Gary Gensler sets his sights on fixed income reform

Gensler spoke on the importance of reforming fixed income markets, while providing recommendations to increase transparency, modernise platforms and enhance financial resilience.

After shaking up the swaps and private funds markets, Gary Gensler, chair of the US Securities and Exchange Commission (SEC) is setting his sights on fixed income.

Speaking at the City and Financial Global’s City Week 2022 conference, Gensler said greater attention needs to be paid on reforming the fixed income markets by the US regulator, particularly as they become more electronic and potentially cause implications for financial stability.

Gensler noted that the $50 trillion-plus US bond market is far from the “dullest” market in the world – highlighting that the fixed income markets represent approximately half of the capital markets that the SEC oversees, making them just as big as the equity markets.

He also added that altogether, the non-treasury fixed income markets are more than 250% larger than the commercial bank lending market.

“America turns more to bonds than to banks to fund their projects,” said Gensler. “Given the size and importance of these markets, it’s worth asking how we can modernise our rules for today’s economy and technologies, so these markets can be as fair as possible for investors and as efficient as possible for issuers of all types.”

Gensler highlighted a trend which has seen the fixed income markets increasingly move to electronic trading – attributing the acceleration of this trend to the Covid-19 pandemic. In addition, he noted that bond ownership has seen a greater share increasingly shift to registered investment companies such as mutual funds, money market funds, exchange-traded funds, and closed-end funds.

“This shift raises challenges for financial resiliency,” Gensler added. “Given these trends, and the sheer size and importance of the fixed income markets, I think we should focus on how we can make improvements to them.”

The SEC wants to improve post-trade transparency by reducing the length of time by which market participants must report transactions, with Gensler suggesting that trades should be reported in real-time or near real-time.

Another suggestion was adding foreign sovereign bonds into Trade Reporting and Compliance Engine (TRACE).

“The European Union’s debt crisis, and more recently Russia’s invasion of Ukraine, have shown the value that regulatory reporting and public dissemination of foreign sovereign bonds would offer. FINRA has already consulted its members on this possibility, so I hope to see a filing soon,” said Gensler.

He also recommended FINRA to consider allowing the investing public to see TRACE data on individual treasury transactions – noting that this could help enhance counterparty risk management and the evaluation of trade execution quality.

Elsewhere, Gensler provided recommendations on improving platforms to enhance market integrity, access and pre-trade transparency, as well as methods to help improve the resiliency of fixed income markets.

“Together, through driving greater transparency, modernising rule sets for electronified platforms, and enhancing financial resiliency, we can help investors and issuers in the bond markets get the same benefits as many other parts of our capital markets,” Gensler concluded.