[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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U.S. GOVERNMENT PUBLISHING OFFICE
28-749 PDF WASHINGTON : 2018
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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
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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
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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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