciate your time here, gentlemen.
    At this point, I will now recognize myself for 3 minutes to 
give an opening statement.
    The United States has the deepest, strongest, most liquid 
capital markets in the world, and the fixed income market is 
one of the largest sources of capital for issuers and 
investment opportunities for a broad array of savers and 
investors. While lesser known to some investors, the fixed 
income market is nearly twice as large as the equity markets, 
and it differs significantly. Fixed income serves as a vital 
source of funding for companies and provides capital for them 
to grow and create jobs as well as funding for local 
infrastructure projects such as roads and bridges. 
Additionally, the fixed income markets help provide 
opportunities for savers and investors ranging from first-time 
home buyers to seniors seeking opportunities for a more stable 
stream of income.
    According to the Securities Industry and Financial Markets 
Association, the total outstanding fixed income debt is nearly 
$40 trillion, with a ``T,'' with new issuances between $6 
trillion and $7 trillion per year over the last 5 years. On 
average, $775 billion of securities are traded each and every 
day.
    Today's hearing will focus on the current market structure 
and potential ways to improve the transparency, liquidity, 
efficiency, and other aspects of fixed income markets. Since 
fixed income markets are different than equity markets, they 
should have a regulatory structure that appropriately reflects 
the market's unique characteristics.
    We will review both the current domestic and international 
regulatory regime for fixed income markets, liquidity, data 
transparency for fixed income asset classes, and increased 
deployment of technology and electronic trading platforms in 
fixed income products.
    Our witnesses will also review components that are working 
well in the fixed income market, components that need 
improvement, and components that may negatively impact the 
market's optimal functionality. The objective of this hearing 
is to provide this subcommittee with the background and 
foundation to examine the optimal design of the fixed income 
market based on today's market conditions.
    In a July 12th speech, I was pleased to hear Securities and 
Exchange Commission Chairman Jay Clayton say, ``The time is 
right for the SEC to broaden its review of market structure to 
include specifically the efficiency, transparency, and 
effectiveness of our fixed income markets. As waves of Baby 
Boomers retire every month and need investment options, fixed 
income products, which are viewed as a stable place to store 
hard-earned money, will attract more and more Main Street 
investors. The Commission must explore whether these are as 
efficient and resilient as we expect them to be, scrutinize our 
regulatory approach, and identify opportunities for 
improvement. To that end, I have asked the staff to develop a 
plan for creating a fixed income market structure advisory 
committee, like the EMSEC. This committee would be made up of a 
diverse group of outside experts who will be asked to give 
advice to the Commission on regulatory issues impacting fixed 
income markets.''
    I can just say this: Bravo.
    This is an area where we can put partisan politics aside, 
and I believe that the SEC and Congress can work together to 
make sure that the fixed income market is performing optimally 
for all investors and the economy.
    I look forward to hearing from our witnesses today.
    At this time, the Chair now recognizes the ranking member 
of the subcommittee, the gentlelady from New York, Mrs. 
Maloney, for 5 minutes for an opening statement.
    Mrs. Maloney. I thank the gentleman for calling this 
important oversight committee. And we have an outstanding group 
of panelists today.
    This hearing will address the market structure of the 
corporate bond market, the Treasury market, and the municipal 
bond market. Bond markets are incredibly important to our 
economy. The corporate bond market allows companies of all 
sizes to raise capital to expand their businesses, hire more 
employees, or invest in new equipment. And the Treasury and 
municipal bond markets allow governments to finance their day-
to-day activities at a very loss cost to taxpayers.
    U.S. companies raised over $1.5 trillion in the bond 
markets in 2016, the fifth consecutive year of record issuance, 
and the Federal Government raised about $2.2 trillion in the 
Treasury market in 2016. With so much money at stake, it is 
important to ensure that the secondary market for these bonds 
is robust and efficient.
    A couple of weeks ago, this subcommittee examined the 
market structure of the U.S. stock market, so it is only 
logical that we also examine the structure of the bond markets 
as well. And what we find is that the market structure of these 
markets, the stock market and the bond markets, are as 
different as night and day. The stock market is a highly 
electronic, mostly exchange-traded market, made up of mom-and-
pop retail investors, institutional investors like mutual funds 
and pension funds, banks, and brokers, and high-frequency 
trading firms. Trades in the stock market happen so fast that 
they are measured in microseconds, which is one one-millionth 
of a second. This is largely because stocks are highly 
standardized. One share of Apple is interchangeable with 
another share of Apple, and there are so many shares 
outstanding.
    In contrast, the corporate bonds are not standardized at 
all. A big U.S. company, like GE, has around 900 different 
bonds outstanding, each with different terms, maturity dates, 
so trading is much more fragmented in corporate bonds.
    As a result, corporate bonds don't trade on centralized 
exchanges like stocks. Instead, they trade through banks acting 
as dealers. Dealers hold large inventories of bonds so that 
when an investor like a mutual bond wants to buy a particular 
corporate bond, the dealer can sell them and that bond out of 
its own inventory. So, in corporate bonds, it is the dealers 
who are responsible for maintaining an orderly liquid market.
    The structure of the Treasury market is somewhere in 
between the stock market and the corporate bond market. 
Treasuries are much more standardized than corporate bonds. All 
Treasury bonds are issued by the same issuer. The Treasury 
Department and the terms are not customized. The Treasury 
Department mostly issues the same 2-year, 5-year, 10-year, and 
30-year bonds over and over again. Because of this 
standardization, the Treasury market has become significantly 
more electronic and significantly faster in the past decade.
    It is still a dealer-based market like the corporate bond 
market, but those dealers now include a lot of high-frequency 
trading firms. And when dealers trade with each other, it is 
done almost entirely electronically now. But when dealers trade 
with their customers, the mutual funds and pension funds that 
buy and hold Treasury securities, they still trade over the 
phone like in corporate bonds. This trend toward more 
electronic, high-speed trading in trading and Treasuries has 
likely made the Treasury market more efficient but also more 
fragile, which is worrying.
    But I want to make two points before we hear from our 
witnesses. First, for all its flaws, the Treasury market is 
still the largest, deepest, and most liquid bond market in the 
world. This allows the Federal Government to borrow at 
extremely low interest rates, which ultimately saves money for 
taxpayers.
    So we need to be very careful before we make changes to the 
Treasury market, because if we get it wrong, then taxpayers 
will end up footing the bill.
    Second, the corporate bond market has never been and likely 
never will be a very liquid market. So while it is important to 
monitor the health of this market, we shouldn't fool ourselves 
into believing that corporate bonds will ever be anywhere near 
as liquid as stocks or even Treasury bonds.
    With that, Mr. Chairman, I look forward to hearing from our 
witnesses, and I thank you for holding so many substantive and 
important oversight hearings.
    Chairman Huizenga. The gentlelady yields back.
    The Chair now recognizes the vice chairman of the 
subcommittee, the gentleman from Illinois, Mr. Hultgren, for 2 
minutes.
    Mr. Hultgren. I would also like to thank Chairman Huizenga 
for holding so many important hearings. It has been a busy 
couple of days, but it's really important for us to tackle the 
challenges facing our markets, especially reassessing some of 
the policy responses made by Washington during the financial 
crisis. We have spent a lot of time debating the modernization 
of our equity markets but our fixed income markets should not 
get overlooked. And while we can draw lessons from the 
modernization of our equity market structure, we must also be 
cognizant of the inherent differences between these financial 
products and markets.
    I was very encouraged to see Chairman Clayton state in his 
speech before the Economic Club of New York earlier this week 
that he would like the Securities and Exchange Commission to be 
more focused on fostering the development of the our fixed 
income markets and ensuring investors have access to products 
with reliable returns.
    I also applaud his proposal to create a fixed income 
structure advisory committee similar to the Equity Market 
Structure Advisory Committee formed by his predecessor. For 
this to be an effective committee it will, of course, need to 
include the right perspective of market participants, such as 
small- and middle-market dealers. It will also need a strong 
mechanism for making recommendations to the Commission so that 
its work won't go overlooked.
    Finally, I would be remiss not to mention that, in addition 
to serving as vice chairman of this subcommittee, I serve as 
co-Chair of the Municipal Finance Caucus in Congress.
    Our work is generally focused on preserving the tax-exempt 
status of municipal bonds, which I believe is foundational for 
States and local governments, especially smaller issuers, for 
accessing of the capital markets. Through this work, I have had 
the opportunity to hear the perspective of dozens of market 
participants, and I look forward to weighing this against the 
recommendations that will be made before this subcommittee 
today.
    Thank you, again, to all of our witnesses. And I yield 
back.
    Chairman Huizenga. The gentleman yields back.
    And today, we have a great panel in front of us. The 
challenge with us doing this on a fly-out day is when everybody 
is trying to escape Oz. We are trying to get back home, but 
that means votes are getting moved around a little bit. We have 
just gotten a notice that votes will be somewhere between 10:25 
and 10:40, and we are going to be on the Floor for about 1 hour 
and 15 minutes. And so if any of the witnesses would care to 
shorten up their opening statement, that would be appreciated 
so that we can get to questions.
    I will note that your written testimony is submitted for 
the record as well, and you will each be recognized for 5 
minutes. But if you have the ability to shorten it up, that 
will be appreciated.
    We have Mr. Matt Andresen, who is the founder and CEO of 
Headlands Technologies, LLC; Mr. John Shay, who is the senior 
vice president and global head of fixed income and commodities 
at Nasdaq; Mr. Alexander Sedgwick, who is the vice president 
and head of fixed income market structure in electronic trading 
with T. Rowe Price, on behalf of the Investment Company 
Institute; Mr. Jonah Crane, former Deputy Assistant Secretary 
for the Financial Stability Oversight Council (FSOC), U.S. 
Treasury Department; and Mr. Randy Snook, executive vice 
president, Securities Industry and Financial Markets 
Association.
    So, gentlemen, we appreciate you being here.
    And, with that, Mr. Andresen, you are recognized now.

 STATEMENT OF MATTHEW F. ANDRESEN, FOUNDER AND CEO, HEADLANDS 
                       TECHNOLOGIES, LLC

    Mr. Andresen. Thank you, Chairman Huizenga, Ranking Member 
Maloney, and members of the subcommittee. I am Matt Andresen, 
the CEO of Headlands Global Markets (HGM). We welcome this 
opportunity to present our views on fixed income market 
structure and, in particular, the secondary market for 
municipal bonds. HGM is an SEC-registered FINRA member broker-
dealer. It launched its municipal bond trading in 2014 and uses 
proprietary models to trade bonds electronically.
    HGM is a widely recognized muni market participant, 
executing close to 1,000 trades a day with over 400 
counterparties, ranking as a top participant on all major 
market platforms.
    In addition to HGM, I am also CEO of its affiliate, 
Headlands Technologies, one of the largest global trading firms 
in more liquid securities.
    Before founding HGM, I was co-CEO of Citadel Securities. 
Prior to that, I was CEO of Island, the largest electronic 
equities market in the U.S. at that time. Currently, I serve on 
the SEC's aforementioned Equity Market Structure Advisory 
Committee.
    Last year, $458 billion in municipal bonds were issued by 
local governments. Most carry tax advantages, making them an 
attractive vehicle for retail investors. In fact, retail holds 
an estimated 75 percent of municipal bonds. Retail investors 
also trade in the secondary market. Last year, 47 percent of 
secondary market trades were for 25 bonds or less, indicating 
active retail participation.
    The secondary market is a dealer market. Investors 
interested in buying or selling a bond need to contact a dealer 
for pricing information. Public post-trade pricing data is of 
limited use to investors if the bond of interest has not traded 
recently, which is usually the case. And due to the abundance 
in diversity of municipal bonds--there are approximately a 
million unique municipal bonds today compared to only 3,800 
listed equities--investors often struggle to identify 
comparable bonds, making investors dependent on dealers for 
pricing information.
    The market has seen several recent areas of improvement, 
however, such as the increased use of bid-wanted auctions, 
implementation of best execution rules, and the forthcoming 
markup/markdown disclosure requirements. Notwithstanding these 
positive developments, there are still areas in need of 
improvement. We share the committee's excitement about SEC 
Chairman Clayton's call this week for a broad review of fixed 
income markets.
    We are going to highlight three areas ripe for improvement. 
First, there is the problematic practice of filtering. 
Filtering occurs when a broker-dealer, handling its own retail 
customer's order, requests a quote and starts an ATS auction 
but filters out responses from specified dealers. Filters are 
used in ways that restrict market participation, resulting in 
investors not receiving the best available price.
    Second, there is the anticompetitive practice of a trade-
through, which occurs when a retail broker-dealer initiates an 
auction for a customer but then ignores the results, purchasing 
the bonds from its customer for its own account at a lower 
price than the winning bid in the auction. This practice is 
harmful because it results in bonds sold at inferior prices 
than those that were available at the time of the execution.
    Finally, there is Last Look, where the submitting broker-
dealer observes the prices in their completed auction and then 
purchases the bond from the customer at a price equal to or 
slightly better than the winning bid, even though MSRB rule G-
43 appears to prohibit such practice. This practice harms 
competitiveness by deterring aggressive pricing by other 
dealers who know the submitting dealer may step in front of 
their winning price.
    We are hopeful that the competitiveness and transparency of 
these markets will continue to improve as more attention is 
paid to these problematic areas and as recently enacted rules, 
such as best execution and markup/markdown disclosure, are 
implemented and appropriately enforced.
    We appreciate the subcommittee's attention to these 
important issues. Thank you.
    [The prepared statement of Mr. Andresen can be found on 
page 32 of the appendix.]
    Chairman Huizenga. Thank you very much.
    Mr. Shay, you now are recognized.

 STATEMENT OF JOHN SHAY, SENIOR VICE PRESIDENT AND GLOBAL HEAD 
            OF FIXED INCOME AND COMMODITIES, NASDAQ

    Mr. Shay. Thank you, Chairman Huizenga, Ranking Member 
Maloney, and members of the subcommittee for the opportunity to 
testify today on fixed income market structure. The market for 
U.S. Treasury securities is widely recognized to be the most 
liquid and consequential market in the U.S., and the U.S. 
Treasury bond reflects the stability of the United States and 
our Nation's strength. However, the market could benefit from 
greater transparency, organization, and efficiency.
    Nasdaq applauds SEC Chairman Clayton's call this week to 
form a market structure advisory committee to help the SEC 
study and understand the evolution of these important markets.
    Nasdaq has extensive experience operating markets, and with 
Nasdaq fixed income, our lineage as the first electronic 
trading platform, we operate one of the largest and most liquid 
fixed income cash markets in the world.
    Currently, our client profile features 112 institutional 
clients, including 23 primary dealers. We offer trading through 
our SEC-registered ATS and FINRA-regulated broker-dealer 
entity, utilizing an anonymous, fully electronic central limit 
order book using price-time priority.
    Nasdaq's analysis of market structure reforms is driven by 
the application of core principles derived from this 
experience. Nasdaq believes that the market for U.S. Treasuries 
can be significantly improved on each of the following 
measures: one, the transparency benefits all market 
participants; two, regulation must be clear, consistent, and 
technologically driven; three, competition must be on a level 
playing field; four, equal access to trading promotes 
efficiency; and five, all investors are entitled to a fair 
deal.
    These markets are evolving, and they are becoming more 
fragmented and segregated and subject to uneven and uncertain 
regulation and enforcement. Therefore, Nasdaq recommends the 
following basic improvements to better serve market 
participants and to protect investors: Transparency. TRACE 
reporting to FINRA was a positive step, just begun this past 
Monday. The further evolution toward a comprehensive 
centralized reporting mechanism is absolutely critical. Nasdaq 
does not support radical change in this area. We prefer a 
cautious and incremental track toward regulatory reform.
    On October 15, 2014, the current market structure as we 
know it today experienced an unusually high level of volatility 
and significant price movements. It is important to state that 
such events are not common in the U.S. Treasury markets.
    As an operator of one of the primary U.S. Treasury venues, 
Nasdaq could not evaluate the liquidity and/or efficacy of the 
entire market either in real time or on a delayed basis then or 
today.
    October 15th prompted 5 Federal agencies to review the 
day's events along with trading data. The resulting findings 
report, published on July 13, 2015, noted that while banks and 
nonbanks continued to execute transactions, it was the nonbank 
firms that represented more than half of the traded volume that 
day.
    Recommendation number two is to impose minimum regulatory 
requirements in all venues to ensure fair and orderly markets. 
Well-functioning markets must be transparent, fair, and 
orderly. This requires uniform minimum regulatory standards 
across all trading venues.
    For example, rules similar to Regulation SCI would ensure 
that participants in the U.S. Treasury markets develop systems 
with sufficient capacity, resiliency, availability, and 
security to minimize the occurrence of disruptive systems 
issues. It is critical that trading venues do their part to 
keep bad actors out of the Treasury market. NFI is operated by 
a FINRA-regulated broker-dealer and NSCC-registered ATS, and 
upholds its duties through a vetting process that includes 
robust know-your-customer and anti-money laundering monitoring 
standards under the USA PATRIOT Act.
    NFI uses a third-party vendor to investigate each customer 
by comparing their information against 120-plus government-
managed lists and websites for any negative information. NFI 
does not allow any access to the ATS prior to confirmation or 
clearance. NFI engages the same vendor to conduct continuous 
monitoring of customers and receives alerts when negative news 
is obtained.
    In summary, we strongly advocate for the standardization of 
regulatory standards and surveillance practices across all U.S. 
Treasury venues. Each U.S. Treasury venue should perform 
similar monitoring surveillance for the activity related to 
that venue.
    Recommendation number three is to reduce systemic risk by 
requiring cost-effective clearing of all transactions, be it 
centralized or through an interoperable model. The clearing 
market structure, in our view, has fallen behind the realities 
of automated trading. The lack of a centralized clearing 
solution poses material counterparty risks to the market and 
leads to the following: less transparency as to the size of 
exposure; concentration risks; clients having to post 
collateral at multiple venues; and a decentralized default 
management process that is cumbersome and prone to delays and 
errors.
    We appreciate the opportunity to testify on these important 
issues. I am happy to answer your questions.
    [The prepared statement of Mr. Shay can be found on page 65 
of the appendix.]
    Chairman Huizenga. Thank you very much.
    Mr. Sedgwick, you are now recognized.

  STATEMENT OF ALEXANDER SEDGWICK, VICE PRESIDENT AND HEAD OF 
 FIXED INCOME MARKET STRUCTURE AND ELECTRONIC TRADING, T. ROWE 
                             PRICE

    Mr. Sedgwick. Thank you, Chairman Huizenga, Ranking Member 
Maloney, and members of the subcommittee, for inviting me to 
testify today. My name is Alexander Sedgwick, and I am the head 
of fixed income market structure and electronic trading at T. 
Rowe Price, a global investment management firm with about $860 
billion in assets under management. I am also appearing at this 
hearing as a member of the Investment Company Institute, a 
leading global organization of regulated funds.
    We greatly appreciate the subcommittee's continuing 
interest in ensuring the quality and integrity of the fixed 
income markets. These markets provide a critical source of 
capital for companies and governments, facilitating job 
creation in corporate America, financing municipal 
infrastructure projects, and providing a vital funding 
mechanism for the Federal Government.
    The funds offered by T. Rowe Price and other ICI members 
play a significant role in this capital formation process by 
investing on behalf of millions of retail investors saving for 
their long-term financial goals, such as purchasing a home, 
paying for college, or funding their retirement.
    Enhancing the transparency, liquidity, and overall 
functioning of these markets is particularly important because 
fixed income market dynamics affect our ability to deliver on 
investment mandates. And so we applaud the subcommittee for 
holding this hearing.
    In my written statement, I outline the evolution of the 
U.S. Government bond market, not because I think members of 
this subcommittee need that history lesson, but because it 
illustrates how fixed income market structure evolves, and it 
speaks to two important points.
    Fixed income securities can and indeed historically have 
traded in a variety of ways. Further, the development of fixed 
income market structure has not been linear, but it has been 
influenced by the changing needs of market participants, 
including issuers, buyers and sellers, and liquidity providers.
    The result is that the fixed income market is a collection 
of diverse sectors, each with its own unique structure, the 
largest and most liquid of which is the U.S. Treasury market.
    One thing I would like to note is that many of the studies 
focused on the Treasury market being constrained by a lack of 
market data. A 2015 study done by the staff of the New York Fed 
concluded that the liquidity is in line with historical 
standards. While we generally agree with this conclusion, along 
with the joint staff report in 2014 on the flash event, both of 
these reports relied on data provided by interdealer trading 
platforms, which highlights the need for a more comprehensive 
source of information in this market.
    As a result, both T. Rowe Price and ICI are supportive of 
the regulatory reporting of Treasury trades, which began 
earlier this week.
    Before discussing the corporate bond market, I would like 
to consider transparency more broadly. Buy-sized firms have a 
range of strong views on transparency and public dissemination 
of trade data. T. Rowe Price has been and continues to be 
broadly supportive of greater transparency in fixed income 
markets, although we recognize risks in this regard.
    We encourage regulators to thoughtfully consider 
requirements to foster transparency and implement those 
requirements in phases with regular periods of review to 
minimize any unintended consequences for market participants as 
well as any market dislocations.
    This kind of careful approach can produce a transparency 
regime that appropriately balances the benefits and risks of 
additionally transparency.
    Turning now to the credit markets, there's been no shortage 
of commentary regarding the current state of liquidity. At T. 
Rowe Price, we have an optimistic long-term view. We believe 
that a modest increase in both yields and volatility may result 
in several constructive developments, including increased 
interests from long-term investors, similar to what we saw 
during the 2013 taper tantrum; buyers and sellers developing 
differing views of value, which is critical to creating two-way 
and more vibrant markets; and widening bid offer spreads, which 
would entice market makers to allocate capital to liquidity 
provision.
    We are also excited about the continued development of 
greater electronification. While less ubiquitous than other 
markets, e-trading continues to grow steadily in corporate 
credit markets. T. Rowe Price believes that removing obstacles 
to further electronification will improve price discovery and 
facilitate best execution.
    Moreover, given the recent proliferation of e-trading 
platforms, regulators may consider standardized reporting for 
Treasury--for trading volumes, which would help market 
participants evaluate which platform meets their trading needs.
    As I said at the outset, the fixed income markets play an 
important role in helping millions of Americans save and 
invest, and enhancing the structure of these markets is 
critical to their success.
    We greatly appreciate the subcommittee's time and their 
continuing interest in these issues. Thank you.
    [The prepared statement of Mr. Sedgwick can be found on 
page 52 of the appendix.]
    Chairman Huizenga. Thank you very much.
    Mr. Crane, you are recognized for 5 minutes.

STATEMENT OF JONAH CRANE, FORMER DEPUTY ASSISTANT SECRETARY FOR 
    THE FINANCIAL STABILITY OVERSIGHT COUNCIL (FSOC), U.S. 
                   DEPARTMENT OF THE TREASURY

    Mr. Crane. Thank you, Chairman Huizenga, Ranking Member 
Maloney, and members of the subcommittee for inviting me to 
participate in today's hearing.
    I was sitting in the Treasury Department on October 15, 
2014, when somewhere around 9:30 in the morning, all of our 
phones started to blow up with several alerts. And we looked 
down and saw price alerts about the Treasury market. And after 
shouting several expletives, we gathered around a Bloomberg 
terminal and tried to figure out what was going on. And the 
reality is, we couldn't figure out what was going on. We 
couldn't figure out what was going on that morning, and it took 
five agencies several months to figure out what had happened 
that day.
    So, following October 15th, an interagency group of five 
agencies got together and conducted what was the most 
comprehensive review of Treasury market structure in about 20 
years and made several recommendations. Those recommendations 
will be reflected in my written testimony, and I will get to 
them very shortly.
    Broadly speaking, I think what you are hearing consistently 
across the panel is that fixed income markets are undergoing a 
period of transition. It is not necessarily a recent 
transition. It is not necessarily limited to fixed income. And 
it certainly is not proceeding all at one speed.
    Nonetheless, there is clearly a big transition on the way. 
The big theme is electronification of financial markets. This 
occurred in other markets, beginning with equities and futures 
in the 1990s, moving into foreign exchange, and at this point, 
it is moving into, really, all areas, even the fixed income 
markets.
    I would just echo the chairman and the ranking member, who 
noted that it is important to think about the unique 
characteristics of the underlying market when thinking about 
the ways that a policy framework should shape the evolution of 
this trend in the different markets.
    With respect to even just the Treasury market, the Treasury 
market itself remains pretty bifurcated between, really, a 
dealer market on the one hand and a client market on the other 
hand. When end users, like mutual funds and insurance 
companies, want to trade Treasuries, they still generally do so 
exclusively through dealers and bilateral transactions. And the 
interdealer market, which has opened up in the past decade to 
nonbank dealers like principal trading firms, you have really 
seen a full evolution into markets with predominant high-
frequency trading now accounting for the majority of trading in 
the interdealer market.
    So the evolution of electronification, even within the 
Treasury markets, is really running at two speeds. And I think 
the recommendations that the interagency working group made and 
that I will echo today really will achieve a couple of things. 
One, they will bring new competition into the Treasury market 
or facilitate the continued entry of new competitors into the 
Treasury market. And you could see a broader, more diverse 
spectrum of liquidity provision across the Treasury market, 
which I think would create a healthy echo system over time.
    Two, it will improve resilience in the market. I think some 
of the recommendations that you heard Mr. Shay discuss and some 
of the recommendations that the interagency working group 
discussed would bring important stability and confidence to the 
market. The recommendations specifically here were registration 
of market participants, registration of minimum standards for 
trading venues. And I think those are important improvements 
that will help to modernize the oversight of the Treasury 
market.
    I will end there and leave the rest of my testimony to be 
submitted for the record, and I look forward to answering your 
questions. Thank you.
    [The prepared statement of Mr. Crane can be found on page 
43 of the appendix.]
    Chairman Huizenga. Thank you very much.
    And Mr. Snook, you are recognized for 5 mines.

    STATEMENT OF RANDOLPH SNOOK, EXECUTIVE VICE PRESIDENT, 
 SECURITIES INDUSTRY AND FINANCIAL MARKETS ASSOCIATION (SIFMA)

    Mr. Snook. Chairman Huizenga, Ranking Member Maloney, and 
distinguished members of the subcommittee, thank you for 
providing me the opportunity to testify today on behalf of 
SIFMA and to share our views on the structure and the health of 
the U.S. fixed income securities markets.
    The U.S. fixed income markets are truly without parallel, 
with nearly $40 trillion in debt outstanding, and on average, 
over $775 billion of securities traded each and every day.
    As the trade association representing a broad range of 
financial services firms active in all aspects of the fixed 
income markets, SIFMA is dedicated to promoting investor 
opportunity, access to capital, and an efficient market system 
that stimulates economic growth and job creation.
    Traditional bank lending is often pointed to by 
policymakers as the driver of economic growth, but we are here 
to highlight the more significant source of financing that 
drives our economy: the capital markets.
    Bonds finance everything from home mortgages and car loans, 
to highways and schools, to factories and equipment, as well as 
the Federal Government itself. The bond market sets the 
interest rates for commercial and consumer lending and provides 
a safe and predictable investment for millions of Americans.
    The cumulative impact of post-crisis reforms must be 
studied and reconsidered to ensure our capital markets are 
providing funding in the most efficient way possible.
    This is particularly important since product credit 
extended to households and nonfinancial businesses has grown at 
a slower pace than in all recoveries in the past 60 years. 
SIFMA supports many of the post-crisis capital reform efforts 
and believes they have enhanced the overall resiliency of our 
capital market system. However, now is the time to review how 
those rules work together with a particular emphasis in 
determining where they may be impeding liquidity by targeting 
the same risk in multiple ways.
    A review should include the new liquidity and leverage 
requirements but also look at the effect of the interactions 
with the CCAR rules, Basel III capital rules, and single 
counterparty credit limits.
    We firmly believe that this sort of clear review of the 
potential costs of the current and additional requirements, 
which could limit the capital available for lending, should be 
undertaken. We are pleased to see that policymakers have begun 
to move in that direction.
    While trying to understand the state of liquidity, it is 
certainly helpful to understand the end users and investor 
points of view. In a 2014 and 2015 survey of corporate bond 
investors, Greenwich Associates asked about the ease of trading 
corporate bonds by size. In each year of the survey, 75 percent 
of the investors found it difficult or extremely difficult to 
execute or trade in block sizes of corporate bonds measured as 
$15 million and larger in size.
    Regulation does, indeed, impact liquidity. For example, the 
Volcker Rule's limits on trading by banks in some cases 
constrain dealers' ability to take on trading for dispositions 
and build inventory necessary for market making. Capital and 
leverage rules also limit dealers' ability to finance positions 
held in inventory and can clearly limit their ability to commit 
to customer trades.
    Although just one of the markets discussed here this 
morning, the importance of the Treasury market or system to our 
economy cannot be overstated. This unique, resilient, and 
robust market serves multiple roles, including as the 
transmission mechanism for monetary policy, and as a safe haven 
investment, particularly during times of financial stress, and, 
most importantly, as a source of stable and efficient funding 
for the Federal Government.
    Given its importance, continued study of any potential 
changes is required to ensure the U.S. Treasury securities 
market remains the preeminent benchmark in the world. Any 
changes to regulation should be carefully calibrated to support 
both the resiliency and the role of the Treasury market and 
recognize the unique auction process that has allowed the 
Treasury to finance the government at extremely low cost to 
taxpayers.
    We support the government's program to collect secondary 
market transaction data, which began last week. Additional 
changes, however, including the public dissemination of that 
data, need further careful study, including a clear 
articulation of any potential benefits to the market to ensure 
no harm.
    In conclusion, SIFMA believes that policymakers have the 
ability to enhance economic activity through tailored 
recalibration of rules and regulations affecting our capital 
markets. This recalibration could help jump-start the economy 
without sacrificing financial stability. We very much 
appreciate the opportunity to present our views here today. We 
look forward to working with policymakers to help ensure that 
our capital markets continue to perform their vital functions 
and operate safely and efficiently to move America forward.
    I look forward to answering your questions. Thank you.
    [The prepared statement of Mr. Snook can be found on page 
82 of the appendix.]
    Chairman Huizenga. Thank you.
    And I thank each of you for your testimony.
    At this time, I will recognize myself for 5 minutes. And I 
am going to try to move rapidly through this and make sure we 
have time for the other Members here.
    Given the testimony today, I have heard a lot about 
transparency and fixed income markets. Mr. Shay, and Mr. 
Sedgwick, especially, you note in your testimony there is room 
for improvement in transparency and reporting in fixed income 
transactions, such as FINRA's TRACE, Trade Reporting and 
Compliance Engine, reporting regime. Can you please explain how 
this is helpful to both regulators and the market participants?
    Mr. Shay. Sure. I am happy to start.
    Without market data, and as we saw back in October of 2014 
and as I think you have heard from testimony from members 
today, it took over a year for the regulators and the five 
different government agencies to come together with a proper 
understanding of what happened. And in my oral testimony today, 
I just mentioned as well that if there were to be another 
similar flash rally or ``12 minutes of fury,'' as we called it, 
it would be very difficult for us as a venue to be able to 
diagnose what actually happened. It would be nearly impossible 
for the regulators. It would have to be another multi-month 
process.
    But during the crisis, I was working at a professional 
trading firm named Virtu Financial. And we were in the enviable 
position of having market data inputs from the various futures 
venues, from the cash venues, from the various direct venues 
that we were using to trade this product. And it was very easy 
for us to recreate what had happened. In fact, we had spent 
some time with both the Federal Reserve and Mr. Crane at 
Treasury reviewing our market data, but, of course, it had to 
be confirmed independently. And that took an enormous amount of 
time.
    And, certainly, in that period of time, Mr. Chairman, I 
think it would have been very helpful if the regulators--
Treasury and the Fed--all had that data at their fingertips to 
be able to diagnose the problem.
    Chairman Huizenga. Mr. Sedgwick, would you care to jump in 
on that?
    Mr. Sedgwick. Thank you for the question, Mr. Chairman.
    I would say there are three main areas where transparency 
is important to us. The first is, as we are trying to deliver 
on our investment mandates, it allows us to identify relative 
value opportunities within the market. So the ability to look 
at where individual bonds have traded and the relative value 
from an investment perspective.
    I think, additionally, liquidity has been a topic that we 
have all talked about in our opening statements. I am sure it 
is something we will talk about further today, but it is really 
helpful in helping us identify where there are pockets of 
liquidity in this market.
    Of the 20,000 or so investment grade bonds, there may only 
be 6,000 traded on a given day. It is important for us to 
understand which ones those are so we can frame up the market 
from that perspective.
    I think the final piece that I would point to in many 
respects is probably the most important, and that is we 
leverage TRACE data for trade cost analysis. That allows us to 
give transparency back to not only our portfolio managers 
internally but also our retail and institutional clients.
    Chairman Huizenga. So, again, I am hearing a lot about the 
transparency, and I know, Mr. Andresen, you talked a little bit 
about filters and Last Look and some other things. And, Mr. 
Shay, you had talked about--I think points number three and 
four were equal access and fair trades.
    Some have called for an electronic trading platform for 
fixed income lead in order to increase this transparency. Is 
that the right direction to go?
    Mr. Andresen. I think, without question, it is. Americans 
insist on transparency in almost all of their economic 
transactions. If you own a house, and you are able to find out 
if anyone else in your neighborhood sold their house, what the 
price was. It is a matter of public record. Imagine trying to 
put your house up for sale and having no price discovery, no 
idea what prices may have been in the last 2 years, the last 3 
years.
    Chairman Huizenga. So is that a vital piece, getting this 
electronic--
    Mr. Andresen. I think, without question. In municipal 
bonds, we have the EMMA system, with which we can see every 
trade that happens as reported. It is reported in near real-
time and is visible for all investors. This is a critical tool 
for investors to understand where the market is pricing risk.
    But the challenge for municipal bonds--and I know I scared 
you. You thought this was my testimony.
    Chairman Huizenga. Yes. I noticed you had a little 
notebook.
    Mr. Andresen. This is five columns, printed on both sides, 
a list of individual municipal bonds. It lists 700,000 
individual securities. Most of them do not trade in a given 
day, a given week, or a given month. So just having that bit of 
pricing--
    Chairman Huizenga. You did mention that is only ``A'' 
through ``N.''
    Mr. Andresen. Yes, that is ``A'' through ``N.'' My 
colleague is not fit enough to carry the whole thing.
    Chairman Huizenga. I think what we are going to need to 
find here, though, is consensus. And is there industry 
consensus on this that this is a direction to go? That is 
certainly something I am looking for in this.
    My time is up, but I suspect that we will have some fairly 
extensive written follow-up questions as well for everybody, 
and I look forward to that.
    So, with that, I recognize the ranking member, Mrs. 
Maloney, for 5 minutes.
    Mrs. Maloney. Thank you, Mr. Chairman.
    Mr. Crane, you mentioned in your testimony that you were 
there for the very famous Treasury flash crash in 2014. And one 
of the recommendations coming out of the staff report was that 
firms should be required to report their transactions in 
Treasuries to regulators on a daily basis. And as I understand 
it, it is being implemented even this Monday by the SEC and 
FINRA to have that take place.
    One of the other debates following that action was whether 
Treasury transactions should be reported publicly as well. And 
some have said that this would be unfair; high-speed traders 
would take advantage of it. But others have thought that it 
would increase market quality and stability and bring more 
investors in.
    So what are your thoughts on this? Should transactions in 
Treasuries be reported publicly or just to regulators?
    Mr. Crane. Thank you for the question. I don't want to--I 
don't think it should be underestimated how important the 
launch of official sector reporting on TRACE was this week. 
That is an important step, and I commend FINRA and the SEC for 
following through on that initiative.
    As Mr. Shay pointed out, it will be really helpful in 
future episodes of volatility to try and diagnose what had 
happened.
    You asked about making that information more broadly 
available to the public, and I do think that is an important 
next step. Public transparency can improve liquidity markets. 
It can improve participation, create a more level playing 
field. And I think history shows that when you brought 
transparency to new markets, especially when it has been done 
in a thoughtful way, that it can improve the overall health of 
the market.
    I do think it is important for it to be done in a 
thoughtful way. It is important to think through the unique 
characteristics of Treasuries and the role that they play in 
the global economy, to have large reserve managers around the 
world and large institutional investors like insurance 
companies, who hold large amounts of Treasury securities. And 
if they need to trade in large blocks, putting that trade out 
there for the world to see may be a risky proposition.
    So I think it is important to think through how to 
accommodate the important unique aspects of Treasuries, but I 
think that can be done with thoughtful design. When FINRA 
originally launched TRACE for corporate bonds and then for 
agency--mortgage-backed securities, they took a similar 
thoughtful approach. They implemented delays in reporting. They 
implemented size thresholds so that block trades were masked, 
for example. I think it is important to be thoughtful about it, 
but the concerns that have been raised about public 
transparency in Treasury markets can be addressed through 
thoughtful design.
    Mrs. Maloney. Okay.
    What are your thoughts on it, Mr. Sedgwick and Mr. Shay?
    Mr. Sedgwick. As I mentioned in my opening statement, T. 
Rowe Price has been broadly supportive of transparency across 
the markets.
    While we are aware of some of the risks that I think Jonah 
outlined, I think, in general, we look at the way TRACE has 
been administered as they expand to new asset classes and the 
extent to which disclosures have been adjusted accordingly, and 
so I think, in this particular case, presuming the same 
approach is taken, we would find value in that.
    I think one thing to point out is, in some respects, when 
you are looking at the credit markets, you are dealing with 
investment views being articulated through a trade. In 
Treasuries, in some respects, you are also dealing with 
collateral trades; you are dealing with a variety of other 
reasons you would trade those securities. So, in some respects, 
that information may be less sensitive.
    Mrs. Maloney. Mr. Shay?
    Mr. Shay. I always find it interesting when I hear public 
data being made available to the professional trading groups as 
being a negative. As we have seen, those particular firms 
enhance other markets that we at Nasdaq are very active in, 
most notably the equity market, the equity option market, the 
listed futures market. But it does strike at the heart of real 
clearing.
    The large banks in the last 8 years have become extremely 
good at managing their technology as well as world class at 
managing risk. They are enormously or, you could almost argue, 
overcapitalized at this moment. And they are wonderful in that 
they have large balance sheets. They have a huge list of 
clients, and they manage the risks for them.
    So the idea would be making data public to everyone in a 
way doesn't level the playing field. It is just a normal 
response. As Mr. Andresen noted, you are not going to sell your 
house without market data. You are not going to buy your car 
from the dealer that you always go to when you could buy it 
from a dealer across town for $1,000 or $2,000 less.
    Mrs. Maloney. Thank you.
    And I would like--Mr. Crane, there has been a lot of talk 
on this committee about how the liquidity in the corporate bond 
market has declined in recent years. And do you think it has 
declined enough that major regulatory changes are necessary?
    Mr. Crane. It is a good question. I think, first, it is 
important to remember that it has declined from a pre-crisis 
period that is probably not the best benchmark to use. I think 
the pre-crisis period was an anomaly in terms of extremely high 
liquidity, and it was probably driven by a lot of leverage and 
turned out to not be all that resilient, as we discovered. So I 
think I would hesitate to draw any firm conclusions about how--
just how far--
    Mrs. Maloney. Thank you.
    My time has expired. Thank you.
    Chairman Huizenga. The gentlelady's time has expired.
    Unfortunately, they have announced they are moving up 
votes. We don't know when that will be, but my intent is to try 
to get through as many people as we can, and then we will 
evaluate if our panel is available to then take that break, 
vote, and come back; if you are able to stay.
    So, with that, I recognize the vice chairman of the 
subcommittee, Mr. Hultgren, for 5 minutes.
    Mr. Hultgren. Thank you so much, Mr. Chairman.
    And thank you all for being here. We appreciate your 
testimony.
    Mr. Andresen, it is great to see you. Thank you for coming 
up from Illinois to testify today.
    We have seen our equity markets evolve more quickly than 
our fixed income markets, at least in terms of the number of 
trades being executed electronically.
    As someone who played an integral role in the development 
of our modern equity markets, and who now serves on the SEC's 
Equity Market Structure Advisory Committee, what takeaways do 
you think we can apply from this evolution in our equity 
markets to our fixed income markets, if any? And do you believe 
our fixed income markets will continue to develop due to market 
forces, or what other role should government have, if any?
    Mr. Andresen. I think government can play an important role 
here. Fixed income, as you see from my list of securities here, 
will never look like the market for Google or Amazon or 
Facebook. There is a very small number of equity securities. A 
lot of interest, as Ranking Member Maloney pointed out, is 
concentrated on one product, whereas in fixed income, even if 
you have a multitude of issuers, all sometimes with hundreds of 
different securities, you are never going to have streaming 
bids and offers driven by natural flow. Most times, things will 
only trade by appointment. But that doesn't mean that 
electronic trading can't play an important role, and the 
government can't play an important role, in facilitating this.
    Already today, in the muni markets, there are about 40,000 
trades a day, and about 8,000 of those actually take place on 
alternative trading systems. Now, the primary method of trading 
on this doesn't look like the New York Stock Exchange or like 
Nasdaq. It looks like an auction. It takes about 4 hours. An 
auction is initiated. Participants who come in can bid on this, 
and it is a competitive auction that yields a very good price.
    In fact, today, there is an average of over seven bidders 
per auction. If you had seven bidders on your house, you would 
probably get a good price. So this is a very robust process 
that is working.
    The challenge we have, and where I think government is 
taking the lead, is to try to bring in new rules to encourage 
the use of this facility and to encourage the proper adherence 
with best practices for how the rules work within those 
auctions.
    Routinely, we see 15 to 20 bidders in these auctions. And I 
think, with the new rules coming into effect, if you had the 
majority of orders in these auctions, you would have a very 
efficient result, but we are not there yet.
    Mr. Hultgren. It sounds like from your answer, you would 
say that these auctions are competitive for municipal bonds?
    Mr. Andresen. The auctions are--we were very surprised when 
we got in this business. It took us years to build the modeling 
to be able to make these prices. And we anticipated that, 
because of our breadth, we would sometimes go into these 
auctions and be virtually alone. And we were very surprised to 
find that they are actually quite competitive.
    Mr. Hultgren. It is helpful.
    Mr. Snook, do you have any response to that? Do you agree? 
Do you disagree?
    Mr. Snook. I think the main point we would want to 
emphasize around electronic trading--and electronic trading has 
been growing and developing for close to 20 years now--is that 
there have been a large number of new entrants coming into the 
market. So we are in favor of pro-competitive forces, 
encouraging the innovation and experimentation that is 
happening.
    In each of the markets, we see different degrees of 
adoption and use of electronic trading. That is a good thing. 
But we think it is important that it can and should develop as 
organically as possible in a pro-competitive way without really 
deciding externally what the correct market structure should 
be. Let's let entrants come in, innovate, compete, find the 
best ways to use and leverage the technology and leverage the 
data, and I think that is what we see. We see 20 percent of 
corporate bonds traded electronically now. There are estimates 
that agency MBS close to three-quarters. Parts of the 
government market, particularly in the on-the-run sector, are 
nearly at 100 percent. So we are in favor of encouraging more 
electronic trading but not imposing that externally.
    Mr. Hultgren. Let me ask one last question here to Mr. 
Shay.
    You mentioned in your testimony that Nasdaq is not 
advocating for something similar to Reg NMS being applied to 
U.S. Treasuries. What steps can policymakers take to 
acknowledge the imperfection of Reg NMS and to make sure any 
potential new rules are appropriately tailored for Treasuries? 
We just have a few seconds.
    Mr. Shay. I think it comes down to clearing. And right now, 
you have a market that some securities, with FICC clearing 
members clears at FICC, part of the DTTC. Some clear at 
Fedwire. You have this global risk-free rate that exists as the 
benchmark of the world, and, yet, it doesn't perfectly clear. 
When you do clear it at FICC, it is very expensive. They are 
cumbersome, anachronistic, idiosyncratic rules that no longer 
make real-day modern market sense.
    Mr. Hultgren. Thank you all.
    I yield back.
    Chairman Huizenga. The gentleman's time has expired.
    The Chair recognizes the gentleman from Connecticut, Mr. 
Himes, for 5 minutes.
    Mr. Himes. Thank you, Chairman Huizenga. I would like to 
echo the ranking member's gratitude for the substantive and 
generally nonpartisan approach of these hearings. I very much 
appreciate that. And I thank the witnesses as well.
    Gentlemen, I want to ask you a question about the Volcker 
Rule and its effect on liquidity. We went through a big 
exercise in the passage of something called the CHOICE Act, 
which is really kind of a rollback of many Dodd-Frank 
regulations. The premise was that Dodd-Frank regulations were 
harming capital markets. And if you look at capital markets, 
actually, there is not much data to support that, whether it is 
venture capital, private equity, corporate bond issuance, 
secondary markets, IPOs, you name it. Those markets are pretty 
robust and growing.
    That is not necessarily true in smaller business lending.
    And, Mr. Chairman, I would love to see us take a look at 
the issues affecting smaller business lending. It also would 
appear that there is some data and studies supporting the 
notion that the Volcker Rule, which I strongly support--I just 
don't believe that FDIC-supported institutions should be making 
proprietary bets. There is a Federal Reserve study and other 
suggestions out there that in moments of stress, we may have a 
liquidity issue in the corporate bond market.
    So I guess I am going to point this question first to Mr. 
Crane, as a non-private-sector participant, but then somebody 
else from the private sector: Are you concerned that the 
Volcker Rule is, in fact, constraining liquidity in a way we 
need to be conscious of? And then, if you agree with me that we 
probably shouldn't do away with the Volcker Rule, meaning we 
don't want FDIC-insured institutions taking proprietary bets, 
is there a modification or change to the Volcker Rule that 
might allow for, if, in fact, there is a decline in liquidity 
and stress corporate bond markets, that would sort of fix that 
problem if it exists?
    Mr. Crane. Thanks for the question.
    As discussed in a little more detail in my written 
testimony, I don't think there is a lot of evidence--and you 
hinted at this as well--that there has been a broad-based 
deterioration in liquidity. So it is a little bit--I am not 
sure I fully agree with sort of the premise of that assertion.
    But there was one study you alluded to done by the Federal 
Reserve staff. I think it is notable in that respect that the 
periods of stress that study looked at were downgrades of the 
individual securities. So, ordinarily, when I think about 
liquidity in a period of stress, I think about market stress 
and marketwide stress, not an individual security experiencing 
a downgrade in an otherwise normal market.
    So I think it is a bit of apples and oranges. That study 
alone, I think, read in conjunction with the rest of the 
evidence on liquidity, makes it difficult to conclude that 
there has been a broad effect on liquidity.
    That said, I heard Chair Yellen's testimony, I think it was 
yesterday, on the Senate side, where she suggested trying to 
look at some of the complexity involved in Volcker Rule 
implementation, and I think that it is appropriate for the 
regulators to do so.
    Mr. Himes. I don't know. Is there maybe, T. Rowe, a private 
sector, take on that question?
    Mr. Snook. I would just add our perspective, which is we do 
think the Volcker Rule, among other rules, is impacting 
liquidity. I think it is important to acknowledge--
    Mr. Himes. Let me stop you, Mr. Snook. We talked about the 
Federal Reserve study. Can you point us to other studies that 
back that assertion?
    Mr. Snook. I think the Federal Reserve study is a good way 
to isolate what we would consider a stress environment. There 
are different ways to do it, but I think that was a really 
thoughtful way of doing it.
    When we look at the volume of secondary market trading in 
the marketplace versus the total outstanding, it hasn't kept 
pace with the growth of the market. So we acknowledge that the 
primary markets are very strong, but there is a virtuous circle 
that exists between primary and secondary markets, and people 
will pay the better prices. They will pay a liquidity premium 
when they have confidence in that very strong and liquid 
secondary market. They will pay a better price in the primary 
market. So that is why liquidity is important.
    We are in a relatively benign environment where we have low 
rates. We have low volatility. We have a lot of stability. We 
are concerned that, if we had more volatility in a rising rate 
environment, that would put pressure on market making.
    And to your point earlier on the small cap companies, there 
is evidence that, despite the growth in the markets, it has 
been principally larger companies issuing larger bonds, and 
there is evidence that the number of smaller companies issuing, 
measured by size of balance sheet assets, there has actually 
been a decline, despite the growth of the marketplace.
    Mr. Himes. No, I take that point. Again, I looked pretty 
hard at all of the capital markets.
    Again, I will direct this to the chairman. I think there 
would be bipartisan support for a hard look at capital 
availability for smaller businesses, but I am out of time.
    So I appreciate the perspective, and I yield back.
    Mr. Snook. Thank you.
    Chairman Huizenga. The gentleman's time has expired.
    The Chair recognizes the gentleman from Arkansas, Mr. Hill, 
for 5 minutes.
    Mr. Hill. I thank the chairman.
    I appreciate the opportunity to talk about fixed income 
structure. Listening to this is always inspirational to me to 
see this much talent in a panel. We are all benefited by that.
    I have to tell you, though, that when I started in my 
financial career, the top technological innovation, Mr. 
Andresen, was muni fax coming across the thermal paper in our 
offices in the 1970s. So it has been neat to see the evolution 
of the market from that moment where we did official circular 
files and kept copious notes to Bloomberg's advances and now 
your trading platform you talked about today.
    You would agree, though, that there are houses that there 
are no bids for. Have you ever seen a--you are a fencer. So is 
there an electronic scoring in fencing?
    Mr. Andresen. Yes, sir, there is.
    Mr. Hill. And how does that compare to human scoring? 
Pretty good?
    Mr. Andresen. As an American, when I used to compete in 
Europe, we always felt like we got some inventive 
interpretations from the European referees about how to 
interpret an electronic score box.
    Mr. Hill. Yes. So, there is no more over-the-counter, more 
complex market than the muni market, and you illustrated that.
    Mr. Andresen. I would agree with that.
    Mr. Hill. And I listened to your opening comments, and I 
took them sort of as I want to lead us to the future 
technologically, but I took your comments as a bit of a 
pejorative maybe towards dealers across the country that are in 
the muni market. You probably didn't intend that. Maybe you 
did. It came across pretty negatively.
    And I think there are a lot of people out there trying to 
fill demand in the municipal market, which is very challenging, 
whether you are at T. Rowe trying to fill out a laddered 
portfolio or individual market-making, which doesn't make me 
not interested in EMMA's success or your trading platform. I am 
for it.
    I just want to recognize that, with over a million issues, 
some a million bucks, some that had one buyer, and the 
difficulty and the fact that most of them are nonrated, and 
even Bloomberg's database is feeble, that it is not fair to 
say, in my view, that this is just going to be imminently 
electronic, made electronic, and easily auctioned across the 
country.
    So I just want to, after 40 years of experience in the 
market, get that off my chest. I feel better now, Mr. Chairman. 
Thank you so much.
    Chairman Huizenga. We are here for your therapy.
    Mr. Hill. Thank you. And in Congress, we need it. We only 
have one psychiatrist in Congress, Tim Murphy from 
Pennsylvania. We need dozens more. So thank you for that.
    Mr. Crane, I want to talk for a minute about the Treasury 
market. In your view of--you talked about the electronics 
there. Tell me a little bit about the changes in the market you 
saw at Treasury. We had 40 dealers when I worked at Treasury. 
We have 20 or so now. That is maybe not even relevant anymore 
vis-a-vis how the market has changed.
    Talk to me about access to the market, price discovery in 
the market. And just give me some more of your views on that.
    Mr. Crane. Sure. Thank you for the question.
    As you note, the number of primary dealers has declined 
over the last several decades. I think we are 23.
    At this point, I think in terms of secondary market 
trading, it is somewhat less relevant. The inter-dealer market 
was opened up to nonbank dealers beginning in the early or mid-
2000s. Firms like Citadel, eventually Virtu, are competing 
actively in that market.
    And it has really become--there are sort of two primary 
platforms, one operated by Nasdaq and the other is BrokerTec, 
and they operate a lot like our stock markets do. There are 
central limit order books, anonymous trading, high-speed 
electronic trading.
    And then there is a very different market in the customer 
market, for a lot of good reasons. Customers whom, as I 
indicated before, may not want to expose their trade to 
everybody, may want to transact in a different market. But the 
dealer-to-client market is very different. Parts of it are 
electronified, but in many ways it is just sort of doing 
electronically what used to be done by the phone.
    The latest data I saw indicated that a majority of trading 
in the dealer-to-client space was still actually done over the 
phone. If you think about the underlying nature of Treasury 
securities, very liquid, very standardized, et cetera. So it is 
a little surprising to see that much trading by phone.
    But it is important to recognize that not all Treasuries 
come in the same form. Even on-the-runs, the most recently 
issued Treasuries, trade a lot more.
    And then there tends to be a process--and I think this is 
true across fixed income, although the other panelists should 
validate this--that in fixed income securities get issued, and 
they trade for a little, and then they tend to sort of find a 
home with a buyer. And then they trade less often.
    So you do tend to have these very different liquidity 
characteristics in more recently issued securities than more 
aged securities.
    Mr. Hill. Thank you, Mr. Crane.
    Thank you, Mr. Chairman.
    Chairman Huizenga. The gentlemen's time has expired.
    In the absence of Members on the other side, we will 
continue on our side of the aisle.
    With that, the gentleman from West Virginia, Mr. Mooney, 
has 5 minutes.
    Mr. Mooney. Thank you, Mr. Chairman.
    I am very intrigued with the transparency comments that 
were made. There is a famous statement by Louis Brandeis in 
1913, that sunlight is said to be the best of disinfectants.
    So, Mr. Sedgwick, you talked a lot about transparency in 
your comments. Are you suggesting that transparency can do a 
better job than more regulations would?
    Mr. Sedgwick. I think in many respects, when you look at 
transparency, what that really does is help remove some of the 
obstacles to things, for example, like greater 
electronification. We tend to see more electronic markets in 
more transparent markets. So when I think about transparency, 
that is an opportunity to facilitate greater electronification.
    In addition, I think that transparency also, as I mentioned 
earlier, helps us manage our trading costs and be able to 
provide additional transparency back to retail investors. So I 
think that is also helpful.
    I think ultimately, when we look at transparency, it is 
really about giving the market an opportunity to find 
equilibrium around things like the optimal state of liquidity.
    Mr. Mooney. This question is probably more directed to Mr. 
Shay as a follow up. And we have here an Ethics Committee where 
there are three Republicans, and three Democrats, and we peer 
review ourselves to keep ourselves straightforward and review 
it that way. My wife is a doctor. They have other doctors who 
peer review what doctors do to decide if they have done 
something they shouldn't have done rather than a bunch of 
bureaucrats.
    So, Mr. Shay, you mentioned a lot about surveillance and 
bad actors, keeping the bad actors out. I was wondering, can 
you do that internally with some peer reviews of people in the 
industry rather than a government program of some kind?
    Mr. Shay. We actually do do that. So if you are going to 
take on a new client, whether it be a PTG or a firm that meets 
our standards for joining our platform, you are going to 
subject them to a clearing sort of pathway. So they cannot gain 
access to our platform unless they have enough capital to 
satisfy the minimum clearing requirements, because we, as an 
ATS in the U.S. Treasury space, are requiring firms to 
eventually get their trades cleared through the FICC, which is 
part of the DTCC.
    So is this whole shining of the light on one's balance 
sheet, availability of capital, actual firm capital, is all 
measured and predetermined before trade one is even remotely 
put on.
    Mr. Mooney. Thank you.
    Mr. Chairman, I know time is tight, and there are a lot of 
people in the queue, so I will go ahead and yield back the 
balance of my time.
    Chairman Huizenga. The gentleman is deeply appreciated by 
that, I am sure, especially by the next gentleman.
    With that, we have Mr. Budd, who is up for 5 minutes or 
less.
    Mr. Budd. Thank you, Mr. Chairman.
    And I thank each of you for being here today.
    So to Mr. Sedgwick, post-Dodd-Frank and Basel III, we have 
heard from market participants that regulations that 
micromanage trading behavior are impacting liquidity, 
specifically a decrease in the lack of sustainable liquidity in 
the U.S. swaps market, corporate bond markets, and the U.S. 
Treasury market. Do you agree with that statement?
    Mr. Sedgwick. I would say that the Volcker Rule, Basel III, 
and the Dodd-Frank Act were all factors in effectively 
disincentivizing dealers to commit capital to secondary 
trading. So what we have seen when we actually transact in the 
market is that whereas we used to transact with a principal 
commitment to do large trades, now much of the trading is 
taking place in a more agency fashion.
    What that means is that we are largely dependent on there 
being the opposite side of the trade or counter interest in the 
market for the trades we would like to do.
    The impact to us has been, in a lot of respects, to take 
large orders, split them into smaller sizes, potentially 
fragment our work flow, and source liquidity from different 
areas.
    So I think in some respects--I am sure you have heard a lot 
of conversation in the industry about low liquidity--the real 
conversation is actually about the changing way in which 
liquidity is being accessed and how it is being delivered to 
us. That has been the most fundamental change since the crisis.
    Mr. Budd. So in the simple yes/no, it would be a ``yes?''
    Mr. Sedgwick. Yes.
    Mr. Budd. We know that the U.S. fixed income market is 
massive at roughly $40 trillion and that the largest 
subcategory of that is U.S. Treasury debt. So with the national 
debt approaching $20 trillion, do you think that U.S. debt is 
not subject to market forces?
    Mr. Sedgwick. I would say it is, yes.
    Mr. Budd. Okay.
    In the interest of time, I am going to let some of my 
colleagues go, as well. I have many more questions. If we come 
back after votes, perhaps I will ask some more, Mr. Chairman.
    Chairman Huizenga. I appreciate that. And we have a number 
of gentlemen and scholars, apparently, on the committee.
    So with that, I recognize the gentleman from Indiana, Mr. 
Hollingsworth, for up to 5 minutes.
    Mr. Hollingsworth. Good morning. Thanks to everybody for 
being here.
    I wanted to touch on, frankly, what Mr. Budd had started, 
which is, again, talking about liquidity. And I think, as the 
gentleman across the aisle had said, perhaps some of the 
indicators show that there is ample liquidity in certain 
markets today, but I find that it is not in good times that you 
find out you have enough liquidity. It is really in moments of 
acute stress when you determine whether or not you have enough 
liquidity in the market.
    And I was struck by the recent Treasury report that came 
out and some of its simplification and repurposing of the 
Volcker Rule, if not eliminating it, and I was curious if you 
all had a view on whether that went far enough. Some of the 
proposals that are out there in the Treasury report include 
eliminating the 60-day rebuttal presumption, changing some of 
the purpose tests around prop trading, and then, in addition to 
that, giving some more flexibility in determining what 
reasonable market-making is for banks.
    And I am just curious if you all had a view of whether that 
went far enough in reforming the Volcker Rule or whether we 
needed to go even further, in fact eliminating the Volcker 
Rule, in order to enhance liquidity.
    I would point out to my gentlemen across the aisle that 
inventory is down 92 percent, according to Bank of America and 
SIFMA, but it is down a further 55 percent from 2013. So this 
is not just from a peak that is anomalous, but instead from 
even normal periods. Going back to 2001, we see that inventory 
is down dramatically, and I worry about liquidity.
    Mr. Shay. And our large banks are very well-capitalized, as 
I have already mentioned. They have huge client distribution 
networks. They were viewed in the world as these wonderful risk 
transfer agents.
    So in that new ecosystem that the banks have created for 
themselves post-crisis, I think it would be very beneficial to 
have the chains taken off and to allow the banks to again 
perform their duties as risk transfer agents, certainly in the 
yield or coupon security businesses that we are trading in.
    Mr. Hollingsworth. Any comments from any others? Fair 
enough.
    The other report that I wanted to talk about was that in 
the Federal Reserve's July 7th Monetary Policy Report--we 
recently had Chair Yellen in--they describe, and I am just 
going to read this statement, and I am kind of interested in 
your views on it, ``A series of changes, including regulatory 
reform, since the global financial crisis have likely altered 
financial institutions' incentives to provide liquidity, 
raising concerns about decreased liquidity in these markets, 
especially during periods of market stress,'' something I also 
believe in.
    But I am curious if that is something that everybody here 
believes in. And then are there other regulations, outside of 
Volcker, that have contributed significantly to the decline in 
liquidity?
    Mr. Snook. Sure. So maybe just to round up the point on 
Volcker, I think, and our members believe, that the Treasury 
report provided a lot of good suggestions. We believe that it 
may be best to repeal it. If that is not the approach, a more 
clear and focused definition of what is proprietary trading as 
opposed to the negative presumption, the 60-day test, and the 
activities-based exemptions could be a better way to go. So we 
do think that is a rule that is impacting liquidity but that 
the implementing regulations would be improved.
    Our members who have market-making functions are doing so 
in a very cautious and deliberate way to make sure they are 
within the guardrails of what the rule and what the compliance 
regimes dictate. And things like reasonably expected near-term 
demand (RENTD), are very difficult to use dynamically because 
they are backward-looking processes.
    It often can be the case that, as you look forward, the 
customer demand and the customer needs are quite varied. It 
could be a large portfolio rebalancing, or that an asset 
manager wants to shift from fixed income to equities. It might 
be something where a large corporation wants to enter into an 
interest rate hedging program to finance long-term debt and 
thus it may be foreseen that down the road and need to use 
interest rate swaps to do so.
    Mr. Hollingsworth. I think that is right. And I think one 
of the things I hear from businesses all the way across the 
district, not just in the financial space but all of them, is 
the gray area around regulators' ability to interpret rules is 
causing them to move further and further away from what they 
think the actual rule says, because they just don't know how 
they are going to be interpreted, and there is so much gray 
around that. So we get further and further back, thus hampering 
their ability to make markets or, in other businesses' case, 
produce the goods that they once thought that they could. And 
so I appreciate that.
    Mr. Snook. Thank you.
    Mr. Hollingsworth. With that, I yield back, Mr. Chairman.
    Chairman Huizenga. We have been on a roll. And I appreciate 
the gentleman yielding back.
    I recognize Mr. Messer for up to 5 minutes.
    I will make a quick note. They are debating the final 
amendment. And at this point, we have three Members in the 
queue. Hopefully, we will be able to get through that before we 
need to break for our vote.
    So with that, Mr. Messer.
    Mr. Messer. Mr. Chairman, I will work to not use my entire 
5 minutes. I heard your message and I will work to do that.
    Chairman Huizenga. Ten points to Gryffindor.
    Mr. Messer. It's great to follow my colleague from Indiana.
    Mr. Snook, I would like to ask you what I think is a fairly 
narrow, but at least to me important, question.
    As you know, current regulations do not permit banks to 
hold investment-grade municipal bonds, American investment-
grade municipal bonds, as high quality liquid assets for the 
purposes of their liquidity coverage ratio (LCR). It creates 
this sort of odd circumstance under Basel where certain German 
municipal bonds can be counted as highly qualified liquid 
assets where American municipal bonds, some of the best 
investments in the world, safest places to put dollars, are 
not.
    In a final rule released by the Fed in April of 2016, I was 
encouraged to see that the Fed conceded that investment-grade 
municipal bonds are appropriate for banks to hold under the 
LCR. And the Treasury Department issued a report last month 
that recommended these bonds be reclassified as 2B HQLAs. 
However, until the FDIC and the OCC act, banks will not be able 
to count these bonds as part of the LCR.
    So what impact do you think reclassifying investment-grade 
municipal bonds would have for cities and towns that issue 
bonds across the country?
    Mr. Snook. First, thank you for that question. I think, 
obviously, the municipal bond market is an incredibly important 
part of our fixed income markets. $400 billion in each year, 
year in and out, plus or minus, is issued in that marketplace, 
and it is obviously a critical part of financing our 
infrastructure.
    We talked earlier about the municipal market being less 
liquid and anything that further constrains or curtails the 
buyer base is potentially harmful. And so it is important that 
munis are traded as high quality liquid assets for purposes of 
the liquidity coverage ratio, because depository institutions, 
banks, hold over $500 billion in municipal securities.
    So for that to be constrained or curtailed, I think would 
be a negative. We want to encourage the use of munis. And if 
they are investment grade, high quality, readily marketable, 
that makes sense to us.
    Thank you.
    Mr. Messer. So on the margins, them not being counted 
drives up the cost on the margins?
    Mr. Snook. On the margin, it will drive up the cost and put 
an additional burden on municipalities and taxpayers there.
    Mr. Messer. And so the reverse, if they are counted, right? 
Lowers the cost, less burden.
    So do you think this type of action would ultimately save 
taxpayer money while ensuring the integrity? You just said 
that, of course you do believe that. So I guess my next 
question would be, do you think legislation is necessary to 
ensure that investment grade munis are reclassified as HQLA?
    Mr. Snook. It may be the case. We are hopeful that the 
banking regulators collectively work together to get there, but 
it may be the case that we, in fact, need legislation.
    Mr. Messer. Yes. In respect to the chairman's time, I guess 
I will yield back my time. We are working on legislation in a 
bipartisan way to do that, trying to create a floor at that 2B 
level that would then allow them to be, maybe, lifted even 
beyond that.
    These are safe assets. They are rarely traded because, 
frankly, people take their money and keep it there. But in 
times of financial crisis, they are a place where dollars with 
flock. And so in that way I think I think they are very liquid.
    Mr. Snook. And we are very much appreciative of the 
leadership and the work you are doing there.
    Thank you.
    Mr. Messer. Thanks.
    Chairman Huizenga. I appreciate the gentleman taking a hint 
from the jumbotron behind there.
    And we have two. Hopefully, if we can get through that, 
that would be a great cap to this.
    I now recognize Mr. Emmer from Minnesota.
    Mr. Emmer. Thank you, Mr. Chairman.
    And thanks to the panel.
    I don't have the background of some of these people, like 
my colleague from Arkansas, the 40 years that he has. I just 
watch what happens and look at this market.
    And whether it is the equity markets or the fixed income 
market, available and accessible capital is what drives our 
economy. In many ways, in my opinion, these markets are the 
true definition of American freedom, the ability of people from 
all walks of life to access capital to start a new business, to 
make an important purchase, to pursue their American dream. 
That is what these markets are all about. And it is 
interesting, because we are talking about transparency and 
liquidity, the evolution of the fixed income market, the 
marketplace itself.
    And one of my colleagues was talking earlier to you about 
his concern with small-cap companies, and I would add mid-size 
or mid-cap companies. Because it seems what I have watched in 
the last 8, 10 years, maybe longer, but certainly as I have 
seen it, more focused in the recent past, we have built 
policies or we have instituted policies in this country that 
have allowed the larger to get even larger. They have been one-
sided. I heard Mr. Shay talk about the large banks and we 
should take the chains off and return them to their risk-
transfer function.
    And it seems to me, and my colleague from Indiana, Mr. 
Hollingsworth, actually cited the July 7, 2017, Monetary Policy 
Report from the Fed, and he read you a quote, I hope you 
remember it, but I would like to know if you agree with that, 
and specifically the Fed's assessment of the state of the 
liquidity in the corporate bond market.
    And then I would like you to talk, and it can be anybody on 
the panel, I want to know what regulations have contributed to 
the decline in liquidity and what are the potential solutions? 
And, again, with a focus towards how do we get the lower end, 
the small-cap companies, the mid-size companies, so everybody 
has access to capital.
    Why don't you go ahead, Mr. Andresen, and start?
    Mr. Andresen. Thank you.
    So I serve on the Equity Market Structure Advisory 
Committee, and this was a focus from the beginning of that 
committee's work, was we all agree that the structure did a 
fantastic job for helping transactions be effectuated in SPDRs, 
in Google and Apple and these huge companies.
    But clearly, in the smaller cap names, that is a dealer-
driven market. We are a dealer. Our purpose in the muni markets 
is to transfer that risk. We hold each position, on average, 
about a month.
    And that is the same type of structure you see in small cap 
companies. You need some intermediary to step up and warehouse 
that risk between the investor that wants to buy and an 
investor that wants to sell, because they are unlikely to have 
those desires contemporaneously.
    So there are a bunch of pilot programs that are being 
enacted now on the equity side to try to help with that. I 
think on the fixed income side you see an enormous profusion of 
new networks, new market platforms attempting to facilitate 
trading between buyers and sellers to try to fill this gap. But 
without a very diverse set of dealers to be able to do that, 
you are not going to be successful.
    Mr. Emmer. And I guess I will go to Mr. Shay, with whatever 
time you want to use. Go to your example, we should take the 
chains off. I am interested to know what regulation, what 
policy has been instituted on the government side that we could 
perhaps roll back or modify that has encouraged this getting 
bigger and bigger and squeezing out.
    I appreciate your trying to find a way under the current 
environment to restimulate the smaller companies and access to 
capital. But what have we done that has caused this problem in 
the first place, and can we reverse it?
    Mr. Shay. Just from the sheer size of the major players, 
and I am talking about in the highly liquid, highly transparent 
visible markets that we were all impacted by during the 
financial crisis, you had mergers of these large institutions. 
You had emergency weddings. You had banks then being sued for 
everything from foreign exchange issues, ISDA fixing issues, 
LIBOR. There was one, it was one compliance issue after 
another.
    So the banks--if you are sitting on a trading desk--and to 
my point about banks have traditionally acted as these risk-
transfer agents with large pools of clients, which as a 
regulator looking at these institutions you want, because you 
are going to have clients that are naturally offsetting risk 
within the bank's portfolio.
    What caused the market to go the wrong way was a result of 
risk and leveraged risk--
    Mr. Emmer. I think you and I are going to have to continue, 
and the whole panel. I will be in touch to continue this 
discussion in light of our time.
    Chairman Huizenga. The gentleman's time has expired.
    With that, last but not least, the gentleman from Maine, 
Mr. Poliquin.
    Mr. Poliquin. Mr. Chairman, you always save Maine for last. 
But that is okay. We don't take it the wrong way. It is still 
the greatest State in America.
    I appreciate everyone being here. I really do. Government 
should be in the business of helping our families. So if you 
are poor or disadvantaged or you are disabled or you are a 
veteran or you are a senior who is trying to save for your 
retirement years or you are a taxpayer, government should help 
you. And the decisions that we make here today set policies 
that make it easier for people like you to help our families in 
the private sector or not.
    Now, I was a State treasurer up in Maine for a period of 
time, and part of the fixed income market I dealt with was the 
municipal bond market. And I will tell you, yes, our companies, 
as Mr. Emmer said and Mr. French said, it's very important they 
can access capital to expand their businesses and grow, pay 
their workers more, and hire more workers, because a good job 
solves a lot of problems.
    Also, in the municipal bond market we need to make sure we 
continue to give our States and cities and towns across America 
a very low-cost way to borrow money. So it is critically 
important that you folks continue to make sure we have 
liquidity in that market so we can drive down the price if you 
are a buyer or increase it if you are a seller and make sure 
interest rates are as low as humanly possible, because of the 
taxpayers who are paying the interest every 6 months and 
repayment of principal at the end of the period.
    Now, there are some folks in this town, not me, who are 
floating an idea of taxing municipal bonds. So all of a sudden 
we have this additional burden, additional cost on the taxpayer 
to build a new sewage treatment plant in Ellsworth, Maine, or 
to build a new water treatment facility in Lewiston, Maine.
    And I would like to ask you, Mr. Sedgwick, you work for one 
of the biggest mutual fund houses in the country and you have, 
I am sure, a significant municipal bond portfolio, tell me what 
taxation of municipal bonds would do to the infrastructure 
needs of this country and what it would do to the folks who are 
saving for their retirement that you service?
    Mr. Sedgwick. I think it is actually a very complex issue. 
As we look at the tax treatment, for example, with munis, but 
also with corporate credit, it is actually a very difficult 
sort of--
    Mr. Poliquin. I have 2 minutes, and 4 minutes and 13 
seconds, before I have to vote. So you have to make your very 
complex--make it very simple quickly.
    Mr. Sedgwick. I'm sorry. I am not a muni trader, but I can 
certainly circle back with you and get you a written response.
    Mr. Poliquin. Great.
    Mr. Snook, do you have a comment on this?
    Mr. Snook. Yes. I think we have tremendous infrastructure 
needs in this country. The municipal tax-exempt market is an 
extremely well-functioning market. We talked about the fact 
that there are almost a million separate securities 
outstanding. That reflects our ability and the market's ability 
to serve all those issuers well, those small towns, those 
municipalities, all those different local entities.
    And if we take that tax exemption away, we will undermine 
that market greatly, because when we talk about liquidity and 
the ability to sell small size, it will be devastating. Right 
now we have a very strong amount of demand from the individual 
investor directly through mutual funds. If we were to take that 
away, we would throw a tremendous cost burden back on those 
local cities, States, and municipalities.
    Mr. Poliquin. Thank you.
    Mr. Shay, you have last say. I have 1 minute.
    Mr. Shay. Again, I am not a municipal bond trader either, 
but I think adding friction to any market is not going to be 
good for the individuals or the municipalities trying to 
raise--
    Mr. Poliquin. Thank you all very much for being here. I 
really appreciate it.
    Mr. Chairman, I yield back my time.
    Chairman Huizenga. The gentleman yields back.
    And with that, I want to say thank you to our panel. 
Already, we have gotten comments from Members that this was 
extremely illuminating, very helpful. And as I was starting to 
say in my questioning, we are really looking for some industry 
consensus. I don't know what exactly that means and what we are 
going to be able to get to. But I deeply appreciate this input 
and your time and effort being here.
    I look forward to working with Chairman Clayton as well at 
the SEC to see where we can go and work hand-in-hand with them 
where we are able to.
    The Chair notes that some Members may have additional 
questions for this panel, which they may wish to submit in 
writing. Without objection, the hearing record will remain open 
for 5 legislative days for Members to submit written questions 
to these witnesses and to place their responses in the record. 
Also, without objection, Members will have 5 legislative days 
to submit extraneous materials to the Chair for inclusion in 
the record.
    And again, thank you for your time. And this hearing is 
adjourned.
    [Whereupon, at 10:47 a.m., the hearing was adjourned.]

                            A P P E N D I X



                             July 14, 2017
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