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September 1, 2017

SEC Report Proves Industry Claims About Access to Capital & Market Liquidity Baseless

A new report by the Securities and Exchange Commission’s professional staff demolishes industry claims that Dodd-Frank and the Volcker Rule have harmed capital formation and liquidity. The exhaustive report[1]covers over 300 pages and “includes a comprehensive assessment of a large body of recent research in addition to original analysis performed by [SEC] staff.”

The combination of novel data collection and analysis provides an inclusive view of the current marketplace and makes it clear that industry claims about the negative impacts of financial reform are baseless and not supported by evidence.

Access to Capital

On Primary Security Issuance:

  • “We do not find that total primary security issuance is lower after the enactment of the Dodd-Frank Act (including during the implementation of the Volcker Rule) and during the implementation of Basel III, and it may have increased around the implementation of the JOBS Act.”

On Private Issuance:

  • “Private market issuance of debt and equity (unregistered offering activity) has increased substantially from $1.16 trillion in 2009 to $1.87 trillion in 2015, amounting to $1.68 trillion in 2016.”

On IPOs:

  • “Recent years have seen an increase in the number of small company IPOs.”

On Regulation A Offering:

  • “Amendments… were followed by a large increase in Regulation A offering activity over the initial 18 months post effectiveness, with 97 qualified offerings seeking to raise $1.8 billion (compared with about 14 qualified offerings seeking to raise approximately $163.3 million in a typical year during 2005-2016).”

Market Liquidity

On U.S. Treasury Markets:

  • “In U.S. Treasury markets, we find no empirical evidence consistent with the hypothesis that liquidity has deteriorated after the regulatory reforms.”
  • “Changes in Treasury market liquidity are unlikely to be directly attributable to the Volcker Rule because U.S. cash Treasuries are exempt from the Volcker Rule’s prohibitions on proprietary trading.”

On Corporate Bond Markets:

  • More corporate bond issues traded after regulatory changes than in any prior sample period”
  • “In the post-regulatory period, we estimate that transaction costs have decreased… for smaller trade sizes ($20,000) and remain low for larger trade sizes relative to the pre-crisis period”
  • Corporate bond trading activity in recent years has also become somewhat more concentrated in less complex bonds and bonds with larger issues sizes.”

On Dealers in Corporate Bond Markets:

  • “We observe no notable changes in the number of dealers providing liquidity per corporate bond issue over time, and we do not detect notable changes in trade sizes around regulatory reforms.”

On Credit Default Swap Markets:

  • “Some measures of CDS market liquidity… have remained stable or point to improvements”
  • “Interdealer trade activity has declined after 2010, but dealer-customer activity has remained stable.”

[1] Report to Congress: Access to Capital and Market Liquidity. Securities and Exchange Commission, Staff of the Division of Economic and Risk Analysis, August 2017. https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-d…

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