A Financial System 

That Creates Economic Opportunities

Capital Markets

U.S. DEPARTMENT OF THE TREASURY

OCTOBER 2017

A Financial System 

That Creates Economic Opportunities

Capital Markets

U.S. DEPARTMENT OF THE TREASURY

Report to President Donald J. Trump

Executive Order 13772 on Core Principles

for Regulating the United States Financial System

Steven T. Mnuchin

Secretary

Craig S. Phillips

Counselor to the Secretary
iii A Financial System That Creates Economic Opportunities • Capital Markets

Staff Acknowledgments

Secretary Mnuchin and Counselor Phillips would like to thank Treasury staff 

members for their contributions to this report. The staff’s work on the report was 

led by Brian Smith and Amyn Moolji, and included contributions from Chloe Cabot, 

John Dolan, Rebekah Goshorn, Alexander Jackson, W. Moses Kim, John McGrail, 

Mark Nelson, Peter Nickoloff, Bill Pelton, Fred Pietrangeli, Frank Ragusa, Jessica Renier, 

Lori Santamorena, Christopher Siderys, James Sonne, Nicholas Steele, Mark Uyeda, 

and Darren Vieira.
Table of Contents

Executive Summary 1

Introduction 3

Scope of This Report 3

Review of the Process for This Report 4

The U.S. Capital Markets 4

Summary of Issues and Recommendations 6

Capital Markets Overview 11

Introduction 13

Key Asset Classes 13

Key Regulators 18

Access to Capital 19

Overview and Regulatory Landscape 21

Issues and Recommendations 25

Equity Market Structure 47

Overview and Regulatory Landscape 49

Issues and Recommendations 59

The Treasury Market 69

Overview and Regulatory Landscape 71

Issues and Recommendations 79

Corporate Bond Liquidity 83

Overview and Regulatory Landscape 85

Issues and Recommendations 87

Securitization 89

Overview 91

Regulatory Landscape 96

Issues and Recommendations 97

A Financial System That Creates Economic Opportunities • Capital Markets iv
v A Financial System That Creates Economic Opportunities • Capital Markets

Derivatives 107

Overview 109

Regulatory Landscape 116

Issues and Recommendations 126

Financial Market Utilities 149

Overview and Regulatory Landscape 151

Issues and Recommendations 164

Regulatory Structure and Process 169

Overview 171

Issues and Recommendations 179

International Aspects of Capital Markets Regulation 187

Overview 189

Issues and Recommendations 190

Appendices 193

Appendix A: Participants in the Executive Order Engagement Process 193

Appendix B: Table of Recommendations 203
Acronyms and Abbreviations

Acronym/Abbreviation Term

ABS Asset-Backed Securities

Agency MBS Agency Mortgage-Backed Securities

ANE Arrange, Negotiate, or Execute

ARRC Alternative Reference Rates Committee

ATR Ability to Repay

ATS Alternative Trading System

BCBS Basel Committee on Banking Supervision

BDC Business Development Company

BNY Mellon Bank of New York Mellon

CCAR Comprehensive Capital Analysis and Review

CCP Central Counterparty

CDO Collateralized Debt Obligation

CDS Credit Default Swap

CEA Commodity Exchange Act

CEM Current Exposure Method

CFTC U.S. Commodity Futures Trading Commission

CFMA Commodity Futures Modernization Act

CHIPS Clearing House Interbank Payments System

CLO Collateralized Loan Obligation

CLOB Central Limit Order Book

CMBS Commercial Mortgage-Backed Securities

CME, Inc. Chicago Mercantile Exchange, Inc.

CMG Crisis Management Groups

CPO Commodity Pool Operator

CPMI-IOSCO Committee on Payments and Market Infrastructures and the Board of 

the International Organization of Securities Commissions

CTU Central Treasury Unit

DCM Designated Contract Market

DCO Derivatives Clearing Organization

A Financial System That Creates Economic Opportunities • Capital Markets vi
vii A Financial System That Creates Economic Opportunities • Capital Markets

DERA SEC Division of Economic and Risk Analysis

DFAST Dodd-Frank Act Stress Test

Dodd-Frank Dodd-Frank Wall Street Reform and Consumer Protection Act

DtC Dealer-to-Client

DTC Depository Trust Company

DTCC Depository Trust and Clearing Corporation

EC European Commission

EGC Emerging Growth Company

eSLR Enhanced Supplementary Leverage Ratio

ETFs Exchange-Traded Funds

EU European Union

Exchange Act Securities Exchange Act of 1934

FCM Futures Commission Merchant

FDIC Federal Deposit Insurance Corporation

FHFA Federal Housing Finance Agency

FIA Futures Industry Association

FICC Fixed Income Clearing Corporation

FINRA Financial Industry Regulatory Authority

FMU Financial Market Utility

FRB Federal Reserve Board of Governors

FRBNY Federal Reserve Bank of New York

FRTB Fundamental Review of the Trading Book

FSB Financial Stability Board

FSOC Financial Stability Oversight Council

FTE Full-Time Equivalent (Personnel)

FX Foreign Exchange

FY Fiscal Year

GAO U.S. Government Accountability Office

GSA Government Securities Act of 1986

GSD Government Securities Division (of FICC)

GSE Government Sponsored Enterprise
HFT High Frequency Trading

HQLA High-Quality Liquid Assets

HUD U.S. Department of Housing and Urban Development

IDB Interdealer Broker

IOSCO International Organization of Securities Commissions

IPO Initial Public Offering

IRS Interest Rate Swap

ISDA International Swaps and Derivatives Association

IT Information Technology

JOBS Act Jumpstart Our Business Startups Act

JP Morgan JPMorgan Chase & Co.

JSR Joint Staff Report

LCR Liquidity Coverage Ratio

LIBOR London Interbank Offered Rate

LPR Large Position Reporting

LSEG London Stock Exchange Group

MAT Made Available to Trade

MBS Mortgage-Backed Securities

MBSD Mortgage Backed Securities Division (of FICC)

MiFID Markets in Financial Instruments Directive

MSRB Municipal Securities Rulemaking Board

NBBO National Best Bid or Offer

NFA National Futures Association

NMS National Market System

NMS Stock ATSs Alternative Trading Systems that trade NMS stocks

NRSRO Nationally Recognized Statistical Rating Organization

NSCC National Securities Clearing Corporation

NSFR Net Stable Funding Ratio

NYSE New York Stock Exchange

OCC Options Clearing Corporation (FMU)

OCC Office of the Comptroller of the Currency (Regulator)

OLA Orderly Liquidation Authority

A Financial System That Creates Economic Opportunities • Capital Markets viii
OTC Over-the-Counter

PLS Private-Label Securities

PTF Principal Trading Firm

QIBs Qualified Institutional Buyers

QM Qualified Mortgage

QRM Qualified Residential Mortgage

RFA Regulatory Flexibility Act

RFQ Request for Quote

SA-CCR Standardized Approach for Counterparty Credit Risk

SDR Swap Data Repository

SEC U.S. Securities and Exchange Commission

SEF Swap Execution Facility

SFA Supervisory Formula Approach

SIP Securities Information Processor

SIFMA Securities Industry and Financial Markets Association

SIFMUs Systemically Important Financial Market Utilities

SLR Supplementary Leverage Ratio

SPV Special Purpose Vehicle

SRC Smaller Reporting Company

SRO Self-Regulatory Organization

SSB Standard Setting Body

SSFA Simplified Supervisory Formula Approach

TBA To-Be-Announced Market

TCH The Clearing House Payments Company, L.L.C.

Title VII Title VII of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act

Title VIII Title VIII of the Dodd-Frank Wall Street Reform and Consumer 

Protection Act

TRACE Trade Reporting and Compliance Engine

Treasury U.S. Department of the Treasury

USD U.S. Dollar

UTP Unlisted Trading Privileges 

ix A Financial System That Creates Economic Opportunities • Capital Markets
Executive Summary

A Financial System That Creates Economic Opportunities • Capital Markets

Executive Summary • Introduction

3

Introduction

President Donald J. Trump established the policy of his Administration to regulate the U.S. financial system in a manner consistent with a set of Core Principles. These principles were set forth in 

Executive Order 13772 on February 3, 2017. The U.S. Department of the Treasury (Treasury), 

under the direction of Secretary Steven T. Mnuchin, prepared this report in response to that 

Executive Order. The reports issued pursuant to the Executive Order identify laws, treaties, regulations, guidance, reporting and record keeping requirements, and other Government policies that 

promote or inhibit Federal regulation of the U.S. financial system in a manner consistent with the 

Core Principles. 

The Core Principles are:

A. Empower Americans to make independent financial decisions and informed choices in 

the marketplace, save for retirement, and build individual wealth;

B. Prevent taxpayer-funded bailouts;

C. Foster economic growth and vibrant financial markets through more rigorous regulatory 

impact analysis that addresses systemic risk and market failures, such as moral hazard and 

information asymmetry;

D. Enable American companies to be competitive with foreign firms in domestic and foreign 

markets;

E. Advance American interests in international financial regulatory negotiations and 

meetings;

F. Make regulation efficient, effective, and appropriately tailored; and

G. Restore public accountability within Federal financial regulatory agencies and rationalize 

the Federal financial regulatory framework.

Scope of This Report

The financial system encompasses a wide variety of institutions and services, and accordingly, 

Treasury is delivering a series of four reports related to the Executive Order covering: 

• The depository system, covering banks, savings associations, and credit unions of all sizes, 

types and regulatory charters (the Banking Report,1

 which was publicly released on June 

12, 2017);

• Capital markets: debt, equity, commodities and derivatives markets, central clearing and 

other operational functions (this report);

1. U.S. Department of the Treasury, A Financial System That Creates Economic Opportunities: Banks and 

Credit Unions (June 2017).
A Financial System That Creates Economic Opportunities • Capital Markets

Executive Summary • Review of the Process for This Report

4

• The asset management and insurance industries, and retail and institutional investment 

products and vehicles; and

• Nonbank financial institutions, financial technology, and financial innovation.

On April 21, 2017, President Trump issued two Presidential Memoranda to the Secretary of the 

Treasury. One calls for Treasury to review the Orderly Liquidation Authority (OLA) established in 

Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank). The 

other calls for Treasury to review the process by which the Financial Stability Oversight Council 

(FSOC) determines that a nonbank financial company could pose a threat to the financial stability of the United States and will be subject to supervision by the Federal Reserve and enhanced 

prudential standards, as well as the process by which the FSOC designates financial market utilities 

as systemically important. While some of the issues described in this report are relevant to OLA 

and FSOC designations, Treasury will submit separate reports on those topics to the President.

Review of the Process for This Report

For this report on capital markets, Treasury incorporated insights from the engagement process 

for the Banking Report and also engaged with additional stakeholders focused on capital markets 

issues. Over the course of this outreach, Treasury consulted extensively with a wide range of stakeholders, including trade groups, financial services firms, consumer and other advocacy groups, 

academics, experts, financial market utilities, investors, investment strategists, and others with 

relevant knowledge. As directed by the Executive Order, Treasury consulted with FSOC member 

agencies. Treasury also reviewed a wide range of data, research, and published material from both 

public and private sector sources.

Treasury incorporated the widest possible range of perspectives in evaluating approaches to regulation of the U.S. financial system according to the Core Principles. A list of organizations and 

individuals who provided input to Treasury in connection with the preparation of this report is set 

forth as Appendix A.

The U.S. Capital Markets 

The U.S. capital markets are the largest, deepest, and most vibrant in the world and of critical 

importance in supporting the U.S. economy. The United States successfully derives a larger portion of business financing from its capital markets, rather than the banking system, than most 

other advanced economies. U.S. capital markets provide invaluable capital resources to our entrepreneurs and owners of businesses, whether they are large or small, public or private. Both our 

equity and debt markets provide investment opportunities to a broad range of investors, from large 

institutions to individuals saving for retirement. Derivatives markets facilitate risk management 

strategies for many financial and nonfinancial businesses. Vibrant securitization markets support 

various lending channels, improving consumer access to credit cards, automobile loans, and a 
A Financial System That Creates Economic Opportunities • Capital Markets

Executive Summary • The U.S. Capital Markets 

5

range of other credit products. Robust financial market infrastructure, including clearing and 

settlement operations, underpins each of these markets and is critical for delivering the benefits of 

our financial system to the broader economy. 

While the United States has some of the largest capital markets, capital markets are global and 

operate around the clock in financial centers around the world. The largest U.S. financial services 

firms are global in nature and benefit from a level playing field to compete in global markets.

Major public capital markets in the United States include the $29 trillion equity market, the 

$14 trillion market for U.S. Treasury securities, the $8.5 trillion corporate bond market, and 

the $200 trillion (notional amount) derivatives markets. Participants in these markets include 

approximately 3,500 domestic public companies, nearly 4,000 broker-dealers, and millions of 

investors domestically and abroad. 

The current statutory and regulatory framework for U.S. capital markets dates back to the Great 

Depression, and has been evolving ever since. Changes have been driven by launches of new capital 

markets products, the increasing complexity of financial products and markets, the implications of 

evolving data and technology capabilities, and the globalization of markets. The primary regulators 

of U.S. capital markets are the Securities and Exchange Commission (SEC) and the Commodity 

Futures Trading Commission (CFTC), along with state securities regulators. Additionally, selfregulatory organizations, including the Financial Industry Regulatory Authority (FINRA), the 

Municipal Securities Rulemaking Board (MSRB), and the National Futures Association (NFA), 

help regulate and oversee certain parts of the financial sector. Following its enactment in 2010, 

Dodd-Frank resulted in several significant changes to capital markets regulation, such as mandating 

risk retention for securitized products, mandating clearing of certain derivatives through central 

counterparties (CCPs), and authorizing the FSOC to designate systemically important financial 

market utilities (SIFMUs). More than seven years after Dodd-Frank’s enactment, it is important to 

reexamine these rules, both individually and in concert, guided by free-market principles and with 

an eye toward maximizing economic growth consistent with taxpayer protection.

Certain elements of the capital markets regulatory framework are functioning well and support 

healthy capital markets. For some elements, more action is needed to guard against the risks of 

a future financial crisis. Other elements need better calibration and tailoring to help markets 

function more effectively for market participants. There are significant challenges with regulatory 

harmonization and efficiency, driven by a variety of factors including joint rulemaking responsibilities, overlapping mandates, and jurisdictional friction.

In order to help maintain the strength of our capital markets, we need to constantly evaluate the 

financial regulatory system to consider how it should evolve to continue to support our markets and facilitate investment and growth opportunities, while promoting a level playing field 

for U.S. and global firms and protecting investors. Treasury has identified recommendations that 

can better align the financial system to serve issuers, investors, and intermediaries to support the 

Administration’s economic objectives and drive economic growth. 
A Financial System That Creates Economic Opportunities • Capital Markets

Executive Summary • Summary of Issues and Recommendations

6

Summary of Issues and Recommendations

Treasury’s review of the regulatory framework for capital markets has identified significant opportunities for reform to advance the Core Principles. The review has identified a wide range of 

measures that could promote economic growth and vibrant financial markets, providing opportunities for investors and issuers alike, while maintaining strong investor protection, preventing 

taxpayer-funded bailouts, and safeguarding the financial system.

Treasury’s recommendations in this report are organized in the following categories:

• Promoting access to capital for all types of companies, including small and growing 

businesses, through reduction of regulatory burden and improved market access to 

investment opportunities;

• Fostering robust secondary markets in equity and debt;

• Appropriately tailoring regulations on securitized products to encourage lending and risk 

transfer;

• Recalibrating derivatives regulation to promote market efficiency and effective risk 

mitigation;

• Ensuring proper risk management for CCPs and other financial market utilities (FMUs) 

because of the critical role they play in the financial system;

• Rationalizing and modernizing the U.S. capital markets regulatory structure and processes; and

• Advancing U.S. interests by promoting a level playing field internationally. 

Treasury’s recommendations to the President are focused on identifying laws, regulations, and 

other government policies that inhibit regulation of the financial system according to the Core 

Principles. Because depository institutions are significant service providers and market makers in 

capital markets, this report builds on several themes identified in the Banking Report. 

A list of all of Treasury’s recommendations within this report is set forth as Appendix B, including the recommended action, the method of implementation (Congressional and/or regulatory 

action), and which Core Principles are addressed.

Following is a summary of the recommendations set forth in the report.

Promoting Access to Capital and Investment Opportunities 

In the wake of the financial crisis, the U.S. economy has experienced the slowest economic recovery of the post-war period. While the Administration is pursuing a range of policies to stimulate 

economic growth, one key area will be promoting capital formation for entrepreneurs and growing businesses. The regulatory burden for public companies has grown, and many companies are 

choosing to retain or return to private ownership. Over the last 20 years, the number of public 

companies in the United States has dropped by nearly 50%.
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Executive Summary • Summary of Issues and Recommendations

7

Treasury’s recommendations include numerous measures to encourage companies toward public 

ownership, including eliminating duplicative requirements, liberalizing pre-initial public offering 

communications, and removing non-material disclosure requirements, among other recommendations. Improperly tailored regulatory burden can benefit the largest companies, which are better 

positioned to absorb the costs, and discourage competition from new entrants. Treasury has also 

identified opportunities to ease challenges for smaller public companies, including scaled disclosure requirements. 

Public companies provide a useful investment vehicle for millions of retail investors who need 

investment opportunities to help save for retirement. If many successful new companies stay private, middle-class Americans may miss out on the significant returns they generate for investors. 

Treasury recommends a series of changes to open private markets for more investors, including 

revisiting the “accredited investor” definition and considering ways to facilitate pooled investments 

in private or less-liquid offerings. 

Our capital markets can also be better harnessed to help America’s entrepreneurs. Through creative 

funding tools such as crowdfunding, markets can help provide capital for these innovators to grow 

their businesses and create jobs. After a few years of experience following the 2012 Jump-start 

Our Business Startups Act (JOBS Act), it is time to take another look at how these tools can be 

improved. Treasury’s recommendations also seek to maintain the efficacy of the private equity 

markets, which will continue to be important for some companies and entrepreneurs. These recommendations include maintaining an appropriate regulatory structure for finders, expanding the 

range of eligible investors, empowering investor due diligence efforts, and modifying the rules for 

private funds investing in private offerings.

While the burden on both public and private companies needs to be reduced, maintaining appropriate investor protection is an important priority. Investor confidence in the integrity of markets, 

supported by robust disclosure and regulatory protections, is a critical element of capital formation. 

Fostering Robust Markets for Businesses and Investors

Robust secondary markets are critical to supporting capital formation, and in turn, economic 

growth. Aligning regulation to promote liquid and vibrant markets is an important element of 

the Core Principles. While the U.S. equity and debt markets are the best in the world, regulators 

need to keep pace with market developments so that markets continue to function optimally for 

issuers and investors of all sizes to best support economic growth and the needs of consumers and 

businesses.

In the equity markets, the current “one-size-fits-all” market structure is not working well for smaller 

companies that are currently experiencing limited liquidity for their shares. While the largest and 

most actively traded companies benefit from a diversity of trading venues, for the least liquid (and 

often smallest) companies, fragmentation of liquidity across 12 equity exchanges and 40 alternative 

trading systems (ATSs) may inhibit effective liquidity provision. Treasury recommends that the 

SEC consider regulatory changes to promote improved liquidity for these companies. Changes to 
A Financial System That Creates Economic Opportunities • Capital Markets

Executive Summary • Summary of Issues and Recommendations

8

the price increment, or “tick size,” at which companies trade could play a role in promoting liquidity provision for less-liquid companies. The SEC should also consider how to reduce complexity, 

increase transparency, and harness competition in other aspects of the equity market, including 

market data, order types and routing decisions, and practices of ATSs.

In the bond market, market liquidity has been challenging, especially for the least liquid securities. 

As discussed in the Banking Report, a combination of the Volcker rule, bank capital rules, and 

bank liquidity rules may be limiting market liquidity. This report explores the effects of these rules 

on the corporate bond and repo markets in particular, reiterating many recommendations from 

the Banking Report. 

Safeguarding the Treasury Market 

The Treasury market has seen substantial changes over recent decades, including the growth of 

electronic trading and principal trading firms (PTFs), which have reshaped the market in numerous ways. Despite recent modernization efforts to improve the visibility of regulators into the 

Treasury market, data gaps remain, particularly regarding PTFs, which are now some of the largest 

participants in the Treasury market. Treasury recommends steps to close these gaps in official sector 

data without imposing significant costs on market participants.

In addition to data gaps, Treasury market clearing has become bifurcated, reducing efficiency and 

presenting potential risks. Our regulatory regime needs to keep pace with these market developments, and Treasury recommends further study of potential solutions by regulators, market 

participants, and other stakeholders.

Safeguarding the Treasury market is crucial because of the central role of the Treasury market in 

the financial system as well as the importance of financing the U.S. government at the lowest cost 

to taxpayers over time. 

Encouraging Lending Through Promotion of Quality Securitization

Securitization, or the process of packaging loans and receivables into more tradable securities, 

is a liquidity transformation and risk-transfer mechanism. When used responsibly, this process 

can have significant benefits for borrowers, lenders, and the economy. The securitization market 

provides a valuable outlet for the banking sector, as well as for other nonbank originators, through 

the placement of securities backed by loans and other asset pools with a wide range of investors, 

including pension funds, insurance companies, asset managers, sovereign wealth funds, and central 

banks.

Dodd-Frank and various rulemakings implemented to address pre-crisis structural weaknesses in 

the securitization market may have gone too far toward discouraging securitization. By imposing excessive capital, liquidity, disclosure, and risk retention requirements on securitizers, recent 

financial regulation has created significant disincentives to securitization. While some changes 

are helpful in promoting market discipline, others unduly constrain market activity and limit 

securitization’s useful role as a funding and risk transfer mechanism for lending. The Banking 

Report explored private sector secondary market activity for residential mortgage lending. This 

report will focus on regulatory recommendations pertaining to securitized products collateralized 
A Financial System That Creates Economic Opportunities • Capital Markets

Executive Summary • Summary of Issues and Recommendations

9

by other consumer and commercial asset classes. Recalibrating regulations affecting this market 

should be viewed through the lens of making the economics of securitization, not the regulatory 

regime governing it, the driver of this market.

Recalibrating Derivatives Regulation

Reforms in the derivatives market, such as mandatory central clearing of certain swaps and 

increased data disclosure requirements, have been effective in promoting greater market liquidity 

and transparency. There are, however, numerous opportunities for improvements in implementation. Derivatives of many forms, including forward agreements, futures contracts, options, and 

swaps, are a class of financial instruments that allow financial and nonfinancial concerns to transfer, and thus better manage, a wide range of risks. Treasury recommends greater harmonization 

between the SEC and the CFTC, more appropriate capital and margin treatment for derivatives, 

allowing space for innovation and flexibility in execution processes, and improvements in market 

infrastructure. Treasury recommends that the CFTC and the SEC strive to improve cross-border 

regulatory cooperation with non-U.S. jurisdictions where possible to avoid market fragmentation, 

redundancies, undue complexity, and conflicts of law. These changes can serve to level the playing 

field for market participants while at the same time ensuring healthy, fair, and robust derivatives 

markets and preserving our domestic financial interests.

Ensuring Proper Oversight of Clearinghouses and Financial Market Utilities

FMUs, including CCPs, play crucial and often distinct roles in the financial system. The capital 

markets and American public rely on these entities to work, and their proper functioning supports 

a broad range of financial market and broader economic activity. For decades, these entities have 

handled tremendous transactional volumes. Dodd-Frank’s derivatives clearing mandate and other 

regulations pushed even more trading activity into clearinghouses and authorized the FSOC to designate FMUs as “systemically important,” but left significant issues for systemic risk management 

unresolved. It is imperative that our financial regulatory system prevent taxpayer-funded bailouts 

and limit moral hazard. The centralization of risk in a clearinghouse and resulting implications 

for systemic risk necessitate appropriate regulatory oversight, and Treasury recommends improving oversight of FMUs. Treasury also recommends that the FSOC, working with the appropriate 

regulatory agencies, continues to study the role that these entities play in the financial system. 

Regulators must finalize an appropriate regulatory framework for FMU recovery or resolution to 

avoid taxpayer-funded bailouts.

Modernizing and Rationalizing Regulatory Structure and Process

Both Congress and the financial regulatory agencies have roles to play in modernizing and rationalizing the federal regulatory framework, and many opportunities for improvement are cited 

throughout this report. The roles of the SEC and CFTC, and the management of regulatory 

overlaps and areas for harmonization, should be evaluated. Greater coordination is also required 

between the market regulators and the prudential regulators of U.S. financial institutions.

Regulatory processes can also be improved. Treasury recommends that the SEC and CFTC make 

their rulemaking processes more transparent and incorporate improved economic analysis, an 
A Financial System That Creates Economic Opportunities • Capital Markets

Executive Summary • Summary of Issues and Recommendations

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updated consideration of the effects on small entities, and public input as appropriate. Treasury 

also recommends that the SEC and the CFTC avoid imposing substantive new requirements 

by interpretation or other guidance. At the same time, Treasury believes regulators should have 

appropriate authority to provide exemptions to requirements when doing so can facilitate market 

innovation.

Finally, Treasury recommends that the CFTC and SEC should conduct comprehensive reviews 

of the roles, responsibilities, and capabilities of self-regulatory organizations (SROs) under their 

respective jurisdictions and make recommendations for operational, structural, and governance 

improvements of the SRO framework.

Promoting U.S. Interests and Ensuring A Level Playing Field Abroad

U.S. agencies should also continue to advance U.S. interests by engaging bilaterally and multilaterally to enhance American companies’ competitiveness. Treasury emphasizes the important 

differences between market regulation and prudential regulation, and urges international standardsetting bodies to fully utilize the expertise of market regulators in formulating international standards for market regulation.

Treasury recommends increased transparency and accountability in international financial regulatory standard-setting bodies. Improved interagency coordination should be adopted to ensure the 

most effective harmonization of U.S. participation in applicable international forums. International 

regulatory standards should only be implemented through consideration of their alignment with 

domestic objectives and should be carefully and appropriately tailored to meet the needs of the 

U.S. financial services industry and the American people. 
Capital Markets Overview

Introduction

The proper functioning and efficiency of U.S. capital markets is critical for ensuring U.S. economic 

strength and maintaining financial stability. Vibrant capital markets allow individuals and institutions to invest in businesses, helping allocate capital where it is needed and supporting efforts to 

innovate. Through the efficient allocation of capital, these markets support efforts by businesses to 

produce goods, offer services, and create jobs. 

Key participants in capital markets include investors, issuers, and intermediaries. Investors provide 

capital, issuers raise capital, and intermediaries help markets function more efficiently by connecting buyers and sellers (either directly, or indirectly by providing liquidity). Investors include 

institutions, such as pension funds and insurance companies, and individuals, who own securities 

directly or through shares of funds – such as mutual funds, exchange-traded funds (ETFs), and 

hedge funds. Issuers of securities include governments, corporations, and certain specialized institutions like government-sponsored enterprises. Intermediaries include various institutional entities, like broker-dealers and proprietary trading firms that engage in market-making. Other entities 

that support capital markets activity – including exchanges and payment, clearing, and settlement 

service providers – are critical for maintaining the infrastructure of these markets. The ability of 

market participants to transfer risk efficiently is also critical to the health of capital markets. When 

considering the impact of major market developments and regulation, it is important to consider 

the effects on each of these categories of market participants. 

Key Asset Classes

The U.S. capital markets can be segmented into several major asset classes. Each have unique characteristics, including participants, venues, and functions. A summary of key market characteristics 

is provided here: 

A Financial System That Creates Economic Opportunities • Capital Markets

Capital Markets Overview • Introduction

13
A Financial System That Creates Economic Opportunities • Capital Markets

Capital Markets Overview • Key Asset Classes

14

Key Market Characteristics

Market Size 

(Amount 

Outstanding)

2016 

Issuance

Average

Daily Volume

Representative 

Issuers

Representative 

Investors

Representative 

Intermediaries

Equities2,3 $29 trillion $200 billion $270 billion Corporations Individuals, 

asset 

managers, 

institutions such 

as pensions

Exchanges, 

broker-dealers

U.S.

Treasuries4,5

$14 trillion 

(marketable 

securities)

Bills: $6.1 

trillion 

Notes: $2.0 

trillion

Bonds: $190 

billion 

$510 billion U.S. 

government

Individuals, 

banks, 

pensions, 

insurers, foreign 

governments

Broker-dealers, 

trading 

platforms

Corporate 

Bonds6

$8.5 trillion $1.5 trillion $31 billion Corporations Insurers, 

pensions, asset 

managers

Broker-dealers

Foreign 

Currencies7

N/A N/A $5.1 trillion Central banks Central 

banks, asset 

managers, 

corporations 

Trading 

platforms, 

broker-dealers

Derivatives8 Interest rate: 

$200 trillion 

(notional) 

Credit: 

$3.6 trillion 

(notional) 

N/A Interest rate: 

$900 billion 

(notional) 

Credit: 

$110 billion 

(notional) 

N/A Corporations, 

hedge funds, 

individuals

Central 

Counterparties, 

exchanges, 

broker-dealers, 

trading 

platforms

Securitized 

Products9

Mortgage 

related: $8.9 

trillion 

Other ABS: 

$1.3 trillion 

$2.1 trillion Mortgage 

related: 

$210 billion 

Other ABS: 

$1.3 billion 

Banks, 

nonbank 

financial 

companies, 

governmentsponsored 

enterprises

Banks, insurers, 

pensions, 

hedge funds, 

asset managers

Broker-dealers

2. SIFMA, 2017 Fact Book, at 32, available at: 

https://www.sifma.org/wp-content/uploads/2016/10/US-Fact-Book-2017-SIFMA.pdf (“SIFMA Fact Book”).

3. SIFMA US Equity Statistics (July 2017), available at: http://www2.sifma.org/research/statistics.aspx.

4. U.S. Department of the Treasury. Total notional outstanding of marketable Treasury securities (including 

bills, notes, bonds, and TIPS) is $13.9 trillion. Non-marketable Treasury securities constitute an additional 

$6.1 trillion. The 2016 issuance figures include gross.

5. SIFMA US Treasury Trading Volume, available at: https://www.sifma.org/resources/research/

us-treasury-trading-volume/.

6. SIFMA U.S. Bond Market Issuance and Outstanding, U.S. Corporate Bond Issuance and Trading Volume 

(July 2017), available at: http://www2.sifma.org/research/statistics.aspx.
A Financial System That Creates Economic Opportunities • Capital Markets

Capital Markets Overview • Key Asset Classes

15

Equities

Equity markets are the largest U.S. capital market, with major equity indexes considered bellwethers for the U.S. economy. At approximately $29 trillion in publicly traded U.S. corporate stock 

outstanding as of 2016 year end,10 healthy U.S. equity markets are an important component of 

well-functioning capital markets and overall economic growth. U.S. equities are heavily traded, 

with an average of $270 billion in daily volume in 2016.11 Despite a shrinking number of publicly 

listed U.S. companies, market capitalization of U.S. equities has increased over the past decade on 

larger equity issues and equity market appreciation.

Equity issuers include U.S. companies, who raise equity capital to finance their operations. 

Individuals own equities either directly or through funds – including mutual funds and other asset 

management products. As of 2016 year end, U.S. mutual funds held 24% of U.S. equities, while 

other registered investment companies – ETFs, for the most part – held another 6%.12

Investment companies can either be actively managed, in which fund managers select specific 

securities for a portfolio, or passively managed, in which securities are chosen to reflect a market 

index. Through inflows into passive mutual funds and ETFs, investors have shifted their asset 

allocation away from actively managed funds over the past decade. Outflows from actively managed funds have totaled approximately $900 billion since 2009, roughly equal to the inflows into 

passive funds over this period.13

As of July 2017, approximately 63% of equities trading occurred on registered exchanges, with 

the top three exchanges representing over half of that volume.14 A larger fraction of equity trading 

occurs on exchanges than in many other asset classes, due to the relatively small number of actively 

traded equity issues (for example, relative to a much larger number of bond issues). Through 

exchanges, market participants can gain access to a substantial amount of data on equity prices, 

volumes, and liquidity. Equities can also be traded in the private market, which is less transparent. 

U.S. Treasuries

U.S. Treasury securities serve a number of roles in the global financial system. Issuance of Treasury 

securities finances the U.S. government, while also providing a risk-free rate against which trillions 

7. Bank for International Settlements, Turnover of OTC Foreign Exchange Instruments (Apr. 2016), available 

at: http://www.bis.org/statistics/d11_1.pdf.

8. Figures on credit derivatives include index-linked products. Volume figures reflect 12-week moving averages ending December 30, 2016. CFTC Swaps Report (Jan. 11, 2017), available at: 

http://www.cftc.gov/MarketReports/SwapsReports/Archive/index.htm.

9. SIFMA U.S. Structured Finance (July 2017), available at: http://www2.sifma.org/research/statistics.aspx.

10. Includes market capitalization of both domestic and foreign companies. SIFMA Fact Book at 32.

11. SIFMA U.S. Equity Statistics (July 2017), available at: http://www2.sifma.org/research/statistics.aspx.

12. Investment Company Institute, 2017 Investment Company Fact Book, at 14, available at: 

https://www.ici.org/pdf/2017_factbook.pdf (“ICI Fact Book”).

13. Morningstar.

14. Rosenblatt Securities.
A Financial System That Creates Economic Opportunities • Capital Markets

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of dollars in financial contracts are benchmarked. Treasury securities also provide individuals and 

institutions the ability to earn a risk-free return. 

The Treasury market has expanded significantly in recent years as government debt levels have 

increased. At $14 trillion in total notional marketable debt outstanding,15 it is the largest market 

for any individual issuer in the world. Treasury securities trade in high volumes, at approximately 

$510 billion per day.16 Treasury futures – contracts that promise the delivery of Treasury securities 

at a future date – are also actively traded. 

Individuals, institutions, and governments seeking safe assets remain the dominant provider of 

credit to the U.S. government. U.S. financial institutions, in an effort to increase asset liquidity, 

have increased their holdings of Treasury securities. Foreign investors also constitute a significant source of funding.17 While traditional broker-dealers continue to provide a large portion of 

Treasury market intermediation – buying and selling securities for their customers – the market 

structure for Treasury trading has shifted in recent years. Principal trading firms not affiliated 

with traditional regulated banks or broker-dealers have become significant participants in market 

intermediation. 

Corporate Bonds

In addition to raising equity capital, corporations also use bonds to borrow funds in the capital markets. Fueled by low interest rates and strong demand for U.S. credit, issuance of corporate bonds has increased markedly over the past decade, with total corporate debt reaching 

$8.5 trillion as of 2016 year end.18 Trading is highly bifurcated; larger, recently issued, and highly 

rated corporate bonds trade relatively frequently, while lower rated and so-called “aged” bonds tend 

to trade much less. 

Institutional investors have a significant presence in the corporate bond market. As of 2016 year 

end, insurance companies and pensions held $3.1 trillion and $1.3 trillion in U.S. corporate 

and foreign bonds, respectively.19 As in the equity market, individuals may own corporate bonds 

directly or indirectly through mutual funds, ETFs, and other funds. Fixed-income focused mutual 

funds – which have witnessed strong inflows over the past decade – hold 16% of bonds issued by 

U.S. corporations and foreign bonds held by U.S. residents, with an additional 3% held by other 

registered investment companies.20

15. U.S. Department of the Treasury. 

16. SIFMA US Treasury Trading Volume (September 2017), available at: 

https://www.sifma.org/resources/research/us-treasury-trading-volume/. 

17. U.S. Department of the Treasury, Major Foreign Holders of Treasury Securities, available at: 

http://ticdata.treasury.gov/Publish/mfh.txt.

18. SIFMA U.S. Bond Market Issuance and Outstanding, U.S. Corporate Bond Issuance and Trading Volume 

(July 2017), available at: http://www2.sifma.org/research/statistics.aspx.

19. Insurance company data includes holdings by life insurers and property and casualty insurers. Financial 

Accounts of the United States.

20. ICI Fact Book, at 14.
A Financial System That Creates Economic Opportunities • Capital Markets

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Intermediation in corporate bonds has also changed in recent years. Broker-dealers historically 

have intermediated corporate bond trading on a principal basis for their customers and have held 

corporate bond positions on their balance sheets to support trading. Some market participants 

have increasingly turned to electronic platforms for trade execution. In addition, intermediaries 

have expanded their agency-based trading, whereby an order is only executed when buying and 

selling customers can be matched and dealers do not need to commit capital to support trades. 

Foreign Exchange

Foreign currencies trade heavily and are in many cases highly liquid, with $5.1 trillion in USD 

equivalent changing hands per day.21 Foreign currencies trade in the “spot” market, with one 

currency traded for another, or via derivatives. Currencies are traded frequently on multilateral 

platforms as well as bilaterally with banks and broker-dealers. Unlike equities and bonds, foreign 

currencies are not securities issued by governments or corporations. However, markets for these 

products remain important in that they allow investors to diversify portfolios and manage risk. 

Derivatives

In financial markets, “derivatives” are a broad class of financial instruments or contracts whose 

prices or terms of payment are dependent upon, or derive from, the value or performance of 

another asset or commodity. Unlike securities (e.g., stocks and bonds), derivatives are originated 

primarily for the purpose of managing, or hedging, the risks associated with the underlying assets. 

Given the large size of derivatives markets and their ability to make markets and institutions more 

interconnected, derivatives are a major feature of the financial system. 

At approximately $200 trillion in total notional outstanding as of 2016 year end,22 interest rate 

derivatives – including interest rate swaps – constitute the largest derivatives market by notional 

outstanding. Credit derivatives on indexes, including credit default swaps, constitute another major 

category, with $3.6 trillion in outstanding notional.23 Other major categories include derivatives 

linked to equities, foreign currencies, and commodities. 

The market for derivatives has changed considerably in recent years. In an effort to reduce counterparty risk and to comply with post-crisis regulations, market participants have increasingly turned 

to derivatives cleared by central counterparties over those backed by other financial institutions like 

banks and broker-dealers. For example, approximately 80% of derivatives linked to interest rates 

and credit indexes are now centrally cleared, each measured as a percentage of transaction dollar 

volume.24

21. Bank for International Settlements, Turnover of OTC Foreign Exchange Instruments (Apr. 2016), available 

at: http://www.bis.org/statistics/d11_1.pdf.

22. CFTC Swaps Report (Jan. 11, 2017), available at: http://www.cftc.gov/MarketReports/SwapsReports/Archive/index.

htm.

23. Id.

24. Id.
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Securitization Markets

Securitization – the process of transforming individual loans into tradable securities – supports the 

financial system by allowing banks to transfer credit risks from customer lending to the broader 

financial system, broadening the investor base for such loans. Securitization begins with individuals 

who borrow money to finance various needs like housing, automobiles, and education. Securitizers, 

including special purpose vehicles sponsored by banks and nonbank financial companies, purchase 

such loans and issue securities against them. Investors are typically institutional investors, including 

insurance companies, pensions, and hedge funds. These investors provide capital and are attracted 

to these securities for their diversification benefits, liquidity, and yield. The ability to sell loans to 

investors through securitization allows banks to make additional loans available to customers.

Across all asset classes, housing has the biggest presence in securitization markets. The notional 

outstanding for U.S. securities backed by other assets, such as automobiles, student loans, and 

credit card debt, is sizeable as well, totaling $1.3 trillion at 2016 year end.25

Key Regulators

The Securities and Exchange Commission (SEC) and the Commodity Futures Trading 

Commission (CFTC), along with state securities regulators, constitute the major U.S. market 

regulators. Additionally, self-regulatory organizations, including the Financial Industry Regulatory 

Authority (FINRA), the Municipal Securities Rulemaking Board (MSRB), and the National 

Futures Association (NFA), help regulate and oversee certain parts of the financial sector. 

The SEC’s mission is to protect investors; maintain fair, orderly, and efficient markets; and facilitate 

capital formation. Broadly, the SEC has jurisdiction over brokers and dealers, securities offerings 

in the primary and secondary markets, investment companies, investment advisers, credit rating 

agencies, and security-based swap dealers. The SEC was mandated by Dodd-Frank to enact rules 

in areas including registration of investment advisers to certain private funds (hedge funds and private equity funds), the Volcker Rule, security-based swaps, clearing agencies, municipal securities 

advisors, executive compensation, proxy voting, asset-backed securitizations, credit rating agencies, 

and nonfinancial disclosures. 

The CFTC’s mission is to foster open, transparent, competitive, and financially sound markets 

to avoid systemic risk and to protect market users and their funds, consumers, and the public 

from fraud, manipulation, and abusive practices related to derivatives and other products that are 

subject to the Commodity Exchange Act.26 The CFTC’s jurisdiction includes commodity futures 

(and options on futures), as well as futures on financial assets and indexes, interest rates, and 

other financial, commercial, or economic contingencies. In 2010, Congress expanded the CFTC’s 

jurisdiction to include swaps. 

25. SIFMA US ABS Issuance and Outstanding (July 2017), available at: http://www2.sifma.org/research/statistics.

aspx.

26. U.S. Commodity Futures Trading Commission, Agency Financial Report, Fiscal Year 2016, available at: 

http://www.cftc.gov/About/CFTCReports/ssLINK/2016afr (“CFTC 2016 Financial Report”).
Access to Capital

Overview and Regulatory Landscape

Access to capital is crucial to promoting a thriving U.S. economy. It allows companies to invest 

in growth and develop new products and services, leading to increased employment opportunities and wealth creation. But for companies to have access to capital, investors must be willing 

to supply capital. Without robust investor protections that underpin confidence in the markets, 

such as the predictable and consistently applied rule of law and the enforceability of contracts, 

investors may be less willing to provide capital. Hence, a well-designed regulatory structure, one 

that promotes fairness, predictability, and efficiency for investors and companies alike, is crucial to 

healthy capital markets.

The source and structure of capital can vary depending on what stage a company is in its lifecycle, 

as well as market conditions and company preferences. Early stage companies may access capital 

from friends and family, angel investors, and venture capital firms. As companies mature further, 

they might attract capital from private equity or through a public listing via an initial public 

offering (IPO). 

Historically, companies seeking a significant amount of capital have often preferred to conduct an IPO 

and have shares traded on a national securities exchange. But over the last two decades, the number 

of domestic public companies listed in the United States has declined by nearly 50% (see Figure 1). 

Figure 1: Number of Public Companies in the United States, 1990-2016

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Foreign

Domestic

Source: Securities and Exchange Commission staff analysis using data from the Center for Research in Securities Prices U.S. Stock 

and U.S. Index Databases(c) 2016 Center for Research in Securities Prices, The University of Chicago Booth School of Business. 

A Financial System That Creates Economic Opportunities • Capital Markets

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A Financial System That Creates Economic Opportunities • Capital Markets

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The trends in the United States toward fewer public listings are unusual compared to the trends 

in other developed countries with similar institutions and economic development. According to 

one study, while U.S. listings dropped by about half since 1996, listings in a sample of developed 

countries increased by 48%.27 The study indicated that the decline in the U.S. market was driven 

by low levels of new listings and a high number of delistings, many of which were the result of 

one public company being acquired by another.28 A wave of business failures following the large 

number of IPOs during the dot-com era also contributed to the high number of delistings.29

As the number of U.S. listings has decreased, the size of listed public companies has increased. A 

recent analysis found that as of early 2017, the average market capitalization of a U.S.-listed public 

company was $7.3 billion compared to an average of $1.8 billion in 1996.30 The analysis noted 

that approximately 140 companies with more than $50 billion in market capitalization constituted 

more than half of the total U.S. market capitalization.31

Although IPO activity has dramatically declined since 1996, the data also shows that the amount 

of capital raised through IPOs varies over time in a cyclical pattern that is consistent with overall 

economic conditions at the time. As shown in Figure 2, the number of IPOs peaked at 821 in 1996 

and fell to 119 by 2016. Since the financial crisis, the annual number of IPOs averaged 188 – far 

less than the average of 325 during the period before. 

27. Craig Doidge, G. Andrew Karolyi, and René M. Stulz, The U.S. Listing Gap, 123 Journal of Financial 

Economics 464 (Mar. 2017), at 467 (“Doidge, Karolyi, and Stulz (2017)”).

28. Id. at 465-66.

29. Ernst & Young LLP, Looking Behind the Declining Number of Public Companies: An Analysis of Trends 

in US Capital Markets (May 2017), at 1, available at: http://www.ey.com/Publication/vwLUAssets/an-analysis-oftrends-in-the-us-capital-markets/$FILE/ey-an-analysis-of-trends-in-the-us-capital-markets.pdf. 

30. Id. at 2-3. The 1996 average market capitalization has been adjusted for inflation to reflect current dollars.

31. Id. at 3.
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1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Figure 2: U.S. Initial Public Offerings by Number and Dollar Volume, 1996-2017 

100

90

80

70

60

50

40

30

20

10

0

900

800

700

600

500

400

300

200

100

0

IPO dollar volume, $ billions (Left Axis) Number of IPOs (Right Axis)

Source: Securities and Exchange Commission staff analysis based on Securities Data Corporation’s New Issues database 

(Thomson Financial). Excludes closed-end funds and American Depository Receipts. The data for 2017 is for the period 

ending Aug. 31, 2017.

While robust public markets are critically important to issuers and investors, private markets also serve as important 

liquidity tools to companies. In discussions with market participants, Treasury staff were told that private markets provide important flexible alternatives for obtaining financing 

for entrepreneurial efforts. Moreover, for the overwhelming 

majority of U.S. firms, a public listing on a national securities exchange might not be appropriate given their business 

size and circumstances.32 For these companies, the nonpublic 

capital markets, or private markets, will remain an important 

source of potential funding.

According to a recent SEC staff report, during 2009-2016, 

the total amount of debt and equity primary offerings 

reported in the private markets was consistently greater than 

32. Less than 0.02% of the estimated 28.8 million firms in the United States are currently exchange-listed 

firms. See Division of Economic and Risk Analysis (DERA), U.S. Securities and Exchange Commission, 

Report to Congress: Access to Capital and Market Liquidity (Aug. 2017), at 37, available at: 

https://www.sec.gov/files/access-to-capital-and-market-liquidity-study-dera-2017.pdf (“DERA (2017)”).

In general, under the federal securities laws, a 

security may be offered or sold in the United 

States only if it is registered with the SEC 

or subject to an applicable exemption from 

registration. 

If a company registers its offering, it files 

extensive disclosures with the SEC, including 

audited financial statements, and becomes 

subject to continuing disclosure requirements. 

Common exemptions from registration 

include Regulation A (mini-public offerings), Regulation D (many types of private 

placements), Regulation CF (crowdfunding), 

Regulation S (offshore offerings), Rule 144A 

(qualified institutional buyers), and Rules 147 

and 147A (intrastate offerings).
A Financial System That Creates Economic Opportunities • Capital Markets

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the comparable amount offered in the public markets.33 Amounts raised through private offerings 

of debt and equity for 2012 through 2016 combined exceeded amounts raised through public 

offerings of debt and equity over the same time period by approximately 26%.

The last major legislative effort to improve access to capital occurred in 2012. The Jump-start 

Our Business Startups Act (JOBS Act)34 was enacted on April 5, 2012 in an effort to spur capital 

formation. 

Key Provisions of the 2012 Jump-start Our Business Startups Act3536

Title Also Known As Description

Title I IPO On-Ramp Creates a category of public companies called “emerging growth 

companies (EGCs).” Status available for up to the first five years 

after an IPO for companies with less than $1 billion in annual 

revenue and publicly traded shares of less than $700 million. 

Permits confidential review of filings by the SEC with public 

release no later than 21 days before start of the company’s road 

show, testing the waters, scaled disclosure requirements, and 

phase-in of certain requirements following an IPO. 

Title II Regulation D General 

Solicitation

Eliminates the prohibition on general solicitation for Regulation 

D offerings provided the issuer takes reasonable steps to verify 

accredited investor status.36 Exempts certain persons – such 

as online marketplaces for issuers and accredited investors that 

facilitate private offerings – from the requirement to register with 

the SEC as broker-dealers if they do not receive transactionbased compensation, possess customer funds or securities, or 

negotiate the terms of issuance.

Title III Crowdfunding Allows private companies to offer and sell up to $1 million in 

equity securities during a 12-month period to any investor in small 

amounts through a broker or funding portal, with accompanying 

disclosure requirements and investment limitations. Resales of 

such securities are restricted.

33. Id. at 35-36.

34. Public Law No. 112-106.

35. On December 4, 2015, the Fixing America’s Surface Transportation (FAST) Act was signed into law 

(Public Law No. 114-94). The FAST Act contained several amendments to the JOBS Act, including a 

reduction of the public release period for confidential submissions from 21 days to 15 days, a revision to 

the grace period for EGCs whose status changes, and permitting an EGC to file only financial information 

that will be included in a preliminary prospectus.

36. SEC rules define “accredited investor.” See 17 C.F.R. § 501(a). One category of qualification is to be 

a person with a net worth of at least $1 million (excluding primary residence) or an income of at least 

$200,000 ($300,000 together with a spouse) each year for the last two years.
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Title IV Regulation A+ Increases the size of offerings from private companies exempt 

from registration under the SEC’s existing Regulation A 

from $5 million to $50 million during a 12-month period. The 

SEC’s implementing regulations divide this exemption into two 

categories: up to $20 million (Tier 1); and up to $50 million 

(Tier 2), which includes ongoing disclosure requirements and 

investment limitations and preempts state securities registration 

requirements. 

Titles V and VI Section 12(g)

Amendments

Increases the thresholds for registering a class of equity securities 

with the SEC until a company has more than $10 million in assets 

and securities that are “held of record” by 2,000 persons, or 500 

persons who are not accredited investors. Banks, bank holding 

companies, and savings and loan holding companies37 are subject 

to a modified threshold. The definition of the term “held of record” 

excludes securities received in an exempt transaction under an 

employee compensation plan.

The JOBS Act contained a number of provisions intended to facilitate capital formation and business startups. While the IPO on-ramp was effective upon enactment, other provisions required SEC 

rulemaking for implementation. The removal of the ban on general solicitation became effective 

in September 2013, followed by Regulation A+ in June 2015 and, most recently, crowdfunding in 

May 2016.37

This chapter looks at recommendations to improve the attractiveness of going public when 

companies are seeking to raise capital, but also considers recommendations to expand access to 

capital more broadly. Becoming an SEC-reporting company may not be appropriate for many 

small enterprises. For example, a small enterprise may be seeking to raise only a modest amount 

of capital. Thus, this chapter examines approaches for improving access to capital in the private 

markets as well. This chapter also discusses ways to improve investors’ access to opportunities while 

maintaining investor protections. 

Issues and Recommendations

Why are there Fewer Public Companies and IPOs?

When raising capital, a company generally weighs the relative costs and benefits of all available 

options before reaching a decision. Those costs and benefits are affected by the regulatory environment, but also by other factors such as the overall state of the economy, interest rates, market 

volatility, and investor sentiment. 

Historically, an IPO has been an important event in the lifecycle of a company. Access to the 

public equity markets means obtaining a source of permanent capital, usually at a cost lower than 

other alternatives. Proceeds from IPOs can be used to hire employees, develop new products and 

37. Savings and loan holding companies were not covered in the JOBS Act, but were later added by the 

FAST Act.
A Financial System That Creates Economic Opportunities • Capital Markets

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technologies, and expand operations. Furthermore, IPOs give institutional and other early stage 

investors an exit, allowing them to reallocate their capital and talent to other ventures. IPOs also 

have important implications for employees, who may have accepted pre-IPO compensation in the 

form of options and stock grants. After an IPO, an employee can monetize his or her compensation by selling into the market. This feature can incentivize employee job performance and work 

commitment. Despite these benefits, the number of IPOs has declined over the last 20 years. 

As illustrated above, the number of IPOs and amounts raised varies over time, and it is challenging 

to identify specific causal factors that contribute to decisions on whether to go public.

However, increased disclosure and other regulatory 

burdens may influence a decision to obtain funding 

in the private markets for a company that might have 

previously sought to raise capital in the public markets. 

In addition, a company must consider not only current 

regulations, but also the potential impact of future 

regulations.

During Treasury’s outreach efforts, stakeholders frequently highlighted the cumulative impact of new 

regulations and legal developments affecting public 

companies since the Sarbanes-Oxley Act, rather than 

any individual regulatory action. Some factors that were 

mentioned include: 

• Heightened compliance costs related to the Sarbanes-Oxley Act, Regulation FD, shareholder proposal rules, and Dodd-Frank;

• Changes in equity market structure that are less favorable to smaller public companies 

(e.g., decimalization, fragmentation of the market, and disappearance of small and 

mid-sized investment banks);

• Nonfinancial disclosure requirements based on social or political issues, which have 

tangential, if any, relevance to the financial performance of a company;

• Shareholder litigation risk;

• Shareholder pressure to prioritize short-term returns over long-term strategic growth;

• Inadequate oversight and accountability of proxy advisory firms;

• Lack of research coverage for smaller public companies.

There are differing views on the degree to which regulatory burdens influence a company’s decision to undertake an IPO and, once public, to remain public. Non-regulatory factors, such as 

changes in the economic environment due to globalization, the changing nature of new firms 

(e.g., service-based companies may have less intensive capital needs than industrial companies), the 

availability of cheaper debt financing, and increased mergers and acquisitions activity (particularly 

“Well-intentioned regulations aimed at protecting 

the public from the misrepresentations of a small 

number of large companies have unintentionally 

placed significant burdens on the large number of 

smaller companies. As a result, fewer high-growth 

entrepreneurial companies are going public, and 

more are opting to provide liquidity and an exit for 

investors by selling out to larger companies. This 

hurts job creation, as the data clearly shows that job 

growth accelerates when companies go public, but 

often decelerates when companies are acquired.”

Interim Report, President Obama’s Council on Jobs 

and Competitiveness, October 2011
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as an alternate to internal research and development) may also play a role.38 The increase in size and 

scale of venture capital and private equity firms has also had an impact. Globally, private equity 

assets under management, for instance, have increased from $1.8 trillion to $2.5 trillion over the 

last 5 years.39

Opportunities Lost for Investors in the Public Markets

When a company offers securities in the public market, it registers with the SEC and makes 

extensive disclosures. The securities exchanges, over the counter markets, and other trading venues 

allow investment opportunities to be made available to the general public. Generally, any retail 

investor can participate without significant regulatory limitations or restrictions. 

If a company decides not to go public and instead raises capital in 

the private market or as an exempt offering,40 it could be subject to 

investor qualification requirements and/or offering limitations. This 

could result in the average investor being deprived of an opportunity 

to consider investing in that enterprise. Instead, those investment 

opportunities and potential wealth gains, along with their attendant 

risks, might be made available only to a relatively small group of 

investors. To the extent that companies decide not to go public 

due to anticipated regulatory burdens, regulatory policy may be 

unintentionally exacerbating wealth inequality in the United States 

by restricting certain investment opportunities to high income and 

high net worth investors. 

The trend over the past several decades indicates an increasing number of Americans investing 

in capital markets through investment vehicles, such as mutual funds and ETFs, rather than 

individual securities.41 However, few mutual funds invest in private companies, with one analysis 

indicating that such investments totaled only 0.13% of $8.6 trillion in assets held by equity and 

allocation funds as of June 2016.42 Thus, in addition to encouraging companies to become public, 

it is equally important to consider methods to increase investor exposure and opportunity to the 

private markets as well.

38. See, e.g., Doidge, Karolyi, and Stulz (2017); Xiaohui Gao, Jay R. Ritter, and Zhongyan Zhu, Where Have 

All the IPOs Gone?, 48 Journal of Finance and Quantitative Analysis 1663 (Dec. 2013) (“Gao, Ritter, and 

Zhu (2013)”).

39. The Boston Consulting Group, Capitalizing on the New Golden Age in Private Equity (Mar. 7, 2017), 

available at: https://www.bcg.com/en-ca/publications/2017/value-creation-strategy-capitalizing-on-new-golden-age-private-equity.aspx.

40. The most common type of exempt offerings is Regulation D. See DERA (2017).

41. ICI Fact Book, at 112 (showing that the percentage of U.S. households owning mutual funds increased to 

43.6% in 2016 from 14.7% in 1985).

42. Katie Rushkewicz Reichart, Morningstar, Unicorn Hunting: Mutual Fund Ownership of Private Companies 

is a Relevant, but Minor, Concern for Most Investors (Dec. 5, 2016), available at: 

http://corporate1.morningstar.com/ResearchArticle.aspx?documentId=780716. The Morningstar report covered 

$11.5 billion held in open-end investment companies. By comparison, as of June 30, 2016, business 

development companies held approximately $51 billion in assets under management according to SEC 

staff analysis.

“Investors, then, and not just entrepreneurs, have a significant interest 

in vibrant public markets that foster 

IPOs. Investors stand to gain most 

when successful growth companies go 

public as soon as possible.”

SEC Investor Advocate

Rick Fleming, May 9, 2017
A Financial System That Creates Economic Opportunities • Capital Markets

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When companies choose the private markets to raise capital, a vast majority of investors lose out 

on the opportunity to participate directly in the potential growth associated with these companies 

or the diversification they provide. More importantly, an active public market has positive spillover 

effects for the market as a whole. The listed-market ecosystem, in which prices are based upon information disclosed and processed by investors, securities analysts, market commentators, investment 

advisers, and the public, provides an important layer of transparency and price discovery which 

benefits investor protection. Valuations in the private markets are often based on public markets.

Prohibiting the public from deciding whether to take on investment risk 

can potentially preclude them from participating in opportunities.

Source: The Wall Street Journal, December 12, 1980

How the JOBS Act IPO On-Ramp Has Worked 

Nearly 87% of the firms filing for an IPO after April 2012 have identified themselves as EGCs 

under the IPO on-ramp. Of those, approximately 88% used the confidential review accommodation, 96% provided reduced executive compensation disclosures, 69% provided only two years of 

audited financial statements (rather than three years as otherwise required), and 15% adopted new 

accounting standards using delayed private company effective dates.43 In deciding not to delay 

their adoption of accounting standards, most EGCs appear to be reassuring investors that their 

financial statements will be comparable to those of other public companies.

An SEC staff report found that after the JOBS Act, smaller IPOs – i.e., those seeking proceeds 

up to $30 million – constituted approximately 22% of all IPOs from 2012-2016 as compared to 

17% from 2007-2011.44 One academic study found that the JOBS Act led to additional IPOs and 

that the confidential review and testing the waters provisions particularly benefitted companies 

with high proprietary disclosure costs, such as those in the biotechnology and pharmaceutical 

43. Ernst & Young LLP, Update on Emerging Growth Companies and the JOBS Act (Nov. 2016), available at: 

http://www.ey.com/Publication/vwLUAssets/ey-update-on-emerging-growth-companies-and-the-jobs-act-november2016/$FILE/ey-update-on-emerging-growth-companies-and-the-jobs-act-november-2016.pdf.

44. DERA (2017) at 5.
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industries.45 The SEC, through a recent staff action, extended the confidential review accommodation to all companies filing for an IPO beginning July 10.46 Treasury views this development as a 

positive step.

The passage of the JOBS Act was followed by a revival in public offerings, which reached a peak of 

291 in 2014, the highest level since 2000. However, IPO activity has been relatively muted since 

then. Further regulatory changes may be needed to enhance the attractiveness of public markets. 

Remove Non-Material Disclosure Requirements 

An important principle underlying federal securities laws is the materiality requirement for disclosures. Materiality is an objective standard based on the reasonable investor, as opposed to a subjective standard that is based on what a particular investor may view as important.47 Unfortunately, 

amendments in Dodd-Frank to the federal securities laws have imposed requirements to disclose 

information that is not material to the reasonable investor for making investment decisions, including information related to conflict minerals (Section 1502), mine safety (Section 1503), resource 

extraction (Section 1504), and pay ratio (Section 953(b)).

Treasury recognizes that the original support for such provisions was well-intentioned. However, 

federal securities laws are ill-equipped to achieve such policy goals, and the effort to use securities 

disclosure to advance policy goals distracts from their purpose of providing effective disclosure 

to investors. If the intent is to use the law to influence business conduct, then this effort will 

be undermined by imposing such requirements only on public companies and not on private 

companies. In addition, such requirements impose significant costs upon the public companies 

that are widely held by all investors.

Recommendations

Treasury recommends that Section 1502, Section 1503, Section 1504, and Section 953(b) of 

Dodd-Frank be repealed and any rules issued pursuant to such provisions be withdrawn, as proposed by H.R. 10, the Financial CHOICE Act of 2017. To the extent Congress determines that 

it is desirable to require disclosure from all companies, both public and private, this oversight 

responsibility could be moved from the SEC to a more appropriate federal agency, such as the 

Departments of State, Commerce, Homeland Security, Labor, or Energy. In the absence of legislative action, Treasury recommends that the SEC consider exempting smaller reporting companies 

(SRCs) and EGCs from these requirements.48

45. Michael Dambra, Laura Casares Field, and Matthew T. Gustafson, The JOBS Act and IPO Volume: 

Evidence that Disclosure Costs Affect the IPO Decision, 116 Journal of Financial Economics 121 (Apr. 

2015).

46. Division of Corporation Finance, U.S. Securities and Exchange Commission, Draft Registration Statement 

Processing Procedures Expanded (June 29, 2017 as supplemented on Aug. 17, 2017), available at: 

https://www.sec.gov/corpfin/announcement/draft-registration-statement-processing-procedures-expanded.

47. In TSC Industries v. Northway, 426 U.S. 438, 445 (1976), the Supreme Court stated in that “[t]he question of materiality, it is universally agreed, is an objective one, involving the significance of an omitted or 

misrepresented fact to a reasonable investor.” The Court then held that a fact is material “if there is a substantial likelihood that a reasonable shareholder would consider it important.” Id. at 449.

48. The JOBS Act amended Section 953(b) of Dodd-Frank to exclude EGCs.
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Eliminate Duplicative Requirements

SEC Regulation S-K49 specifies the disclosure requirements for public companies. Since at least 

2013, SEC staff has been reviewing whether the disclosure requirements should be modified or 

eliminated and can be presented in a manner that is more effective.50 An update to the regulation 

is long overdue, particularly with a view to removing provisions that are duplicative, overlapping, 

outdated, or unnecessary. 

Recommendations 

Treasury recommends that, as required by the Fixing America’s Surface Transportation Act, the 

SEC proceed with a proposal to amend Regulation S-K in a manner consistent with its staff’s recent 

recommendations. To the extent that there are other provisions of Regulation S-K or elsewhere not 

described in the staff report that are duplicative, overlapping, outdated, or unnecessary, Treasury 

encourages inclusion of those provisions in the proposal. Treasury also recommends that the SEC 

move forward with finalizing its current proposal to remove SEC disclosure requirements that 

duplicate financial statement disclosures required under generally accepted accounting principles 

by the Financial Accounting Standards Board.51

Permit Additional Pre-IPO Communications 

Under the JOBS Act, EGCs may communicate with qualified institutional buyers (QIBs)52 and 

institutional accredited investors prior to filing a registration statement with the SEC to determine 

whether they might be interested in a contemplated securities offering. This ability is known as 

“testing the waters,” which allows a company to gauge investor interest in a potential offering 

before undertaking the expense of preparing a registration statement. 

When combined with the ability to file a registration statement confidentially with the SEC, 

testing the waters reduces the company’s risk associated with an IPO. The company has a better 

gauge of investor interest prior to undertaking significant expense and, in the event the company 

elects not to proceed with an IPO, information has been disclosed only to potential investors and 

not to the company’s competitors. 

Recommendations

Given that the SEC now permits all companies to file for IPOs confidentially,53 Treasury recommends that companies other than EGCs be allowed to “test the waters” with potential investors 

who are QIBs or institutional accredited investors. 

49. 17 C.F.R. Part 229.

50. Staff of the U.S. Securities and Exchange Commission, Report on the Simplification and Modernization of 

Regulation S-K (Nov. 23, 2016), available at: https://www.sec.gov/files/sec-fast-act-report-2016.pdf.

51. Disclosure Update and Simplification (Jul. 13, 2016) [81 Fed. Reg. 49431 (Aug. 26, 2016)].

52. As defined in 17 C.F.R. § 230.144A.

53. See footnote 46.
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Proxy Advisory Firms

During outreach meetings, Treasury staff heard differing views on proxy advisory firms. Public 

companies expressed concerns with the role of proxy advisory firms in advising shareholders 

on how to vote their shares and the limited competition between, and the resulting market 

power of, the two dominant firms.54 Public companies also expressed their desire for greater 

transparency into the process by which proxy advisory firms develop recommendations. Public 

companies also had concerns about potential conflicts of interest that arise when a proxy 

advisory firm provides voting advice to its clients on public companies while simultaneously 

offering consulting services to those same companies to improve their corporate governance 

rankings. In addition, others have expressed concern that institutional investors have become 

too reliant on proxy advisory firms, which may reduce market discipline.55

On the other hand, institutional investors, who pay for proxy advice and are responsible for 

voting decisions, find the services valuable, especially in sorting through the lengthy and significant disclosures contained in proxy statements.

Several government agencies have identified and studied these issues. For example, in a recent 

report on proxy advisory firms, the U.S. Government Accountability Office (GAO) reviewed 

studies and obtained stakeholders perspectives. The report concluded that proxy advisory 

firms influenced shareholder voting and corporate governance practices, but was mixed on the 

extent of their influence and whether it was helpful or harmful.56 The SEC also raised issues 

with respect to proxy advisory firms in a concept release in 201057 and a roundtable held in 

December 2013.58 Treasury recommends further study and evaluation of proxy advisory firms, 

including regulatory responses to promote free market principles if appropriate.

Address Concerns on Shareholder Proposals 

Exchange Act Rule 14a-859 allows a shareholder to have his or her proposal placed in a company’s 

proxy materials. The rule requires the company to include the proposal unless the shareholder has 

not complied with procedural requirements or it falls within one of 13 bases for exclusion. To be 

eligible under the rule, a shareholder must have held, for at least one year before the proposal is 

54. One firm is an SEC-registered investment adviser and the other firm has not registered with any regulator.

55. David F. Larcker, Allan L. McCall, and Gaizka Ormazabal, Outsourcing Shareholder Voting to Proxy 

Advisory Firms, 58 Journal of Law and Economics 173 (Feb. 2015).

56. U.S. Government Accountability Office, Proxy Advisory Firms’ Role in Voting and Corporate Governance 

Practices (Nov. 2016).

57. Concept Release on the U.S. Proxy System; Proposed Rule (July 14, 2010) [75 Fed. Reg. 42982 (July 

22, 2010)].

58. U.S. Securities and Exchange Commission, Press Release No. 2013-253 (Nov. 27, 2013), available at: 

https://www.sec.gov/news/press-release/2013-253. Subsequently, SEC staff issued additional guidance regarding the proxy voting responsibilities of investment advisers and the availability of exemptions from the proxy 

rules for proxy advisory firms. See Staff of the U.S. Securities and Exchange Commission, Staff Legal 

Bulletin No. 20 (June 30, 2014), available at: https://www.sec.gov/interps/legal/cfslb20.htm.

59. 17 C.F.R. § 240.14a-8.
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submitted, either (1) company securities with at least $2,000 in market value, or (2) at least 1% of 

the company’s securities entitled to vote on the proposal. 

According to one study, six individual investors were responsible for 33% of all shareholder proposals in 2016, while institutional investors with a stated social, religious, or policy orientation 

were responsible for 38%.60 During the period between 2007 and 2016, 31% of all shareholder 

proposals were a resubmission of a prior proposal. 

One trade association asserted that it costs companies tens of millions of dollars and significant 

management time to negotiate with proponents of shareholder proposals, seek SEC no-action 

relief to exclude proposals from proxy statements, and prepare opposition statements, all of which 

divert attention from operating the business.61 During outreach meetings with Treasury, however, 

some groups representing investors countered that the ability to submit proposals is a key right 

that allows them to hold management accountable and that many shareholder proposals have been 

adopted that have become widely accepted best practices in corporate governance. 

Recommendations

Treasury recommends that the $2,000 holding requirement, which was instituted over 30 years ago, 

be substantially revised. The SEC might also want to explore options that better align shareholder 

interests (such as considering the shareholder’s dollar holding in company stock as a percentage 

of his or her net liquid assets) when evaluating eligibility, rather than basing eligibility solely on a 

fixed dollar holding in stock or percentage of the company’s outstanding stock.

Treasury also recommends that the resubmission thresholds for repeat proposals be substantially 

revised from the current thresholds of 3%, 6%, and 10% to promote accountability, better manage 

costs, and reduce unnecessary burden.62

60. James R. Copland and Margaret M. O’Keefe, Manhattan Institute, Proxy Monitor: An Annual Report on 

Corporate Governance and Shareholder Activism (2016), available at: 

https://www.manhattan-institute.org/sites/default/files/pmr_2016.pdf.

61. The Business Roundtable, Responsible Shareholder Engagement and Long-Term Value Creation (Oct. 

2016), at 5, available at: http://businessroundtable.org/sites/default/files/reports/BRT%20Shareholder%20proposal%20

paper-final.pdf.

62. Under Rule 14a-8(i)(12), if a shareholder proposal is substantially similar to another proposal that has 

been previously included in a company’s proxy materials during the preceding five calendar years, the new 

proposal may be excluded from proxy materials for any shareholder meeting held within three calendar 

years of the last submission if the proposal received (i) less than 3% of the vote if proposed once during 

the preceding five years, (ii) less than 6% of the vote on its last submission if proposed twice previously 

within the preceding five years, or (iii) less than 10% of the vote on its last submission if proposed three 

times or more within the preceding five years.
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Concerns on Class Action Litigation 

The potential for class action securities litigation may discourage companies from listing their 

shares on public markets and encourage companies that are already public to “go private” 

rather than face the cost and uncertainty of securities litigation. Section 10(b) of the Exchange 

Act, and Rule 10b-5 thereunder, create a private right of action for investors to sue a securities 

issuer for the issuer’s misrepresentations or omissions. 

The number of securities class action lawsuits filed in the U.S. has steadily increased from 151 

in 2012 to 272 last year, though this total is significantly below the recent peak in 2001, when 

498 securities class action lawsuits were filed. In the first nine months of 2017, 317 such lawsuits have been filed.63 This increase in lawsuits is particularly notable given the smaller number 

of public companies, meaning that securities issuers face a greater likelihood of lawsuits. In 

2016, a record 3.9% of exchange-listed companies faced a class action securities lawsuit (not 

including additional securities lawsuits related to mergers and acquisitions or Chinese reverse 

mergers).64

The majority of class action securities lawsuits resolved since 1996 have settled before going to 

trial. Since 1996, 55% of completed class action securities lawsuits were settled for an amount 

totaling over $90 billion.65 Of the settled cases since 2007, approximately 27% were settled 

before the first hearing on motion to dismiss, while approximately two-thirds were settled after 

a ruling occurred on motion to dismiss, but prior to summary judgment.66 Only 21 cases since 

the adoption of the Private Securities Litigation Reform Act of 1995 have gone to trial.67

Some observers have argued that securities class action lawsuits are a means for shareholders 

to hold company managers accountable and potentially deter future securities law violations. 

However, class action securities lawsuits have been criticized as an economically inefficient 

way to address securities law violations. Because judgments and settlements are funded from 

corporations’ assets or their insurance policies, the shareholder plaintiffs’ recovery is funded 

indirectly from the investments of other shareholders. Transaction costs are also high, as plaintiffs’ and defendants’ legal fees in securities litigation have totaled billions of dollars over the last 

20 years, reducing payments to shareholders.68 Thus, securities class actions can significantly 

benefit attorneys at the expense of shareholders.

63. Data from Stanford Law School Securities Class Action Clearinghouse, available at: 

http://securities.stanford.edu/charts.html (last accessed on Oct. 2, 2017).

64. Cornerstone Research, Securities Class Action Filings: 2016 Year in Review, at 1, available at: 

http://securities.stanford.edu/research-reports/1996-2016/Cornerstone-Research-Securities-Class-Action-Filings-2016-YIR.

pdf.

65. Data from Stanford Law School Securities Class Action Clearinghouse, available at: 

http://securities.stanford.edu/stats.html (last accessed on Oct. 2, 2017).

66. Laarni T. Bulan, Securities Class Action Settlements: 2016 Review and Analysis (Apr. 18, 2017), available at: https://corpgov.law.harvard.edu/2017/04/18/securities-class-action-settlements-2016-review-and-analysis/.

67. Stefan Boettrich and Svetlana Starykh, Recent Trends in Securities Class Action Litigation: 2016 FullYear Review (Jan. 2017), at 41, available at: 

http://www.nera.com/content/dam/nera/publications/2017/PUB_2016_Securities_Year-End_Trends_Report_0117.pdf.

68. In 2006 and 2007 alone, securities class action settlements totaled $24.766 billion and judges awarded 

attorneys’ fees of $3.366 billion, or approximately 13.6% of the settlement amounts. Brian T. Fitzpatrick, 

Class Action Settlements and Their Fee Awards, 7 The Journal of Empirical Legal Studies 811, at 825 

and 831 (Dec. 2010). The median attorneys’ fee award in securities suits when judges used the percentage of settlement amount as a basis (the more common method) was 25% of the settlement amount. Id. 

at 835.
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Treasury recommends that the states and the SEC continue to investigate the various 

means to reduce costs of securities litigation for issuers in a way that protects investors’ 

rights and interests, including allowing companies and shareholders to settle disputes 

through arbitration.

Shareholder Rights and Dual Class Stock

Corporate governance and shareholders rights are a matter of state law. Some companies have 

dual classes of common stock, where shareholders may have equal economic interests but different 

voting rights, to the extent permitted by the company’s state of incorporation. The difference 

in voting power allows holders of one class, often a founder or group of insiders, to control the 

outcome of a shareholder vote. During outreach meetings with Treasury, some participants stated 

that dual class stock represents a defense mechanism against short-term investors who may not 

support a longer-term strategy for the company. Conversely, some participants representing investors expressed concern with the move away from a one share, one vote principle.

The federal securities laws provide the SEC with limited ability to substantively regulate corporate 

governance.69 The national securities exchanges currently permit listed companies with dual classes 

of stock. Major index providers are considering to what extent companies with dual class stock 

should be included in widely followed stock indexes.

Recommendations

State law remains the principal authority for determining issues of corporate governance and shareholder rights. Treasury recommends that the SEC continue its efforts, when reviewing company 

offering documents, to comment on whether the documents provide adequate disclosure of dual 

class stock and its effects on shareholder voting.

Allow Business Development Companies to Use Securities Offering Reform

In 2005, the SEC adopted its securities offering reform rules, which modernized the registered 

offering process under the Securities Act.70 Many of these changes did not apply to business 

development companies (BDCs). BDCs are ineligible to be considered “well-known seasoned 

issuers.”71 In addition, BDCs may not use the safe harbor for factual business information and 

forward-looking information, may not use the expanded communications provisions in connection with filing a registration statement, and may not utilize the “access equals delivery” model for 

prospectus delivery.72 BDCs were created as a means of making capital more readily available to 

69. In 1988, the SEC issued a rule prohibiting the exchanges from listing companies that took any action to 

disenfranchise shareholder voting rights. The D.C. Circuit vacated the rule as exceeding the SEC’s authority. Business Roundtable v. SEC, 905 F.2d 406 (D.C. Cir. 1990).

70. Securities Offering Reform (July 19, 2005) [70 Fed. Reg. 44722 (Aug. 3, 2005)] (“Securities Offering 

Reform”).

71. 17 C.F.R. § 230.405.

72. Securities Offering Reform. “Access equals delivery” is where investors are presumed to have access to 

the Internet, and issuers and intermediaries can satisfy their prospectus delivery requirements if the filings 

or documents are posted on a web site.
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small, developing, and financially troubled companies that do not have access to public markets 

or other forms of conventional financing.73 BDCs provide significant managerial assistance to 

their portfolio companies. Although BDCs are a type of closed-end fund, they are not required to 

register under the Investment Company Act and have greater flexibility in certain areas, such as 

in use of leverage, than registered investment companies.74 However, unlike registered investment 

companies, BDCs are subject to the full reporting requirements under the Exchange Act, including the requirements to file Forms 10-K, 10-Q, and 8-K. 

Recommendations

Treasury recommends that the SEC revise the securities offering reform rules to permit BDCs to 

utilize the same provisions available to other issuers that file Forms 10-K, 10-Q, and 8-K.75

Disproportionate Challenges for Smaller Public Companies 

Access to capital is a persistent challenge for small and young companies and has remained weak 

relative to access to capital by larger firms following the financial crisis. Small companies are particularly well positioned to make beneficial use of capital because they tend to be more innovative 

than large companies and account for a significant percentage of jobs created every year.76

The substantial drop in the number of IPOs in the United States is characterized by the disappearance of small IPOs. One review found that IPOs with an initial market capitalization of 

$75 million or below constituted 38% of IPOs in 1996, but had declined to only 6% of IPOs by 

2012.77 During this same time period, large IPOs – those with an initial market capitalization of 

$700 million and more – grew from 3% of IPOs in 1996 to 33% in 2012.78

The challenges facing smaller public companies are driven in part by increased regulatory burden, 

but also by other factors such as the growth in mutual fund sizes (which makes holding smaller 

positions less attractive),79 and broader equity market structure changes, which are reviewed in 

detail in the following chapter. 

Institutional investors have historically favored large public companies over smaller ones. As of 

October 2013, institutional investors held over 83% of equity ownership in companies with more 

than $750 million in market capitalization but only 31% in companies with a smaller market 

73. Definition of Eligible Portfolio Company under the Investment Company Act of 1940 (Oct. 25, 2006) [71 

Fed. Reg. 64086 (Oct. 31, 2006)].

74. See 15 U.S.C. § 80a-2(a)(48).

75. See also Financial CHOICE Act of 2017, H.R. 10, 115th Cong. § 438 (2017).

76. Salim Furth, Heritage Foundation, Who Creates Jobs? Start-up Firms and New 

Businesses (Apr. 4, 2013), available at: http://www.heritage.org/jobs-and-labor/report/

research-review-who-creates-jobs-start-firms-and-new-businesses.

77. Paul Rose and Steven Davidoff Solomon, Where Have All the IPOs Gone? The Hard Life of the Small 

IPO, 6 Harvard Business Law Review 83, at 103-04 (2016).

78. Id.

79. See, e.g., Jeffrey M. Solomon, Presentation to the SEC Investor Advisory Committee (June 22, 2017), at 

5-8, available at: https://www.sec.gov/spotlight/investor-advisory-committee-2012/jeffrey-solomon-presentation.pdf.
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capitalization.80 One working paper has also observed that while mutual funds were historically a 

strong source of demand for small IPOs, they have invested only sparingly in such offerings since 

the late 1990s.81

Increased regulatory burdens under federal securities laws since the enactment of the SarbanesOxley Act appear to have had a disproportionate impact on smaller companies when compared to 

their larger counterparts, despite measures to limit such effects. For instance, the annual attestation by outside auditors of management’s report on the effectiveness of internal controls under 

Section 404(b) of the Sarbanes-Oxley Act imposes significant costs for smaller public companies.82

A recent working paper suggests that corporate innovation may be declining due to compliance 

costs, citing as evidence the reduction in the number of patents and patent citations for companies 

subject to Section 404.83

Modify Eligibility Requirements for Scaled Regulation

Companies with less than $75 million in public float are considered smaller reporting companies 

and non-accelerated filers. SRCs may elect to provide scaled disclosure requirements for reporting 

issuers. Non-accelerated filers are given additional time to file periodic reports with the SEC and 

are exempt from the requirement under Section 404(b) of the Sarbanes-Oxley Act to have an 

independent auditor attest to management’s assessment of internal controls. EGCs currently may 

not hold such status for more than five years. 

Recommendations

Treasury supports modifying rules that would broaden eligibility for status as an SRC and as a 

non-accelerated filer to include entities with up to $250 million in public float, an increase from 

the current limit of $75 million in public float.84

Consistent with the H.R. 1645, the Fostering Innovation Act of 2017, Treasury further recommends extending the length of time a company may be considered an EGC to up to 10 years, 

80. Equity Capital Formation Task Force, From the On-Ramp to the Freeway: Refueling Job Creation and 

Growth by Reconnecting Investors with Small-Cap Companies (Nov. 11, 2013), at 19, available at: 

https://www.scribd.com/document/193918638/From-the-on-Ramp-to-the-Freeway-Refueling-Job-Creation-and-Growthby-Reconnecting-Investors-With-Small-Cap-Companies.

81. Robert P. Bartlett, III, Paul Rose, and Steven Davidoff Solomon, The Small IPO and the Investing 

Preferences of Mutual Funds, working paper (July 27, 2017), available at: 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2718862.

82. Peter Iliev, The Effect of SOX Section 404: Costs, Earnings Quality, and Stock Prices, 65 The Journal of 

Finance 1163 (June 2010).

83. Huasheng Gao and Jin Zhang, The Real Effects of SOX 404: Evidence from Corporate Innovation, working paper (Jan. 2017), available at: https://www3.ntu.edu.sg/home/hsgao/SOX404Innovation20170119.pdf. See 

also Testimony of John Blake, aTyr Pharma, Inc., before the House Financial Services Subcommittee on 

Capital Markets, Securities, and Investment (July 18, 2017) (“expensive regulatory requirements siphon 

innovation capital from the lab, diverting funds from science to compliance on a quarterly and annual 

basis”).

84. Amendments to Smaller Reporting Company Definition (June 27, 2016) [81 Fed. Reg. 43130 (July 1, 

2016)].
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subject to a revenue and/or public float threshold.85 These measures would more appropriately 

tailor compliance costs associated with being a smaller public company. 

Review Rules for Interval Funds

Smaller public companies have expressed concerns that they are overlooked by institutional investors such as mutual funds. Fund managers have indicated that SEC rules restrict their ability to 

invest in illiquid securities and that the relative size and market capitalization of smaller public 

companies means that an investment will not meaningfully impact fund returns. To date, trends 

show relatively less interest by institutional investors in investments in smaller public companies 

compared to larger public companies.

Registered investment companies are either open-end (i.e., offer daily redemption) or closed-end 

(no redemption rights but often tradable, at a discount to net asset value, on an exchange). Openend funds will be subject to the additional liquidity requirements under new SEC rules.86 Because 

of their limited redemption rights, closed-end funds can more easily invest in thinly traded securities and private startup companies. The SEC adopted Rule 23c-3 under the Investment Company 

Act in 1993 to permit closed-end funds to be “interval funds” in which periodic redemptions are 

offered, but the number of interval funds is small. SEC staff reports there are 34 interval funds 

with about $12.1 billion in assets under management.87

Recommendations

Treasury recommends that the SEC review its interval fund rules to determine whether more 

flexible provisions might encourage creation of registered closed-end funds that invest in offerings 

of smaller public companies and private companies whose shares have limited or no liquidity. For 

example, rather than requiring redemptions on a fixed time basis, the rules could permit redemptions based on a liquidity event of a portfolio company in a manner similar to a venture capital 

fund.

Review and Consolidate Research Analyst Rules

In 2003 and 2004, securities regulators settled with 12 major broker-dealer firms for conflicts of 

interest between their research analysts and investment bankers (Global Settlement).88 Under the 

Global Settlement, broker-dealers were required to reform their structures and practices to insulate 

research analysts from investment banking pressures. The Global Settlement only applies to the 

firms that are parties to the settlement. The terms of the Global Settlement were modified in 2010, 

85. See also Financial CHOICE Act of 2017, H.R. 10, 115th Cong. § 441 (2017).

86. Investment Company Liquidity Risk Management Programs (Oct. 13, 2016) [81 Fed. Reg. 82142 (Nov. 

18, 2016)].

87. By comparison, at the end of 2016, total net assets was $262 billion for closed-end funds, $16.3 trillion 

for mutual funds, and $2.5 trillion for ETFs. ICI Fact Book, at 9.

88. U.S. Securities and Exchange Commission, Press Release No. 2003-54 (Apr. 28, 2003), available at: 

https://www.sec.gov/news/press/2003-54.htm; U.S. Securities and Exchange Commission, Press Release No. 

2004-120 (Aug. 26, 2004), available at: https://www.sec.gov/news/press/2004-120.htm. Of the 12 settling firms, 

Bear, Stearns & Co. and Lehman Brothers Inc. are no longer in existence.
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but have otherwise remained unchanged.89 Other broker-dealers are subject to rules on research 

analyst reports adopted by the SEC and FINRA, but the rules may differ in part from the Global 

Settlement.90 In 2012, the JOBS Act modified the research analyst rules for communications in 

connection with the IPO of an EGC. 

In outreach meetings with Treasury, smaller public companies asserted that sell-side research coverage of their firms has become sparse, or has even been discontinued, due in part to the increase in 

regulation and compliance costs caused by the Global Settlement. Another possible reason for the 

decline in analyst coverage could be the mergers among investment banks.91 If this is the case, then 

recent studies would suggest that the decline in the number of analysts can negatively affect the 

quality of information in the overall market. For example, one study found that an increase in the 

number of analysts covering an industry improved the quality of analyst forecasts and information 

flow to market participants, which suggests that a decline in the number of sell-side analysts would 

have the opposite effect.92 Despite assertions of a decline in the number of analysts, however, one 

study found no empirical evidence indicating a decline in post-IPO analyst coverage for either 

small company or large company IPOs since the Global Settlement.93

Recommendations

Treasury recommends a holistic review of the Global Settlement and the research analyst rules 

to determine which provisions should be retained, amended, or removed, with the objective of 

harmonizing a single set of rules for financial institutions.

Expanding Access to Capital Through Innovative Tools

In order to foster a healthy economy, the regulatory framework should provide innovative tools to 

companies at every stage of their lifecycle, particularly to new companies that are not contemplating an IPO. Regulation A+ and crowdfunding represent innovative capital raising frameworks that 

are targeted to support pre-IPO companies. The JOBS Act also sought to make matching investors 

with companies seeking to raise capital easier by removing the prohibitions on general solicitation 

and advertising under certain conditions.

89. U.S. Government Accountability Office, Additional Actions Could Improve Regulatory Oversight of 

Analyst Conflicts of Interest (Jan. 2012), at 30-31. In 2012, GAO recommended that the SEC formally 

assess and document whether any of the Global Settlement’s remaining terms should be codified.

90. In 2015, the SEC approved FINRA rule 2241, which consolidated prior NASD rule 2711 and NYSE rule 

472. Exchange Act Release No. 75471 (July 16, 2015) [80 Fed. Reg. 43482 (July 22, 2015)]. Although 

FINRA considered the provisions of the Global Settlement in modifying rule 2241, it specifically disclaimed any intent to supersede the Global Settlement.

91. See, e.g., Bryan Kelly and Alexander Ljungqvist, Testing Asymmetric-Information Asset Pricing Models, 25 

The Review of Financial Studies 1366, at 1370 (May 2012).

92. Kenneth Merkley, Roni Michaely, and Joseph Pacelli, Does the Scope of the Sell-Side Analyst Industry 

Matter? An Examination of Bias, Accuracy, and Information Content of Analyst Reports, 72 Journal of 

Finance 1285 (June 2017).

93. Gao, Ritter, and Zhu (2013).
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Increase Flexibility for Regulation A Tier 2

In adopting final rules implementing Regulation A+, the SEC kept the prior Regulation A exemption as Tier 1, while increasing the aggregate offering amount from $5 million to $20 million, and 

created Tier 2 for offerings of up to $50 million.94 Regulation A+ has enabled more companies to 

take advantage of the “mini IPO” process than under the previously existing Regulation A registration exemption for small offerings. A Tier 2 offering may be less costly than an IPO, particularly 

for companies seeking relatively smaller amounts of capital. Companies’ continuing disclosure 

obligations under Tier 2 are particularly useful to broker-dealers to satisfy their obligations to 

review information about a company before making quotations, which permits them to publish 

quotes for Tier 2 securities under SEC rules, thereby facilitating secondary trading.95

In the year after implementation, 147 Regulation A+ offerings were filed by companies seeking 

to raise $2.6 billion in financing. Of these, approximately 81 offerings totaling $1.5 billion were 

qualified under Regulation A+ by the SEC, 60% of which were Tier 2. By comparison, there were 

27 qualified Regulation A offerings in the preceding four years. The average size of the Regulation 

A+ offerings was approximately $18 million, with most of the issuers having previously engaged in 

private offerings.96 Despite the increase in offerings after the adoption of Regulation A+, companies making Regulation A+ offerings sought significantly lower amounts of capital than companies 

making use of other exemptions, such as Regulation D.

A recent study by the SEC’s Division of Economic and Risk Analysis suggests that the ongoing disclosure requirements for issuers in Tier 2 offerings might encourage the development of a 

secondary market for Regulation A securities.97 There are various obstacles to the development of a 

secondary market. For example, although federal securities laws do not impose trading restrictions 

on Tier 2 securities, state securities laws may prohibit secondary transactions without registration 

at the state level. In addition, issuers may elect to impose such restrictions to have a stable investor 

base or avoid triggering thresholds that would require registering the securities with the SEC.

Tier 2 permits companies to conduct offerings of up to $50 million in a 12-month period exempt 

from registration under the Securities Act using a scaled offering document. Tier 2 issuers are 

subject to an ongoing reporting regime, including requirements for semi-annual, annual, and 

current reports, as well as audited financial statements. These disclosures are electronically available 

on the SEC’s Electronic Data Gathering and Retrieval (EDGAR) system. Tier 2 offerings are 

subject to investment limits for unaccredited investors and are preempted from state “blue sky” 

requirements. Tier 2 issuers may also test the waters with any investor prior to qualification of an 

offering statement. 

94. Amendments for Small and Additional Issues Exemptions under the Securities Act (Regulation A) (Mar. 

25, 2015) [80 Fed. Reg. 21806 (Apr. 20, 2015)].

95. 17 C.F.R. § 240.15c2-11.

96. Anzhela Knyazeva, Regulation A+: What Do We Know So Far?, Nov. 2016, available at: 

https://www.sec.gov/dera/staff-papers/white-papers/18nov16_knyazeva_regulation-a-plus-what-do-we-know-so-far.html.

97. DERA (2017), at 51-52.
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Although the JOBS Act does not include any specific issuer eligibility requirements, SEC rules prohibit Exchange Act reporting companies from using Tier 2.98 During the related SEC rulemaking, 

a number of commenters supported extending eligibility to Exchange Act reporting companies but 

the SEC declined to expand eligibility until it had an opportunity to observe the use of Tier 2.99

Recommendations

Given the relatively modest use of Tier 2 since it became available in June 2015, particularly in comparison to other exemptions such as Regulation D, Treasury recommends expanding Regulation 

A eligibility to include Exchange Act reporting companies. This modification will provide already 

public companies with a lower-cost means of raising additional capital and potentially increase 

awareness and interest in Regulation A offerings by market participants. 

Treasury further recommends steps to increase liquidity in the secondary market for Tier 2 securities. Although federal securities laws do not impose trading restrictions on Tier 2 securities, state 

“blue sky” laws may impose registration requirements. Treasury recommends that state securities regulators promptly update their regulations to exempt secondary trading of Tier 2 securities 

or, alternatively, the SEC use its authority to preempt state registration requirements for such 

transactions.

Finally, Treasury recommends that the Tier 2 offering limit be increased to $75 million. The JOBS 

Act requires the SEC to review the Tier 2 offering limit every two years and, if needed, revise to 

an amount the SEC determines “appropriate.” The increase to $75 million is consistent with the 

House-passed Financial CHOICE Act (H.R. 10) and would allow private companies to consider a 

“mini-IPO” under Regulation A as a potentially less costly alternative to raise capital.

Crowdfunding

The crowdfunding rules implementing Title III of the JOBS Act became effective in May 2016. 

In the 12-month period following effectiveness, 335 companies filed crowdfunding offerings with 

the SEC and there were 26 portals registered with FINRA for unaccredited investors. Of the filed 

crowdfunding offerings, 43% were funded, 30% of campaigns ended unsuccessfully, and the others are still ongoing. Total capital committed was in excess of $40 million. On average, each funded 

offering raised $282,000 and included participation from 312 investors.100

However, in conversations with Treasury staff, market participants have expressed concerns 

about the cost and complexity of using crowdfunding compared to private placement offerings. 

Participants cited regulatory constraints, such as disclosure requirements and issuance costs, as 

well as structural factors, such as the challenges associated with having a large number of investors, 

as potentially limiting the use of this capital raising method. Some participants also expressed 

concern that unless crowdfunding platforms can demonstrate clear advantages relative to the ease 

and availability of private placements, such as meaningfully increasing the amount of investor 

98. 17 C.F.R. § 230.251(b)(2).

99. 80 Fed. Reg. at 21811.

100. Crowdfund Capital Advisors, One Year into Regulation Crowdfunding and It Is Off to the Portal Races

(May 19, 2017), available at: http://crowdfundcapitaladvisors.com/one-year-regulation-crowdfunding-off-portal-races/.
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capital available from unaccredited investors, crowdfunding may lead to adverse selection where 

only less-attractive companies pursue funding from less sophisticated investors, who may lack the 

expertise to properly evaluate such investments. 

Recommendations

Treasury recommends allowing single-purpose crowdfunding vehicles advised by a registered 

investment adviser, which may mitigate issuers’ concerns about vehicles having an unwieldy number of shareholders and tripping SEC registration thresholds (2,000 total shareholders, or over 500 

unaccredited shareholders). These vehicles could potentially facilitate the type of syndicate investing model that has developed in accredited investor platforms, whereby a lead investor conducts 

due diligence, pools the capital of other investors, and receives carried interest compensation. 

However, risks exist that such vehicles may weaken investor protections by creating layers between 

investors and the issuer, and present potential conflicts of interest. Appropriate investor protections are critical in the crowdfunding market given the participation of unaccredited investors. 

Therefore, Treasury recommends that any rulemaking in this area prioritize alignment of interests 

between the lead investor and the other investors participating in the vehicle, regular dissemination of information from the issuer, and minority voting protections with respect to significant 

corporate actions.

Treasury recommends that the limitations on purchases in crowdfunding offerings be waived for 

accredited investors as defined by Regulation D. Crowdfunding might become more attractive 

if a company can more easily reach its fund-raising goals. Treasury further recommends that the 

crowdfunding rules be amended to have investment limits based on the greater of annual income 

or net worth for the 5% and 10% tests, rather than the lesser.101 The current rules unnecessarily 

limit investors who have a high net worth relative to annual income, or vice versa, which is inconsistent with the approach taken for Regulation A Tier 2 offerings.102

Treasury also recommends that the conditional exemption from Section 12(g) be modified by raising the maximum revenue requirement from $25 million to $100 million. The higher threshold 

will allow crowdfunded companies to stay private longer. These companies likely lack the necessary 

size to be a public company and should not be forced to register as public companies until reaching 

higher revenues.

Finally, Treasury recommends increasing the limit on how much can be raised over a 12-month 

period from $1 million to $5 million, as it will potentially allow companies to lower the offering 

costs per dollar raised.

101. A crowdfunding investor is limited as to how much can be invested during any 12-month period based 

on net worth and annual income. Under current rules, if either annual income or net worth is less than 

$107,000, then an amount up to the greater of either $2,200 or 5% of the lesser of annual income or net 

worth may be invested. If both annual income and net worth are equal to or more than $107,000, then an 

amount up to 10% of annual income or net worth, whichever is lesser, but not to exceed $107,000 may be 

invested. 17 C.F.R. § 227.100.

102. 17 C.F.R. § 230.251(d)(2)(i)(C) (using a “greater of” annual income or net worth test).
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Women and Entrepreneurship

Female entrepreneurs have been historically underserved by sources of venture capital. Between 

2010 and 2015, 12% of venture funding rounds and 10% of venture dollars globally went to 

startups with one or more female founders.103 Innovative funding tools may disrupt traditional 

networks, resulting in better access to capital for women and other underserved communities. 

Equity-based crowdfunding may help female entrepreneurs raise capital for their businesses. 

Regulation Crowdfunding has been in effect for only a little more than a year, so data is 

limited. However, evidence from the previously existing rewards-based crowdfunding market 

shows its promise for increasing opportunities for female entrepreneurs. 

In rewards-based crowdfunding, run by platforms like Kickstarter and Indiegogo, backers 

receive a “reward” or prize in exchange for their investment, rather than an equity share in the 

company. 47% of successful Indiegogo funding campaigns are run by women, a significantly 

higher percentage when compared to venture capital funding.104 Analysis of Kickstarter data 

shows that from 2009 to 2012, women had a 69.5% success rate in crowdfunding compared 

to a 61.4% success rate for men. A separate study looking at crowdfunding globally in 2015 

and 2016 shows that women had a 22% success rate in reaching their funding goals while men 

had a 17% success rate.105 While this is still a fairly nascent field, many point to the fact that 

the “crowd” tends to be more balanced in terms of female versus male participants, which may 

contribute to the more representative success of female-led crowdfunding campaigns. 

Equity crowdfunding is relatively new, but many companies have already used it successfully as 

discussed in this report. While equity crowdfunding is not a perfect substitute for traditional 

venture capital investments, making changes to equity crowdfunding to increase its flexibility 

and cost effectiveness may further improve an innovative tool that broadens access to capital 

for female entrepreneurs.

Maintaining the Efficacy of the Private Markets

Treasury believes that regulators can increase the attractiveness and efficiency of public markets 

while preserving the current vibrancy of private markets. Although some have suggested that 

restricting access to capital in private markets might force more companies to seek financing in 

public capital markets, Treasury does not believe that removal of choices from the marketplace is 

an appropriate path forward. 

Treasury observes that measures can be taken to improve access to capital for small business enterprises in the private markets. Certain provisions of the JOBS Act were intended to address this gap 

103. Gene Teare and Ned Desmond, The First Comprehensive Study on Women in Venture Capital and their 

Impact on Female Founders (Apr. 19, 2016), available at: 

https://techcrunch.com/2016/04/19/the-first-comprehensive-study-on-women-in-venture-capital/.

104. Elena Ginebreda-Frendel, Women’s Day Should Be Every Day, Indiegogo Blog (Mar. 8, 2016), available 

at: https://go.indiegogo.com/blog/2016/03/women-entrepreneurs.html.

105. PricewaterhouseCoopers, Women Unbound: Unleashing Female Entrepreneurial Potential (July 2017), 

available at: http://womenunbound.org/download/Women_Unbound_-_PwC_Crowdfunding_Report.pdf.
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and the SEC has adopted rules to implement those provisions. Appropriate regulatory adjustments 

should be made based on how market participants have reacted to and utilized these provisions. 

Title II of the JOBS Act required the SEC to revise Securities Act Rule 506 to remove the prohibition against general solicitation or advertising, provided that all purchasers are accredited investors. 

In implementing Title II, the SEC retained the prior exemption, which prohibits general solicitation or advertising but allows participation by unaccredited investors, as Rule 506(b). The new 

provision permitting general solicitation and advertising was codified as Rule 506(c). 

According to SEC data, for the approximately three-year period through the end of 2016, 

$107.7 billion was raised in debt and equity offerings under Rule 506(c), while $2.2 trillion was 

raised under Rule 506(b) during the same period.106 Thus, Rule 506(c) offerings amount to only 

3% of the capital reportedly raised under Rule 506. Although Rule 506(b) offerings are permitted 

to be sold to unaccredited investors, relatively few companies reported an intention to do so.107

Title II also provided an exemption for online marketplaces. The last three years have seen nearly 

$1.5 billion in commitments raised in over 6,000 private offerings on 16 online marketplaces for 

accredited investors.108 Although annual capital commitments and success rates (in terms of raising 

the amount of capital sought) for online capital offerings to accredited investors have steadily 

increased over the last three years, reaching over $600 million and 30%, respectively, the number 

of annual new offerings has declined from approximately 4,700 to nearly 550 over this period.109

Online marketplaces thus far represent only a very small share of the Regulation D private placement securities offerings and venture capital investments. Activity in online marketplaces, however, 

is growing, with a number of third-party firms now providing critical services including accredited 

investor verification, compliance, legal documentation, and reporting to meet the needs of issuers, 

investors, and platforms.

Create Appropriate Regulatory Structure for Finders

For a small business seeking to raise capital, identifying and locating potential investors can be 

difficult. It becomes even more challenging if the amount sought (e.g., less than $5 million) is 

below a level that would attract venture capital or a registered broker-dealer, but beyond the levels 

that can be provided by friends and family and personal financing. The number of registered 

broker-dealers has been falling, and few registered broker-dealers are willing to raise capital in small 

106. DERA (2017) at 39. For the period between September 23, 2013 and December 31, 2016, initial Form 

D filings reported that $70.6 billion was raised under Rule 506(c), with an additional $37.1 billion reported 

in amended Form D filings. By comparison, new Rule 506(b) offerings reported raising nearly $2.2 trillion 

in initial Form D filings and an additional $1.9 trillion in amended Form D filings. The data on Regulation 

D offerings may not accurately reflect the true amount of capital raised, because a Form D filing is not a 

condition to the exemption provided by the rule. In addition, there is no requirement to update Form D to 

report the total amount actually raised in the offering.

107. Id. at 66 (reporting only 6% of Rule 506(b) offerings were sold or intended to be sold to unaccredited 

investors).

108. Crowdnetic, Annual Title II Data Analysis for the Period Ending September 23, 2016, at 5, available at: 

https://www.crowdwatch.co/hosted/www/download-report?report_month=oct_2016.

109. Id. at 7.
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transactions. Thus, finders, individuals or firms who connect a firm seeking to raise capital with 

an investor for a fee, can play an important role in filling this gap to help small businesses obtain 

early stage financing. 

Finders have operated in an uncertain regulatory environment, one that has developed more from 

no-action letters and enforcement actions than rules. Frequently, the role of the finder in a private 

capital-raising transaction is limited and does not involve handling of any securities or funds. 

However, finders who seek to receive transaction-based compensation may be required to register 

as a broker-dealer with the SEC, FINRA, and the applicable states. Resolving issues regarding finders has been a frequent topic of the SEC Government-Business Forum on Small Business Capital 

Formation and the SEC Advisory Committee on Small and Emerging Companies.

Recommendations

Treasury recommends that the SEC, FINRA, and the states propose a new regulatory structure 

for finders and other intermediaries in capital-forming transactions. For example, a “broker-dealer 

lite” rule that applies an appropriately scaled regulatory scheme on finders could promote capital 

formation by expanding the number of intermediaries who are able to assist smaller companies 

with capital raising. 

Allow Additional Categories of Sophisticated Investors to Participate in 

Regulation D Offerings 

Rules 506(b) and (c) of Regulation D provide an exemption from registration for offerings made to 

accredited investors. Natural persons can qualify as an accredited investor if they have a net worth 

of at least $1 million (excluding primary residence) or have income of at least $200,000 ($300,000 

together with a spouse) for each year for the last two years. Certain legal entities with over $5 million in assets are accredited investors, while certain regulated entities such as banks, broker-dealers, 

registered investment companies, BDCs, and insurance companies are automatically designated 

as accredited investors. In December 2015, SEC staff published a report that suggested potential 

modifications to the definition of accredited investor.110

Recommendations

Treasury recommends that amendments to the accredited investor definition be undertaken with 

the objective of expanding the eligible pool of sophisticated investors. The “accredited investor” 

definition could be broadened to include any investor who is advised on the merits of making a 

Regulation D investment by a fiduciary, such as an SEC- or state-registered investment adviser. 

Furthermore, financial professionals, such as registered representatives and investment adviser 

representatives, who are considered qualified to recommend Regulation D investments to others, 

could also be included in the definition of “accredited investors.” 

110. Division of Corporation Finance, U.S. Securities and Exchange Commission, Report on the Review of the 

Definition of “Accredited Investor” (Dec. 18, 2015), available at: 

https://www.sec.gov/corpfin/reportspubs/special-studies/review-definition-of-accredited-investor-12-18-2015.pdf.
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Review Rules for Private Funds Investing in Private Offerings

Investing in a well-diversified portfolio of private placement offerings instead of a single offering 

can potentially reduce investment risk. For unaccredited investors, exposure to Rule 506 offerings 

through a fund could provide diversification benefits to an investment portfolio. 

Recommendations

Treasury recommends a review of provisions under the Securities Act and the Investment Company 

Act that restrict unaccredited investors from investing in a private fund containing Rule 506 

offerings. 

Empower Investor Due Diligence Efforts

Investment opportunities allow all Americans to participate as investors in the capital markets. 

But to effectively empower investors, government should ensure that the public has access to 

information to make informed investment decisions. Given that financial markets also present 

opportunities for bad actors to take advantage of investors, it is critical that investors have information to protect themselves.

Information on bad actors is currently fragmented across databases maintained by different agencies and organizations. FINRA maintains a database on investment advisers, which compiles 

information from the SEC and the states, called Investment Adviser Public Disclosure. The SEC 

and FINRA jointly maintain a database on broker-dealers called BrokerCheck.111 The National 

Futures Association maintains a database on firms involved with futures, options on futures, and 

foreign currency called Background Affiliation Status Information Center (BASIC).112 No centralized databases are available to the public, free of charge, that provide information on other 

disciplinary actions handed out by the SEC, Public Company Accounting Oversight Board, or 

state regulators. Information on criminal convictions for financial fraud obtained by federal, state, 

or local prosecutors is also not available in a centralized database.

Recommendatons

Treasury recommends that federal and state financial regulators, along with their counterparts in 

self-regulatory organizations, work to centralize reporting of individuals and firms that have been 

subject to adjudicated disciplinary proceedings or criminal convictions, which can be searched 

easily and efficiently by the investing public free of charge.

111. BrokerCheck includes some but not all state level information on broker-dealer discipline. Investors may 

need to use BrokerCheck and additional state databases to obtain full information on an individual broker.

112. The CFTC has launched an effort, called Smartcheck (https://smartcheck.cftc.gov/check/), which provides a portal for investors to separately search records on BASIC and BrokerCheck as well as a general Internet 

search.

Equity Market Structure

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Overview and Regulatory Landscape

The fairness, soundness, and efficiency of the U.S. capital markets promote investment in the 

enterprises that fuel innovation and jobs. The previous section focused on primary markets for 

equity capital formation. This section will turn to market structure and liquidity, with a focus on 

secondary market activity – that is, the markets for buying and selling previously issued securities. 

Secondary markets facilitate investment opportunities for individuals and companies, establish 

market-based valuations to help investors efficiently allocate capital, and provide liquidity for 

entrepreneurs, workers, and investors who wish to cash out of all or part of their investments. 

Secondary markets for equity in the United States, including stock exchanges, options exchanges, 

and alternative trading systems (ATSs), provide investors with access to a broad array of securities 

to fulfill myriad investment objectives. For the largest companies and most liquid stocks, the 

secondary equity market is operating very well, with strong competition, low transaction costs 

for investors, and generally strong liquidity conditions. However, this same market is not serving 

less liquid (often smaller and newer) companies as well. For these companies, liquidity provision, 

trading activity, and research coverage have declined. Accordingly, many of the recommendations 

in this section focus on improving the market for less liquid stocks by more appropriately tailoring 

regulation. In addition, our recommendations aim to promote greater transparency, reduce unnecessary complexity, and improve the overall vibrancy of equity markets to foster economic growth.

The National Market System and Regulation NMS

Recent U.S. equity market regulation has focused on encouraging competition between multiple 

venues to enhance trade execution pricing and innovation. All securities exchanges, which are 

key components of the National Market System, provide a venue for securities buyers to establish 

prices for and execute securities transactions. While securities are listed on a primary exchange, 

they can be traded on any national securities exchange (or other trading venues such as alternative 

trading systems) through a system of Unlisted Trading Privileges (UTP). UTP allows companies 

that do an initial public offering (IPO) and list on New York Stock Exchange (NYSE), for example, 

to be traded on other trading venues such as NASDAQ and BATS. Because of UTP, there is 

intense competition among trading venues to capture secondary market trading and the revenue it 

generates. While UTP is one important element of today’s framework, regulatory changes adopted 

over the last 20 years underpin the current equity market structure. 

In 2005, the SEC adopted Regulation NMS, which updated earlier rulemakings that were intended 

to strengthen and modernize the National Market System.113 Regulation NMS included new substantive rules to modernize and strengthen the regulatory structure of the U.S. financial markets. 

113. Regulation NMS (June 9, 2005) [70 Fed. Reg. 37495 (June 29, 2005)]. This rulemaking helped to satisfy 

certain key objectives of 1975 amendments to the Exchange Act, including: (1) promoting more efficient and 

more effective market operations, (2) enhancing competition, (3) improving price transparency, and (4) contributing to the best execution of customer orders. Public Law No. 94–29.
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Regulation NMS

Features of NMS Description

Order Protection Rule (Rule 

611, also called the Tradethrough Rule)

Requires trading centers114 to establish, maintain, and enforce written 

policies and procedures reasonably designed to prevent the execution of 

trades at prices inferior to protected quotations displayed by other trading 

centers, subject to an applicable exception. 

To be protected, a quotation must be immediately and automatically 

accessible.115

Impact: The price and speed incentives created by the rule encouraged 

trading venues to move to electronic execution and discouraged open outcry 

markets. 

Access Rule (Rule 610) Requires fair and non-discriminatory access to quotations, establishes a 

limit on access fees to harmonize the pricing of quotations across different 

trading centers, and requires each national securities exchange and national 

securities association to adopt, maintain, and enforce written rules that 

prohibit their members from engaging in a pattern or practice of displaying 

quotations that lock or cross automated quotations.

Impact: Promotes competition among trading venues by allowing any trading 

venue to compete for any order on any other venue.

Sub-penny Rule (Rule 612) Prohibits market participants from accepting, ranking, or displaying orders, 

quotations, or indications of interest in a pricing increment smaller than a 

penny, except for orders, quotations, or indications of interest that are priced 

at less than $1.00 per share.

Impact: Encouraged broker internalization which continued to allow trading 

(though not quoting) at sub-penny prices.

Market Data Rules (Rules 601 

and 603)

Updated the requirements for consolidating, distributing, and displaying 

market information, as well as amendments to the joint industry plans for 

disseminating market information that modify the formulas for allocating plan 

revenues.

Impact: Helped to create an environment where market information becomes 

an increasingly valuable commodity.

Regulation NMS has been credited with reducing trading costs to some of the lowest levels in the 

world, reducing bid-ask spreads, and generally increasing liquidity. However, Regulation NMS has 

also faced criticism for its role in adding to the complexity of equity markets as well as facilitating 

the rise of high-frequency trading practices, which many have criticized as harming true liquidity 

and market quality.116 Regulatory change that had been underway before Regulation NMS also 

contributed to significant market structure changes. 

114. “Trading centers” include any national securities exchange, national securities association that operates an 

SRO (self-regulating organization) trading facility, alternative trading system, exchange market maker, overthe-counter market maker, or any other broker or dealer that executes orders internally by trading as principal or crossing orders as agent. See 17 C.F.R. § 242.600(b)(78).

115. See 17 C.F.R. § 242.600(b)(57)(iii) (defining a “protected bid” or “protected offer” to include only automated quotations) and 17 C.F.R. § 242.600(b)(3) (defining “automated quotation”).

116. See, e.g., Larry Tabb, Regulation NMS Part I: Loved or Loathed and Why Many Want It to 

Die (May 13, 2013), available at: https://research.tabbgroup.com/report/v11-018-regulation-nms-part-iloved-or-loathed-and-why-many-want-it-die; and Christopher Groskopf, The Modern Stock Market 

is a Badly Designed Computer System (June 15, 2016), available at: https://qz.com/662009/

the-sec-tried-to-fix-a-finance-problem-and-created-a-computer-science-problem-instead/.
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Regulatory Changes Before Regulation NMS

Changes Description

Decimalization The gradual reduction in “tick sizes,” or the minimum increment of price for 

the trading of stocks on exchanges. Prior to 1992, stocks had traded in 1/8 

of a dollar tick sizes, which effectively created a minimum bid-ask spread for 

a stock of 12.5 cents. This wide bid-ask spread created high transaction 

costs for buyers and sellers but also sustained large profit margins for 

dealers. 

In the 1990s, the SEC and stock exchanges progressively narrowed tick 

sizes, first to 1/16 of a dollar and culminating in April 2001 with the full 

implementation of decimalization, or the pricing of most stocks in one penny 

increments.117

Impact: Decimalization reduced the spreads on the most heavily traded 

stocks to as little as a penny, dramatically reducing trading costs.118

Regulation ATS Adopted in 1998, exempts certain alternative trading systems (ATSs) from 

registration as a national securities exchange, while applying core elements 

of exchange regulation.

Requires ATSs to provide order display and execution access when market 

share thresholds are reached.

Imposes capacity, integrity, and systems-security standards and requires 

ATSs to register as broker-dealers.

Impact: Institutionalized ATSs, allowing them to operate and grow with 

modest regulatory oversight compared to exchanges. They grew significantly 

upon enactment of Regulation NMS (national market system). Today, these 

ATSs, operated by broker-dealers registered with the SEC, have become 

important sources of liquidity. 

Electronification and Increased Competition 

Technological evolution, in addition to regulatory changes, has driven changes to equity market 

structure. Electronification has facilitated an extraordinary increase in the speed of trading, with 

trading activity now measured in milliseconds and microseconds. Market participants are often 

keenly focused on the speed by which trade data travels between data centers or in collocating their 

own servers on exchanges’ premises to minimize data latency. Electronification has also been critical to promoting market participant and venue competition. Barriers to entry for a new electronic 

market maker or electronic venue are much lower than those of the human-centered past. Equities 

trading has been on the cutting edge of this transition for decades. 

These regulatory and structural changes spurred the conversion of manual stock markets, which 

executed trades through floor brokers, to largely automated operations, which placed a premium 

117. See Securities and Exchange Commission, Report to Congress on Decimalization (July 2012) at 4-6, 

available at: https://www.sec.gov/news/studies/2012/decimalization-072012.pdf.

118. Id.
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on high-speed computers, sophisticated execution algorithms, and rich data about the financial 

market prices and orders.119 These changes also helped ensure widespread and near-instantaneous 

dissemination of market prices electronically, which enabled ATSs to compete with exchanges. 

Another trend of note during this period was the “demutualization” of stock exchanges beginning in 2005. Demutualizing stock exchanges went from nonprofit institutions owned by their 

broker-dealer members to for-profit entities. These for-profit exchanges then consolidated into 

larger entities operating multiple exchanges within and across national borders.120

When considering the operational effects, electronification has been a double-edged sword. 

Electronic trading has made the everyday trading process more efficient and reduced the frequency 

of human error. On the other hand, operational risk has grown significantly. As an example, at 

Knight Capital in 2012, a series of errors relating to an internal software update triggered more 

than $400 million of losses and ultimately led to the sale of the firm.121

Technological and regulatory changes have also promoted increased competition between equity 

trading venues. Investors looking to buy and sell securities may now do so at any of 12 registered 

national securities exchanges, 40 broker-dealer operated ATSs that trade equities,122 and numerous 

other internal trading systems run by registered broker-dealers. The changes in market share for 

the NYSE and NASDAQ underscore the dramatic shift that occurred in the equity markets in the 

mid-2000s. Exchanges now handle only a minority of the trading in their stock listings. 

119. CFA Institute, Liquidity in Equity Markets: Characteristics, Dynamics, and Implications for Market Quality

(Aug. 2015), at 4-5, available at: http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2015.n7.1.

120. See Ernst & Young LLP, IPO Insights: Comparing Global Stock Exchanges (2007), at 5-6, available at: 

http://www.ey.com/Publication/vwLUAssets/IPO_Insights:_Comparing_global_stock_exchanges/$FILE/IPO_comparingglobalstockexchanges.pdf. 

121. See In re: Knight Capital Americas LLC (Oct. 16, 2013), available at: 

https://www.sec.gov/litigation/admin/2013/34-70694.pdf. 

122. Financial Industry Regulatory Authority, Equity ATS Firms as of Sept. 1, 2017, available at: 

http://www.finra.org/industry/equity-ats-firms (last accessed Sept. 14, 2017).
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Figure 3: NYSE-Listed Equities by Exchange

Sources: Office of Financial Research analysis, U.S. Equities Trade and Quote (TAQ), calculated (or derived) based on 

data from Daily Stock File ©2017 Center for Research in Security Prices (CRSP®), the University of Chicago Booth 

School of Business.

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

NASDAQ and affiliates

BATS and affiliates

NYSE and affiliates

Trade Reporting Facility

Other

Market Share

0%

20%

40%

60%

80%

100%

Figure 4: NASDAQ-Listed Equities by Exchange

Sources: Office of Financial Research analysis, U.S. Equities Trade and Quote (TAQ), calculated (or derived) based on 

data from Daily Stock File ©2017 Center for Research in Security Prices (CRSP®), the University of Chicago Booth 

School of Business.

0%

20%

40%

60%

80%

100%

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

NASDAQ and affiliates

BATS and affiliates

NYSE and affiliates

Trade Reporting Facility

Other

Market Share
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Market share is now dispersed amongst trading venues, including a substantial portion of trading 

flow being internalized by broker-dealers in lieu of being executed on the exchanges. 

Figure 5: Equities Market Share by Venue

Source: Rosenblatt Securities, July 2017

Dark Pools

14.8%

Other Trade 

Reporting Facilities

(internalization)

22.5%

Other

1.4%

NASDAQ

14.1%

NYSE

13.3%

NYSE Arca

9.3% EDGX

6.5%

NASDAQ BX

3.2%

Exchanges (total)

62.7%

IEX

2.2%

EDGA

1.6%

BATS BZX

6.2%

BATS BYX

4.9%

To attract volume, some venues offer incentives for directing orders to the exchange or for entering 

orders. Some offer novel order types, causing an increasingly complex trading environment. Some 

offer preferential access to data at a price, which may enable high-frequency traders to engage 

in practices that disadvantage institutional sellers and may contribute to higher volatility. The 

proliferation of electronic trading venues has given rise to high-frequency trading (HFT) activities, 

which rely on high-speed computers and sophisticated algorithms to effectively make markets on 

multiple venues and in multiple securities simultaneously. HFT strategies have been used by new 

entrants, often trading with their own capital, as well as by some established market participants 

such as broker-dealers that are part of banks. 

An increasing share of trading is also done in dark pools and other unlit venues. Institutional 

investors may elect to use dark pools to effect large transactions without impacting market prices, 

and some dark pools may offer lower transaction costs and spreads. Dark liquidity includes certain 
A Financial System That Creates Economic Opportunities • Capital Markets

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ATSs on which broker-dealers’ customers may trade with each other or with the broker-dealer 

anonymously; exchange-executed hidden orders; and other OTC venues, such as broker-dealers 

who internalize orders. Dark pools are controversial because they may reduce the effectiveness of 

the lit markets’ price discovery function,123 may enable abusive trading by high-frequency traders, 

and may conceal trading by broker-dealers that is disadvantageous to their customers.124 However, 

dark pools may benefit investors by reducing trading costs, facilitating the sale of lower-volume 

securities, and permitting investors to trade without triggering unfavorable price changes.125

The SEC’s regulation and oversight of securities exchanges and ATSs differs meaningfully. A registered national securities exchange is a self-regulatory organization (SRO) that must fulfill certain 

responsibilities defined by statute and SEC rules. A national securities exchange must, among 

other obligations, register with the SEC (unless an exemption or exception applies);126 enforce 

its members’ compliance with federal securities laws and its own rules;127 adopt listing requirements for securities on its exchange (if the exchange lists securities);128 equitably allocate reasonable 

dues, fees, and other charges among its members and other users; and have rules designed to 

prevent fraudulent and manipulative acts and practices to promote just and equitable principles 

of trade and to protect investors and the public interest.129 SROs must also file any new rule or 

rule change with the SEC for approval.130 Although an ATS matches buyers and sellers like an 

exchange, an ATS is exempt from the definition of exchange and thus is not required to register 

as an exchange or to fulfill the regulatory obligations of an SRO.131 Instead, an ATS must comply 

with the requirements of the SEC’s Regulation ATS.132 Among the requirements are that an ATS 

must be registered with the SEC as a broker-dealer and become a member of FINRA,133 file Form 

ATS with the SEC before beginning operations,134 and update the form to maintain its accuracy.135

123. Linlin Ye, Understanding the Impacts of Dark Pools on Price Discovery (Oct. 2016), available at: 

https://arxiv.org/pdf/1612.08486.pdf (finding that dark pools impair price discovery when information risk is 

high but enhance price discovery when information risk is low). See also PricewaterhouseCoopers, An 

Objective Look at High-Frequency Trading and Dark Pools (May 6, 2015), available at: 

http://www.pwc.com/us/en/pwc-investor-resource-institute/publications/assets/pwc-high-frequency-trading-dark-pools.pdf

(“PwC HFT Report”) (suggesting price discovery is harmed when a significant portion of a security’s trading is in dark pools). Other researchers find that dark pools improve price discovery. See, e.g., Haoxiang 

Zhu, Do Dark Pools Harm Price Discovery? (Nov. 16, 2013), available at: 

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1712173.

124. Various settled enforcement actions involving ATS operators are described in footnote 140.

125. See PwC HFT Report.

126. 15 U.S.C. § 78e.

127. 15 U.S.C. § 78f(b)(1).

128. 15 U.S.C. § 78f(h)(3).

129. 15 U.S.C. § 78f(b)(4).

130. 15 U.S.C. § 78s(b)(1).

131. See 17 C.F.R. § 240.3a1-1 (exempting any organization, association, or group of persons from the definition of “exchange” if it complies with Regulation ATS).

132. 17 C.F.R. §§ 242.300 et seq.

133. 17 C.F.R. § 242.301(b)(1).

134. 17 C.F.R. § 242.301(b)(2).

135. 17 C.F.R. § 242.301(b)(2)(ii).
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Form ATS is merely a notice filing, which the SEC does not approve in any way. An ATS must 

also report information to the SEC quarterly on Form ATS-R, including the volume of specified 

categories of securities traded on the ATS and a list of all subscribers that were participants during 

the quarter.136 These forms tell the SEC about ATSs’ operations, but the forms otherwise remain 

confidential and are not disclosed to the public.137

An ATS is required to provide “fair access” if the ATS’s market share is more than 5% of the average 

daily volume of national market system (NMS) stocks (e.g., exchange-listed stocks) or certain 

other securities for four of the preceding six calendar months.138 “Fair access” requires an ATS to 

publicly display its best bid or offer and to provide equal access to those orders. Accordingly, an 

ATS must establish standards for granting access to its platform and fairly apply those standards 

without unreasonably prohibiting or limiting any person from trading in any equity securities.139

An ATS must also notify the SEC on Form ATS-R when it has denied or limited access to the ATS. 

The opaque operations of ATSs and limited public disclosure requirements have created the conditions for numerous instances of malfeasance by ATS operators. ATS operators have been accused 

of making inadequate or false disclosures about their operations and failing to disclose conflicts of 

interest. In the last five years, the SEC has settled enforcement actions against several ATS operators for making inadequate or false disclosures about their operations, failing to update their Forms 

ATS as required, or for failing to disclose conflicts of interest.140

Market Quality

The U.S. capital markets are the most liquid in the world and a powerful force in promoting 

economic growth and investment. Liquidity is difficult to define precisely, and its characteristics 

vary by asset class. However, it generally relates to the ease, speed, and cost with which investors 

can buy or sell assets. Some commonly used metrics for liquid markets include: 

136. Id.

137. Regulation of NMS Stock Alternative Trading Systems (Nov. 18, 2015) [80 Fed. Reg. 80998 at 81005-

06 (Dec. 28, 2015)] (“Regulation NMS Proposal”).

138. 17 C.F.R. § 242.301(b)(5). The fair access provisions apply on a security-by-security basis. 17 C.F.R. § 

242.301(b)(5)(ii).

139. See Regulation of Exchanges and Alternative Trading Systems (Dec. 8, 1998) [63 Fed. Reg. 70844 (Dec. 

22, 1988)].

140. See, e.g., In re: ITG Inc. and Alternet Securities, Inc. (Aug. 12, 2015) (failing to disclose the operation of 

a proprietary trading desk that traded algorithmically against customers’ order based on live feeds of an 

ATS’s order book while purporting to be an “agency-only” broker that would protect the confidentiality of 

its customers’ data). See also In re: UBS Securities LLC (Jan. 15, 2015) (illegally accepting sub-penny 

orders from high-frequency traders, who were allowed to use special order types marketed exclusively to 

them to jump the queue ahead of lawful whole-penny orders); In re: LavaFlow, Inc. (July 25, 2014) (giving 

an affiliate access to its customers’ confidential order information, which affiliate then used the knowledge 

of those orders to determine how to route orders for others); In re: Liquidnet, Inc. (June 6, 2014) (selectively providing favored private equity and venture capital customers with confidential information about 

Liquidnet members’ indications of interest and executions in contravention of confidentiality assurances 

it gave to its members); and In re: eBX, LLC (Oct. 3, 2012) (using ATS members’ confidential order flow 

information in contravention of its promises to members to inform and improve the order routing process 

of an ATS affiliate).
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• Breadth of market: the width of the bid-ask spread, or the difference between the price 

at which investors may purchase shares (the “ask” or “offer”) and the price at which they 

may sell shares (the “bid”). 

• Depth of market: the number of shares of stock available at the best bid or offer. 

Robust market depth and breadth combine to give investors and traders the ability to buy or sell 

shares of stock with limited effects on the market price, a characteristic that has been called “resilience.” Companies that enjoy good liquidity can more easily raise money in the capital markets to 

fund investments and provide jobs. Investors rely on the liquidity in our financial markets to make 

new investments and to realize returns from their earlier investments. Liquid markets also allow 

investors to transfer risks among themselves at low cost, further helping the process of allocating 

capital among competing business opportunities. 

Liquidity relies on having a large pool of investors who are willing to buy and sell securities and 

venues upon which they can interact. Market makers, floor specialists, institutions, day traders, 

and retail investors are all important contributors of liquidity. 

As discussed in the last section, regulatory and market changes have affected the sources of liquidity in the last two decades. These structural market changes have contributed to reduced direct 

trading costs (both bid-ask spreads and commissions), but have also caused liquidity to fragment 

among many venues. 

Figure 6: Value-Weighted Effective Spreads on NASDAQ

Trading costs have fallen

Note: Securities traded in NYSE/AMEX/NASDAQ/ARCA

1 Stocks priced below $10 per share traded in sixteenths

2 Decimalization test covering selection of 15 representative stocks began on 3/2/2001

Source: Center for Research in Security Prices

1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Regulation NMS

Eighths regime1 Sixteenths

regime

Decimals regime2

0.000

0.005

0.010

0.015

0.020

0.025

0.030

0.035

0.040

Average Effective Spread ($)
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One particular complaint is that while share volume in the United States is substantial, executing 

large transactions has become harder. The average trade size in U.S. markets fell precipitously in 

just 15 years, though some of this effect may be due to increasing electronification and greater 

reliance on algorithms to split trades and minimize market impact. The average trade size for 

large capitalization stocks in 1999 was 988 shares, but by 2014 it had fallen to 195 shares.141 For 

small capitalization stocks, average trade size dropped from 732 shares to 118 shares in the same 

period.142 Block trades, trades of 10,000 shares or more, have become much less frequent. Block 

trades account for less than 8% of volume on the NYSE, compared with over 50% in the 1990s.143

Average transaction sizes for NYSE-listed stocks declined by 14% from 2004 to 2014.144

Figure 7: Average Trading Size in U.S. Equities Markets

Sources: Office of Financial Research analysis, Muzan Trade and Quote Data

0

1,000

2,000

3,000

1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015 2017

NYSE

NASDAQ

Number of Shares

Liquidity is also unevenly distributed across the equities market, with small- and mid-capitalization 

stocks enjoying much less liquidity than large-capitalization stocks. A study of liquidity among 

companies with market capitalizations of less than $5 billion found that in general, companies 

with the smallest market capitalizations (less than $100 million) had larger quoted and effective 

141. CFA Institute, Liquidity in Equity Markets: Characteristics, Dynamics, and Implications for Market Quality, 

Exhibit 4 (Aug. 2015), available at: http://www.cfapubs.org/doi/pdf/10.2469/ccb.v2015.n7.1.

142. Id.

143. BlackRock, The Liquidity Challenge: Exploring and Exploiting (Il)liquidity (June 2014), available at: 

https://www.blackrock.com/corporate/en-mx/literature/whitepaper/bii-the-liquidity-challenge-us-version.pdf. 

144. PricewaterhouseCoopers, Global Financial Markets Liquidity Study (Aug. 2015), at 88, available at: 

http://www.pwc.se/sv/pdf-reports/global-financial-markets-liquidity-study.pdf (“PwC Liquidity Study”).
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spreads than the largest capitalization companies (between $2 billion and $5 billion).145 The smallest capitalization companies also had shallower depths of book, or pending orders at prices outside 

the best bid or offer.146 The gap between the “liquidity haves” and the “liquidity have-nots” may 

be expanding. Trading volume in the mid-capitalization stocks in the Standard & Poor’s 400 MidCap index dropped 25% between 2008 and 2014.147

Figure 8: Quoted Bid-ask Spreads

Median stock

75th percentile

95th percentile

2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

$0.14

$0.12

$0.10

$0.08

$0.06

$0.04

$0.02

$0.00

Source: NYSE TAQ data/James J. Angel, Lawrence E. Harris, Chester S. Spatt, Equity Trading in the 21st Century: An Update 

at 5 (June 21, 2013)

Issues and Recommendations

Fragmentation of Liquidity and Promoting Liquidity in Less Liquid Stocks

Regulatory, technology, and market factors have fueled an increase in the number of trading venues. Competition has increased and trading activity has fragmented among these venues. 

While competition in trading venues has been a significant driver in the reduction of transaction costs over the past decade, the benefits have not been shared evenly by all listed securities. 

Competition among venues has garnered the most benefits for heavily traded stocks, where volumes are sufficient to support many venues. In thinly traded stocks, venue fragmentation can 

be especially problematic, as light volumes are thinly spread across many venues. The primary 

145. Charles Colliver, A Characterization of Market Quality for Small Capitalization US Equities, white paper 

(Sept. 2014), available at: https://www.sec.gov/marketstructure/research/small_cap_liquidity.pdf.

146. Id.

147. PwC Liquidity Study, Figure 4.83 at 92.
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function of markets is to facilitate the meeting of buyers and sellers, but with so little volume 

spread across so many venues, finding the other side of a trade has become harder. Excessive 

fragmentation can complicate provision of liquidity as market-makers limit the size they post to 

each market to manage their risk, which in total reduces the available liquidity.

Recommendations 

Treasury recognizes that one size may not fit all when it comes to trading venue regulation. Treasury 

recommends exploring policies that would consolidate liquidity for less-liquid stocks on a smaller 

number of trading venues. Consolidating trading to fewer venues would simplify the process of 

making markets in those stocks and thereby encourage more market makers to provide more 

liquidity in those issues. 

To accomplish this goal, Treasury recommends that issuers of less-liquid stocks, in consultation 

with their underwriter and listing exchange, be permitted to partially or fully suspend UTP for 

their securities and select the exchanges and venues upon which their securities will trade. Issuers 

have a unique interest in promoting the liquidity of their stocks and balancing the interests of 

market-makers and investors. While issuers may not be experts in market structure, they could 

consult their underwriter and the listing exchange on these important issues. 

Accordingly, the SEC should consider amending Regulation NMS to allow issuers of less-liquid 

stocks to choose to have their stock trade only on a smaller number of venues until liquidity in 

the stock reaches a minimum threshold. To maintain a basic level of competition for execution, 

broker-internalization should remain as a trading option for all stocks.

A number of measures could be used to determine which stocks are “illiquid” for these purposes. 

While definitions of and metrics used to measure liquidity differ,148 one simple approach would 

be to use average daily volume as the metric to differentiate between liquid and illiquid stocks for 

these purposes. 

Dynamic Tick Sizes

As explained previously, decimalization, or the conversion of quoting conventions to decimals 

instead of fractions, coincided with a reduction in the tick size (or minimum increment) for most 

stocks to one penny.149 Decimalization and the associated reduction in tick size is one of the many 

factors cited as contributing to the long-term reduction in equities trading costs.

The tick size creates an arbitrary minimum cost to trade, and also establishes at what increments 

market participants can interact. From the perspective of a market operator, tick size is a useful tool 

to balance the minimum cost to trade with the rewards of liquidity provision. A tick size that is 

too large imposes costs on participants who choose to cross the spread, and such large transaction 

costs can discourage trading activity and investment. On the other hand, a tick size that is too 

148. See, e.g., Ruslan Y. Goyenko, Craig W. Holden, and Charles A. Trzcinka, Do Liquidity Measures Measure 

Liquidity?, 92 Journal of Financial Economics 153 (May 2009) for a discussion of alternative measures of 

liquidity. A sample of these measures include bid-ask spreads, “Effective Tick,” and “Effective Tick2.”

149. 17 C.F.R. § 242.612(a) generally requires all tick sizes to be at least one penny per share for NMS stocks 

if the bid or offer, order, or indication of interest is equal to or greater than $1.00 per share.
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small fails to consolidate liquidity at a given price because a small tick size encourages freeriding 

on the quotes others have made (by improving the price by economically insignificant amounts), 

discouraging liquidity provision. 

Beginning in October 2016, the SEC launched a pilot to evaluate the effects of larger tick sizes 

(three different technical variations of moving from a penny to a nickel) on small cap stocks.150

While the pilot is still ongoing, some observers are beginning to draw preliminary conclusions. 

Research suggests displayed depth of book (i.e., the number of shares available at the best bid or 

offer) increased, but return volatility increased as average trade volume dropped.151 The tick size 

pilot may also be driving volume off exchanges and onto inverted markets.152 However, the tick 

pilot did not distinguish between small cap stocks that had previously traded with narrow spreads 

and those with wide spreads. Some stocks which previously traded well at one penny have seen 

unnecessary cost increases, while other stocks that had typical bid-ask spread of 10 cents or wider 

have not seen significant changes. 

Recommendations

Tick size is another area where “one-size-fits-all” changes may need to be better tailored to individual stocks. Treasury recommends that the SEC evaluate allowing issuers, in consultation with 

their listing exchange, to determine the tick size for trading of their stock across all exchanges. 

Such a change would borrow a good idea from the futures markets, where each listed contract 

has a different tick, and the ticks are updated periodically to improve market quality. More-liquid 

stocks would likely have lower tick sizes (reflecting their low cost and extremely competitive liquidity provision), and less-liquid stocks higher tick sizes (reflecting the need to coalesce liquidity to 

improve market functioning). As companies grow and their liquidity profile changes, they could 

update their tick size.

While different tick sizes for different stocks would increase the complexity of the market, this 

could be managed by limiting the potential choices to a small number of standard options, e.g., 10 

cents, 5 cents, 1 cent, or 1⁄2 cent per share. Similar to the tick size pilot, exceptions could also be 

made for retail orders as appropriate.

150. Order Approving the National Market System Plan to Implement a Tick Size Pilot Program by BATS 

Exchange, Inc., BATS Y-Exchange, Inc., Chicago Stock Exchange, Inc., NASDAQ OMX BX, Inc., NASDAQ 

OMX PHLX LLC, The Nasdaq Stock Market LLC, New York Stock Exchange LLC, NYSE MKT LLC, and 

NYSE Arca, Inc., as Modified by the Commission, For a Two-Year Period (May 6, 2015) [80 Fed. Reg. 

27513 (May 13, 2015)].

151. Peter Reinhard Hansena et al., Mind the Gap: An Early Empirical Analysis of SEC’s “Tick Size Pilot 

Program,” working paper (May 22, 2017), available at:

https://sites.google.com/site/peterreinhardhansen/research-papers/mindthegapanearlyempiricalanalysisofsecsticksizepilotprogram. See also José Penalva and Mikel Tapia, Revisiting Tick Size: Implications from the SEC Tick Size 

Pilot, working paper (Aug. 3, 2017), available at:

https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2994892 (finding that the tick size pilot has increased depth of 

book but has also increased cost of execution).

152. Yiping Lin, Peter Swan, and Vito Mollica, Tick Size is Little More Than an Impediment to Liquidity Trading: 

Theory and Market Experimental Evidence, working paper (Aug. 10, 2017).
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Maker-Taker and Payment for Order Flow

Traditional securities markets charge both buyers and sellers a transaction fee for executing transactions in addition to other fees they may charge for other services. In contrast, on “maker-taker 

markets,” the venues charge fees to some parties and pay rebates to others based on their order 

types. The fees and rebates are intended to help maker-taker markets attract a higher volume of 

transactions. In the traditional maker-taker market, “takers” who purchase or sell shares at a quoted 

price (and are therefore taking liquidity from the market) are charged a fee. “Makers” who provide 

resting quotes (and are therefore supplying liquidity to the market) receive a rebate of a portion of 

the taker fee if their bids or offers are executed. The rebates create an incentive for market makers to 

provide displayed liquidity while increasing costs for participants who cross the spread to execute 

their transaction. The exchange realizes a profit based on the difference between the taker’s fee and 

the rebate paid to the maker. 

The rebate system of maker-taker and inverted markets (where venues actually pay rebates to the 

liquidity taker) may distort the incentives of broker-dealers executing customers’ trades. It could 

also encourage broker-dealers to direct trades to venues where they can receive greater payments 

for order flow rather than venues where their customers will receive the fastest execution or the 

greatest likelihood of execution. While best execution obligations and the Order Protection Rule 

require (in different ways) a broker-dealer to execute its customers’ trades at the best available price, 

if multiple venues have the same price, the broker-dealer may choose to effect the transaction on 

the exchange that will provide it the greatest rebate. 

Recommendations

Treasury is concerned that maker-taker markets and payment for order flow may create misaligned 

incentives for broker-dealers. Accordingly, Treasury recommends that the SEC consider rules to 

mitigate the potential conflicts of interest that arise due to these compensation arrangements. 

First, Treasury recommends that the SEC require additional disclosures regarding these arrangements. Specifically, Treasury recommends that the SEC adopt a final rule implementing the changes 

it proposed in 2016 to Exchange Act Rules 600 and 606.153 The proposed rule changes would 

require broker-dealers to provide institutional customers with specific disclosures related to the 

routing and execution of their orders, and also require broker-dealers to make aggregated information about their handling of customers’ institutional orders publicly available. The proposed rule 

changes would also require that retail customers receive additional information about their orders, 

including the disclosure of the net aggregate amount of any payment for order flow received, payment from any profit-sharing relationship received, transaction fees paid, and transaction rebates 

received by a broker-dealer from certain venues; and descriptions of any terms of payment for 

order flow arrangements and profit-sharing relationships. 

Second, Treasury supports a pilot program to study the impact reduced access fees would have on 

investors’ execution costs or available liquidity. Reducing access fees reduces the direct funding 

source for maker-taker arrangements by limiting the fees paid by takers, which generally fund the 

rebates paid to makers. If the study showed that the reduction in fees did not have material negative 

153. Disclosure of Order Handling Information (July 13, 2016) [81 Fed. Reg. 49431 (July 27, 2016)].
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effects on market quality, the SEC should consider restricting the use of rebates and payment for 

order flow arrangements. The SEC could also consider whether it should require broker-dealers 

acting as agents to refund rebates and payments for order flow to their customers. If payments went 

directly to customers rather than intermediaries, incentives would be more appropriately aligned. 

Rebates are another area where tailoring to the situations of more- and less-active stocks may be 

appropriate. While the issues affecting the market for less-liquid stocks are many, and a potential 

rebate is a small part of the equation, Treasury is hesitant to recommend any course of action that 

could worsen liquidity for less actively traded stocks. Accordingly, Treasury recommends that the 

SEC exempt less liquid stocks from the restrictions on maker-taker rebates and payment for order 

flow if such exemptions promote greater market making. 

Market Data 

As noted above, Regulation NMS included new Market Data Rules, which were intended to 

promote the wide availability of market data and reward trading exchanges which produce the 

most useful information for investors.154 Under the Market Data Rules, an exchange or brokerdealer must make the best bids and offers available to a Securities Information Processor (SIP) on 

terms that are fair and reasonable. Each trading venue has only a single SIP, which then resells the 

consolidated data to broker-dealers and others. The SIP is responsible for consolidating the data it 

receives and determining the national best bid or offer (NBBO) for each security. 

The Market Data Rules also allow venues to sell additional non-core data at additional cost. This 

has allowed venues to make considerable revenue as a provider of additional data not provided 

to the SIPs (such as depth of book and odd-lot orders), and by delivering that information more 

quickly than SIPs are able to deliver the consolidated feed. Many HFT firms rely on these proprietary data feeds to inform their trading, in part by consolidating information from exchanges’ 

proprietary feeds faster than it can be delivered by the SIP, and by using their knowledge of the 

depth of book to anticipate price changes driven by executions. 

Many broker-dealers report that they feel compelled to purchase these enhanced data feeds from 

the trading venues both to provide competitive execution services to their clients and to meet their 

best execution obligations. Exchange Act provisions and FINRA rules require broker-dealers to 

give their customers “best execution” of the customers’ securities transactions.155 Broker-dealers 

interpret their best execution obligations as requiring them to use the best available data to find 

their customers the best reasonably available price. Broker-dealers’ customers may also demand 

that firms employ proprietary data feeds to identify the best prices. Broker-dealers must also 

compete with HFT firms that use enhanced data feeds to trade at an advantage to retail investors 

and institutional investors with slower data connections. In addition, the market for proprietary 

data feeds is not fully competitive. For use in making routing and trading decisions for active or 

institutional size order flow, data from one exchange’s feed cannot substitute for data from another 

exchange’s feed. 

154. Regulation NMS (June 9, 2005) [70 Fed. Reg. 37495 (June 29, 2005)].

155. See 15 U.S.C. § 78j(b) 17 C.F.R. § 240.10b-10; FINRA Rule 5310.
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Competitive pressure among broker-dealers and limited constraints on exchange pricing power 

has allowed exchanges to regularly raise prices. Consequently, exchange data fees made up nearly a 

third of exchanges’ $28.3 billion in revenue in 2016.156

Recommendations 

Treasury recommends that the SEC and FINRA issue guidance or rules clarifying that brokerdealers may satisfy their best execution obligations by relying on SIP data rather than proprietary 

data feeds if the broker-dealer does not otherwise subscribe to or use those proprietary data feeds. 

This should help to eliminate the need for broker-dealers to defensively subscribe to these costly 

data feeds to ensure that they meet increasingly cautious interpretations of their best execution 

obligations. Such guidance might help reduce the barriers to entry for new broker-dealers and 

benefit smaller broker-dealers who would otherwise find the cost of proprietary data prohibitive.

Treasury recommends that the SEC also recognize that markets for SIP and proprietary data feeds 

are not fully competitive. The SEC has the authority under the Exchange Act to determine whether 

the fees charged by an exclusive processor for market information are “fair and reasonable,” “not 

unreasonably discriminatory,” and an “equitable allocation” of reasonable fees among persons who 

use the data.157 The SEC should consider these factors when determining whether to approve SRO 

rule changes that set data fees. 

To foster competition and innovation in the market for SIP data, the SEC should also consider 

amending Regulation NMS as necessary to enable competing consolidators to provide an alternative to the SIPs. Competing consolidators should be permitted to purchase exchanges’ proprietary 

data feeds, including last sale and depth of book, on a non-discriminatory basis. The competing 

consolidators would aim to provide faster consolidation and distribution, improved breadth of 

data, and lower cost than the SIPs. 

Order Protection Rule 

The Order Protection Rule requires a broker-dealer to route a customer’s order to the trading venue 

with the best available price, referred to as the NBBO. One purpose of the rule is to help customers 

get the best available price regardless of the market which displays that order. The rule has been 

credited with improving prices and reducing transaction costs for retail investors. 

The Order Protection Rule has helped to foster competition among execution venues because it 

allows a venue to attract some order flow any time that venue has the best available bid or offer. But 

the same feature of the rule has also contributed to the proliferation of execution venues and the 

fragmentation of the equities market. To meet their best execution obligations, broker-dealers are 

effectively required to continuously check even small venues that rarely offer meaningful liquidity 

or the best available prices. This means that even small execution venues with little liquidity can 

continue to exist and thrive, notwithstanding their low volume, by selling their data streams to 

broker-dealers. 

156. Joe Parsons, Exchange Data Made Up a Third of Revenues in 2016 (July 11, 2017), available at: https://

www.thetradenews.com/Trading-Venues/Exchange-data-made-up-a-third-of-revenues-in-2016/.

157. 15 U.S.C. § 78k-1(c)(1)(B) and (D).
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The rule has also been criticized as overly simplistic and price focused, as it does not account for the 

likelihood of execution, the depth of available liquidity on a venue, or even the cost of executing 

on the venue. To execute large transactions, institutional investors have had to rely on electronic 

algorithms (their own or those operated by their broker-dealers) to break large orders into smaller 

ones to take available liquidity on multiple markets without tipping off other traders to their large 

trade, or by moving their transactions to dark pools, which further fragments the equity markets. 

The Order Protection Rule can also cause unintended outcomes in trade execution. The rule protects only round lot orders (orders of 100 shares or larger orders in increments of 100 shares). Some 

have noted that the execution of a round lot order against an odd lot order can cause the round lot 

order to become an odd lot residual. For example, an investor may have a bid at the top of the book 

for 100 shares at $50 per share. If a sell order for one share executes against the standing round lot 

order, an unprotected 99 share residual will remain. 

Recommendations 

The Order Protection Rule is intended to help investors receive the best bid or offer available 

in any market. However, the rule has fragmented liquidity among small venues that rarely offer 

significant price improvement and driven up the value of data accumulated by those exchanges. 

The SEC should consider amending the Order Protection Rule to give protected quote status only 

to registered national securities exchanges that offer meaningful liquidity and opportunities for 

price improvement. Furthermore, protected quote status should go to exchanges only if the cost 

of connecting to the market offsets the burden in market complexity and data costs that connecting would impose on broker-dealers and other market participants. Accordingly, the SEC should 

consider amending the Order Protection Rule to withdraw protected quote status for orders on 

any exchange that do not meet a minimum liquidity threshold, measured as a percentage of the 

average daily trading volume executed on the particular exchange versus the volume of all such 

securities transactions executed on all exchanges. 

The SEC should carefully consider the appropriate threshold, including evaluating the benefits 

received by broker-dealers’ customers in the form of price improvement obtained on exchanges 

with different levels of volume, as well as the costs broker-dealers face executing transactions on 

those exchanges. 

Treasury recognizes that instituting a minimum volume test on exchanges could have anticompetitive effects. The proposed changes could undermine transaction revenue and data revenue at smaller 

exchanges, thus reducing their ability to compete with larger exchanges for volume. A minimum 

volume test could also create a barrier to entry, whereby a new exchange would need sufficient 

volume to earn the coverage of the Order Protection Rule. Without the rule, the exchange might 

never be able to attract the necessary volume. Accordingly, the SEC should consider proposing that 

any newly registered national securities exchange also receive the benefit of protected order status 

for some period of time to allow the new exchange an opportunity to thrive. 

If a broker-dealer’s best execution obligations require it to seek price improvement from every 

exchange, the broker-dealer may not be able to benefit from the simplification this proposal might 

otherwise offer. If the SEC proposes the rule described above, the SEC should also consider issuing 
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interpretive guidance concerning whether broker-dealers’ best execution obligations could be satisfied without checking the best bid or offer available on marginal exchanges.

Reducing Complexity in Equity Markets

Trading venues also compete by offering alternative order types beyond bids and offers. For example, one trading venue offers order types that vary on times of execution (pre-market, post-market, 

regular session, or all sessions); time in force (day orders, immediate or cancel, fill or kill orders, or 

good til time); market vs. limit orders; routable, non-routable, and non-routable by design orders 

with several variants; displayed or non-displayed orders; aggressive or superaggressive orders, etc. 

Many of these order types can be combined creating multiple permutations. One source estimated 

that exchanges offer 2,000 variations of order types.158 Some large institutional investors are concerned that other short-term traders, such as HFT firms, may exploit these order types to learn 

about the institutions’ trading intentions. These participants can then use this information to 

effectively trade ahead of the institutions, increasing their cost of execution. Exchanges assert that 

these order types are transparent and fully disclosed because all new order types on exchanges are 

approved by the SEC and fully documented. They are also available for all traders to use. Others 

assert that order type proliferation has made the trading environment so complex that even professional investors may not understand how others are exploiting the information advantages that 

may be gained from different order types. 

Recommendations

Because market complexity is exacerbated by the proliferation of order types, Treasury recommends that the SEC review whether exchanges and ATSs should harmonize their order types and 

make recommendations as appropriate. The SEC should consider whether particular order types 

sustain sufficient volume to merit continuation.

Regulation ATS 

In 2015, the SEC proposed to amend Regulation ATS to increase public information about ATSs 

that trade NMS stocks (NMS Stock ATSs) and to facilitate better SEC oversight of those ATSs. 

The proposed rule would: 

• Require an ATS to publicly disclose information about its operator (and any affiliates) 

and the ATS’s operations, including information about potential conflicts of interest. 

• Give the SEC authority to approve an ATS’s disclosure as well as revoke an ATS’s ability 

to operate under appropriate circumstances.

• Require ATSs to maintain written safeguards and procedures to protect subscribers’ 

confidential trading information. 

158. Herbert Lash, Complaints Rise over Complex U.S. Stock Orders, Reuters (Oct. 19, 2012), available 

at: http://www.reuters.com/article/us-exchanges-ordertypes/analysis-complaints-rise-over-complex-u-s-stock-orders-idUSBRE89I0YU20121019. See also Paul G. Mahoney and Gabriel Rauterberg, The Regulation of Trading 

Markets: A Survey and Evaluation, Virginia Law and Economics Research Paper No. 2017-07 (Apr. 19, 

2017), available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2955112.
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Some industry participants are concerned, however, that the proposed rule may be unnecessarily 

burdensome. They also believe that the rule encompasses overbroad categories of information and 

would require ATSs to disclose confidential material that would not give participants any useful 

insight into the ATS operations. Among the problematic disclosures that would be required under 

the proposal are: 

• “[A]ny materials provided to subscribers or other persons related to the operations of the 

NMS Stock ATS or the disclosures on Form ATS-N.”159

• Disclosures about affiliates that do not present potential conflicts of interest with ATS 

participants. 

• Disclosure about a broker-dealer operator’s or its affiliate’s use of smart order routers or 

algorithms to send or receive orders or indications of interest to or from the NMS Stock 

ATS and details on how the ATS and smart order routers or algorithms interact. 

• Details of an NMS Stock ATS’s outsourcing arrangements concerning any of its operations, services, or functions. 

Recommendations

Treasury agrees with the SEC’s goals of amending Regulation ATS to increase public information about NMS Stock ATSs. Additional transparency regarding an NMS Stock ATS’s operations 

will allow participants and investors to make more informed decisions about whether to execute 

transactions on the venue. 

Treasury recommends that the SEC adopt the amendments to Regulation ATS substantially as proposed to promote improved information about ATS operations. However, Treasury recommends 

that the SEC revise aspects of the proposal that would require public disclosure of confidential 

information that is unnecessary and unhelpful to investors deciding where to send their orders. 

Treasury recommends that the SEC instead require only confidential disclosure of such information to the agency if the agency can demonstrate that the information would improve its ability to 

oversee the industry. Treasury suggests that the SEC also ensure disclosures related to conflicts of 

interest are tailored to provide useful information to market participants. Finally, Treasury recommends that the SEC consider ways to simplify the disclosures to reduce the compliance burden and 

to increase their readability and comparability across competing ATSs.

159. Regulation NMS Proposal, 80 Fed. Reg. at 81140.

The Treasury Market

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Overview and Regulatory Landscape

Overview of Treasury Market Structure

The U.S. Treasury market is the deepest and most liquid government securities market in the world 

and serves as the primary means of financing the U.S. government. Treasury securities play a critical role in global finance as a risk-free benchmark from which many other financial instruments are 

priced. Domestic and foreign investors use Treasury securities as a vehicle for investment and the 

Federal Reserve uses Treasury securities in its implementation of monetary policy.

In recent years, the structure of the U.S. Treasury market has changed in many important ways. 

As with many other financial markets, advances in technology have facilitated growth in electronic 

trading for large segments of the Treasury market. At the same time, extraordinary monetary policy 

has attended a shift in the composition of Treasury end investors. Additionally, the roles played 

by dealers in the Treasury market are shifting, and new types of intermediaries – particularly those 

specializing in electronic trading – have entered and recently come to dominate major segments 

of the market. 

Recent Trends and Developments

Over the last decade, Treasury marketable debt outstanding has grown sharply to about $14 trillion as of June 30, 2017, up from $4.3 trillion as of June 30, 2007, just before the onset of the 

financial crisis.

Figure 9: Treasury Marketable Debt Outstanding ($ trillions)

2001 2003 2005 2007 2009 2011 2013 2015 2017

Source: U.S. Department of the Treasury, Office of Debt Management

16

14

12

10

8

6

4

2

0
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Ownership of Treasury securities has also changed over the last decade. For example, as the use of 

diversified portfolio and passive investment strategies has grown generally, so have mutual fund 

holdings of Treasury securities.160 Holdings of Treasury securities outside the United States have 

grown significantly as well. According to Treasury International Capital and Federal Reserve data, 

foreign holdings of Treasury securities increased from about $2.2 trillion in June 2007, to about 

$6.2 trillion in June 2017.161

Changes to regulation since the financial crisis have driven changes in holdings of Treasury securities by the domestic banking sector and money market mutual funds. According to Federal Reserve 

data, U.S. chartered bank holdings of Treasury securities have grown from about $78 billion in 

2007 to over $500 billion in the first quarter of 2017, due in part to U.S. Basel III capital requirements to hold greater amounts of high quality liquid assets (HQLA) since the financial crisis. 

Money market mutual fund holdings have grown from $92 billion to about $741 billion over the 

same period, primarily as a result of revised SEC rules on the securities money market funds can 

hold to retain a fixed net asset value.162 The Federal Reserve, through the System Open Market 

Account, is also a significant holder of Treasury securities; the Federal Open Market Committee 

recently announced it will begin normalizing its balance sheet.163

According to the Securities Industry and Financial Markets Association (SIFMA), Treasury market 

daily volume has remained steady since 2010 at about $510 billion per day.164

Treasury Market Ecosystem

The cash Treasury market ecosystem consists broadly of two segments: the dealer-to-client (DtC) 

market, and the interdealer market. In addition, activity in the Treasury futures market is closely 

related to the cash market. Treasury repurchase agreements (repo) are often used by market participants, particularly intermediaries, to finance positions in Treasury securities.

160. Board of Governors of the Federal Reserve System, Financial Accounts of the United States – Z.1, L.210 

Treasury Securities (1), available at: https://www.federalreserve.gov/releases/z1/current/html/l210.htm (showing 

mutual fund holdings have grown from just fewer than 4% of marketable Treasury debt outstanding in the 

years preceding the financial crisis to over 6% in 2017).

161. Id.

162. Id.

163. Board of Governors of the Federal Reserve System, Implementation Note issued September 20, 2017, 

available at: https://www.federalreserve.gov/newsevents/pressreleases/monetary20170920a1.htm.

164. SIFMA US Treasury Trading Volume, available at: https://www.sifma.org/resources/research/

us-treasury-trading-volume/.
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Figure 10: Treasury Cash Market Structure

Source: Treasury

Principal Trading Firms

Interdealer brokers

Dealer

Client Client

Dealer

Request-for-quote

Platforms

Direct Stream Direct Stream

Dealer-to-Client Trading 

Institutional investors and other end users of Treasury securities – including mutual funds, pension 

funds, insurers, hedge funds, foreign central banks and sovereign wealth funds – transact in the 

DtC segment of the market. Bank-owned SEC registered dealers, referred to as bank dealers, hold 

inventory in Treasury securities and stand ready to make markets upon request from investors 

and end users. The bank dealer side of the DtC market is dominated by 23 primary dealers, as 

designated by the Federal Reserve Bank of New York (FRBNY). 

The DtC market for Treasury securities is an over-the-counter (OTC) market. Transactions do 

not occur on central trading venues, but rather bilaterally between market participants. Though 

data on the size and composition of the DtC market is not widely available,165 it is estimated to 

account for roughly half of all daily Treasury transactions. According to the FRBNY’s weekly 

survey of primary dealers, primary dealers have transacted $313 billion on average per day outside 

the interdealer broker market in 2017, serving as a proxy for DtC activity.166

165. In July 2017, FINRA began requiring its members to report transactions in certain Treasury securities to 

its Trade Compliance and Reporting Engine (TRACE). The data is available to regulators and to Treasury.

166. Federal Reserve Bank of New York, Primary Dealer Statistics, available at: https://www.newyorkfed.org/markets/gsds/search.html.
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 150,000

 200,000

 250,000

 300,000

 350,000

 400,000

 450,000

 500,000

Average Daily Volume, Weekly

Figure 11: Primary Dealer Transactions Not With Interdealer Brokers ($ million) 

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3

2015 2016 2017

Source: Federal Reserve Bank of New York

Trading in the DtC market has been traditionally conducted by phone (i.e. voice). In recent years, 

electronic request-for-quote platforms (RFQ), such as Bloomberg and Tradeweb, have arisen. 

These platforms allow clients to electronically solicit bids and offers for Treasury securities from 

multiple dealers simultaneously (rather than serially by phone). As a result, the DtC market has 

become more automated operationally, without changing the fundamental nature of transactions 

between bank dealers and clients.

Interdealer Trading 

The interdealer market is where wholesale trading between large institutional intermediaries, such 

as bank dealers, takes place. Most institutional investors and end users of Treasury securities, such 

as the mutual funds, pension funds, etc. mentioned above, do not access this market, and instead 

trade bilaterally with bank dealers. Bank dealers then use the interdealer market to manage inventory and hedge client trading activity. 

Interdealer brokers (IDBs) intermediate trades between dealers in the interdealer market. IDBs 

manage central limit order books (CLOBs) and enable dealers to post anonymous bids and offers 

for Treasury securities to the order book, which are made available for other dealers to transact on. 

The majority of trading in the interdealer cash Treasury market is electronic and occurs on one of a 

few electronic interdealer platforms, such as BrokerTec, NASDAQ Fixed Income, and Dealerweb. 

Voice-brokered and manual electronic (as opposed to automated electronic) interdealer broker 

platforms still exist and intermediate significant interdealer volumes. 
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Along with bank dealers, principal trading firms (PTFs) also transact in the interdealer Treasury 

market. The Joint Staff Report: The U.S. Treasury Market on October 15, 2014167 (JSR) concluded 

that PTFs account for a majority of trading in the interdealer market, while bank dealers account 

for approximately 30-40% of volume. In contrast to bank dealers, PTFs do not have customers, 

trade only for their own account, and focus on automated trading methods executed on interdealer 

electronic platforms. While bank dealers will conduct large trades to service their clients’ needs and 

often carry inventory in Treasury securities, PTFs commonly act as short-term liquidity providers, 

frequently buying and selling in small amounts but rarely carrying inventory overnight. 

Recently, some PTFs (and bank dealers) have developed the means to electronically stream executable bids and offers to bank dealers and other market participants. These direct streams are targeted 

at individual firms rather than available to the market as a whole, and the terms of the streams can 

be negotiated bilaterally between the participants. While still a small part of the market overall, 

this development illustrates how electronic execution methods are changing the structure of the 

Treasury market.

The vast majority of trading in the interdealer cash Treasury market takes place in the most recently 

issued Treasury securities, often referred to as on-the-run securities. Two of the major electronic 

interdealer platforms trade on-the-run securities exclusively.

Futures 

Futures on Treasury securities, and options on these futures, are traded at the Chicago Board of 

Trade, a futures exchange regulated by the CFTC. The exchange is owned by the CME Group, 

Inc., and the vast majority of futures trades occur electronically on an anonymous CLOB, though 

larger or more complex trades may take place off exchange as block trades. All trades are reported 

publicly in real time.

As with the Treasury cash interdealer market, according to the JSR, PTFs dominate the Treasury 

futures market and account for over half of Treasury futures trading. Futures trading can be used 

by market participants to hedge cash Treasury positions or to take speculative positions in futures 

that closely track the returns of underlying Treasury securities. Market forces ensure that the prices 

of Treasury futures and their underlying Treasury securities remain tightly coupled.

Treasury Repo

Treasury repo plays a central role in U.S. securities financing markets. Repo transactions are used 

by market intermediaries to finance long positions in Treasury securities. Long-only investors use 

repo to invest cash with safe collateral. Some investors use repo to implement short positions in 

Treasury securities. All of this activity contributes to the Treasury market being the deepest and 

most liquid government securities market in the world.

In a repo transaction, one firm agrees to sell a security to another firm, with a simultaneous agreement to buy back the security at a later date at a specified price. Repo transactions are often 

167. U.S. Department of the Treasury, Board of Governors of the Federal Reserve System, Federal Reserve 

Bank of New York, U.S. Securities and Exchange Commission, and U.S. Commodity Futures Trading 

Commission, Joint Staff Report: The U.S. Treasury Market on October 15, 2014 (July 13, 2015), available 

at: https://www.treasury.gov/press-center/press-releases/Documents/Joint_Staff_Report_Treasury_10-15-2015.pdf (“Joint 

Staff Report”).
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conducted on an overnight basis, but the term of the trade can be extended to any length the 

two counterparties agree to. These transactions entail short-term loans of Treasury securities in 

exchange for cash. Like the DtC market, the Treasury repo market is an OTC market, and bank 

dealers are at its center. Treasury repo transactions can be settled either triparty — i.e., with a 

settlement bank such as the Bank of New York Mellon (BNY Mellon) or JPMorgan Chase & Co. 

(JP Morgan) providing back-office support for the trade — or bilaterally between the two parties 

to the transaction. Relatedly, these transactions can be cleared, via the Fixed Income Clearing 

Corporation’s (FICC) General Collateral Financing repo service in the case of tri-party transactions or via FICC’s delivery-versus-payment (DVP) repo service for bilateral ones. Conversely, 

bilateral repo transactions can be managed between the parties directly and hence be uncleared.

Estimates of the current size of the repo market vary. Joint OFR-FRBNY research estimates that 

in the post-crisis era, total repo activity is around $5 trillion.168 This is likely lower than levels prior 

to the financial crisis. Statistics collected by the FRBNY indicate that primary dealer Treasury 

financing volumes, a large component of repo outstanding, are approximately two-thirds the size 

they were prior to the financial crisis. Quarterly Average Principal ($ billions)

Figure 12: Primary Dealer Treasury Financing Volumes

2001

Q2

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

3,000

2,800

2,600

2,400

2,200

2,000

1,800

1,600

1,400

1,200

1,000

Source: Federal Reserve Bank of New York

168. Viktoria Baklanova, Adam Copeland, and Rebecca McCaughrin, Reference Guide to U.S. Repo and 

Securities Lending Markets, Federal Reserve Bank of New York Staff Report No. 740 (Sept. 2015 and 

revised Dec. 2015), available at: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr740.pdf.
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Treasury Market Oversight

Several agencies, under a range of authorities, are responsible for regulating various entities transacting in the Treasury market. The Government Securities Act of 1986 (GSA) established a federal 

system for the regulation of brokers and dealers in the U.S. government securities market.169 The 

GSA required previously unregistered brokers and dealers that limit their business to government 

and other exempt securities to register with the SEC and join a self-regulatory organization.170 Few 

firms fall within this category; most broker-dealers transacting a business in government securities 

do not do so exclusively and have the more general securities broker-dealer registration with the 

SEC. The GSA also specified that firms registered as general securities brokers or dealers, and 

financial institutions that conduct a government securities business, are required to file a written notice with the SEC, Financial Industry Regulatory Authority (FINRA), or bank regulator, 

respectively, if they conduct government securities transactions.171 The GSA registration and notice 

requirements provide, among other things, information and identification of government securities market participants.

Congress, in enacting the GSA, largely relied on the existing federal agency structure when assigning registration, examination, reporting, and enforcement responsibility.172 The GSA authorized 

Treasury to promulgate rules to provide safeguards with respect to the financial responsibility of 

government securities brokers and dealers, including capital adequacy standards, acceptance of 

custody and use of customers’ securities, record keeping, and financial reporting. In consultation 

with Treasury, the SEC, federal bank regulators, and FINRA also have authority to issue sales 

practice rules for the U.S. government securities market. Transactions in government securities are 

also subject to the antifraud provisions of Section 10(b) of the Securities Exchange Act of 1934 

(Exchange Act) and the SEC’s Exchange Act Rule 19b-5. 

Congress included a large position reporting (LPR) provision in the 1993 amendments to the 

GSA.173 Treasury was provided the authority to prescribe LPR rules for purposes of monitoring 

the impact in the Treasury securities market of concentrations of positions, assisting the SEC in 

enforcing the GSA, and providing Treasury with information to better understand supply and 

demand dynamics in certain Treasury securities.

Treasury futures and options are regulated by the CFTC under the Commodity Exchange Act 

(CEA) and CFTC rules. The CEA establishes a comprehensive regulatory structure to oversee 

169. Public Law No. 99-571.

170. As used in this report, the term “registered government securities broker or dealer” means a broker or 

dealer conducting a business exclusively in government and other exempted securities (excluding 

municipal securities) registered pursuant to 15 U.S.C. § 78o-5(a)(1)(A). The term “registered broker or 

dealer” means a broker or dealer conducting a general securities business that is registered pursuant to 

15 U.S.C. § 78o, and has filed written notice pursuant to 15 U.S.C. § 78o-5(a)(1)(B) that it is acting as a 

broker or dealer of government securities.

171. The SEC is the designated regulatory agency for securities brokers and dealers, and the federal bank regulators (Office of the Comptroller of the Currency, FRB, and FDIC) are the designated regulatory 

agencies for financial institutions.

172. The history of the GSA made clear that it was intended to address identified weakness in the market without creating duplicative requirements, unnecessarily impairing the operation of the market, increasing the 

costs of financing the public debt, or compromising the execution of monetary policy.

173. Public Law No. 103–202 [codified at 15 U.S.C. § 78o–5(f)].
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futures and swaps trading, including surveillance of the markets under the CFTC’s jurisdiction. 

The CFTC exercises surveillance and enforcement authority over participants in these markets. The 

CFTC, as the futures regulator, receives a transaction audit trail identifying market participants, 

which aids in ongoing market surveillance and enforcement.

Clearing Treasury Security Transactions 

Since the 1980s, Treasury security transactions in major segments of the market have been cleared 

(prior to settlement) by a central counterparty, which supports efficient and predictable settlement. 

Prior to the settlement of Treasury securities transactions, firms may clear trades through a central 

counterparty. The primary purpose of clearing trades through a central counterparty is to “net 

down” gross trading activity among participants that transact frequently together in both directions (such as bank dealers) into a lower net trading amount. By submitting the lower net trading 

amounts to BNY Mellon and JP Morgan for settlement (rather than the larger gross amounts), 

clearing participants are able to eliminate unnecessary transfers of cash and ownership of securities 

when a trading day’s business is settled.

FICC, a subsidiary of the Depository Trust and Clearing Corporation (DTCC), serves as a central 

clearing counterparty for major segments of the Treasury market. FICC provides trade comparison, netting, and settlement for the government securities market, including many major SECregistered brokers and dealers. FICC members pay fees for these services and must meet FICC’s 

standards of membership, including minimum capital requirements. The central clearing function 

that FICC provides to its members promotes the safety and soundness of the Treasury market as 

a whole.

Settlement in Treasury Markets

Treasury market liquidity depends on the smooth and predictable settlement of transactions. 

While the clearing function provides an important role in trade reconciliation and netting, 

settlement is the final step in a trade between two market participants. The business of settling 

transactions (that is, finalizing the transfer of ownership in Treasury securities after trades are 

completed) is conducted predominantly by two firms: BNY Mellon, with approximately 85% 

of the market share, and JP Morgan, representing the majority of the remainder. 

In July 2016, JP Morgan announced its intention to exit the government securities services 

business, which will leave BNY Mellon as the remaining large provider of these services to 

the Treasury market. The transition of clients from JP Morgan to BNY Mellon is currently in 

progress, and is expected to be completed in 2018. As part of this process, in May 2017, BNY 

Mellon announced the formation of a wholly owned subsidiary, BNY Mellon Government 

Securities Services, intended to house the settlement business under a separate governance 

structure and focus on enhancing and protecting its services and technology. The activities of 

BNY Mellon Government Securities Services fall under the supervision of the Federal Reserve.

Treasury market participants are watching this transition carefully to measure the sustainability 

of such a concentration in service and what, if any changes might need to be made to the 

settlement landscape.
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Issues and Recommendations

Treasury Market Data Gaps

On October 15, 2014, the U.S. Treasury cash market experienced a very high level of volatility 

that also affected the Treasury futures market and other closely related markets. In response to this 

event, staff of Treasury, the Board of Governors of the Federal Reserve System, FRBNY, the SEC, 

and the CFTC (Joint Staff) prepared a report analyzing the events of the day.174

Because data on Treasury market transactions is not widely available to the public, the Joint 

Staff relied on participant-level transaction data collected from a few trading venues — namely 

BrokerTec, eSpeed,175 and CME Group, Inc. — to conduct the analysis. In other words, only 

data from the interdealer and futures segments of the Treasury market was available for study. 

The report did not analyze any transactions occurring in the dealer-to-client segment, because a 

comprehensive source of data did not exist.

In July 2016, the SEC approved a FINRA rule proposal to require its members to report certain transactions in Treasury securities to FINRA’s Trade Reporting and Compliance Engine 

(TRACE).176 FINRA began collecting the data in July 2017. Because FINRA’s membership 

includes all SEC registered broker-dealers, the data collected by TRACE includes significant volumes from the dealer-to-client segment of the Treasury cash market. The data also contains reports 

of trades conducted by broker-dealers in the IDB market. Post-trade data on Treasury security 

transactions across so many venues and at the level of detail found on TRACE had not previously 

been available. The data on Treasury transactions is not being publically disseminated and is available to regulators and Treasury only, with the policy concerning public dissemination of the data 

currently under review by Treasury.

Though the amount of data recently made reportable through TRACE greatly enhances the ability 

of regulators and Treasury to understand and monitor activity in the Treasury securities market, 

significant gaps in the data available to regulators and Treasury still exist. Closing some of these 

gaps would improve Treasury’s ability to understand market activity, which will assist Treasury in 

its mission to fund the deficit at the lowest cost to the taxpayer over time.

PTF Trade Reporting

Most PTFs are not regulated because they do not meet the definition of “dealer,” as set forth 

in the Exchange Act and interpreted by the SEC.177 Because they are not dealers, they are not 

required to register with the SEC, become members of FINRA, or report their activity to TRACE. 

Trading activity on the major electronic interdealer platforms is dominated by PTFs, however, and 

174. See Joint Staff Report.

175. eSpeed was rebranded as NASDAQ Fixed Income in 2017.

176. Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of Filing of Amendment 

No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by Amendment 

No. 1, Relating to the Reporting of Transactions in U.S. Treasury Securities to TRACE (Oct. 18, 2016) [81 

Fed. Reg. 73167 (Oct. 24, 2016)].

177. 15 U.S.C. § 78c(5).
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collectively they account for over half of all transaction volumes in the interdealer broker segment 

of the market, according to the JSR. 

Because all of the major interdealer brokers in the Treasury securities market are registered with the 

SEC and are members of FINRA, the activity of unregistered PTFs in the IDB market is captured 

by TRACE through the reports of these interdealer brokers. The trade reports of PTF activity 

submitted by the interdealer brokers do not identify the unregistered PTF trade counterparts, 

however, because the PTFs are not FINRA members. Instead the PTF trade counterparty is identified only generically as a customer. In essence, a significant portion of PTF activity is anonymized 

in the TRACE data.

Recommendations

Treasury recommends closing the gap in the granularity of PTF data. To close this gap, trading platforms operated by FINRA member broker-dealers that facilitate transactions in Treasury 

securities would be required to identify customers in their reports of Treasury security transactions 

to TRACE. Treasury intends to work with SEC and FINRA to assess the feasibility of, and implement, this policy. Because most PTF activity occurs on electronic IDB platforms, requiring them 

to identify customers would capture a large fraction of total PTF trading volume, according to the 

results of the JSR. 

Bank Trade Reporting

Some Federal Reserve member banks that conduct a government securities business under the GSA 

are not brokers-dealers or members of FINRA. As such, their trading activity in Treasury securities 

is not reported to TRACE. In 2016, the Federal Reserve Board announced that it plans to collect 

data from banks for transactions in Treasury securities and that it has entered into negotiations 

with FINRA to potentially act as collection agent.178

Recommendations

Treasury supports the Federal Reserve Board’s efforts to collect Treasury transaction data from its 

bank members.

Treasury Futures Data Availability

The CFTC collects data from CME Group, Inc. on Treasury futures transactions, but the data is 

not available on a regular basis to other market regulators or Treasury. In order to effectively study 

and monitor the Treasury cash market, regulators and Treasury require comprehensive data that 

covers closely related securities, such as Treasury futures, as the Joint Staff Report demonstrated. 

Recommendations

To improve cross-market monitoring of Treasury cash and futures trading activity, as well as to 

improve the overall efficiency of government data collection and consumption, Treasury recommends that the CFTC share daily its Treasury futures security transaction data with Treasury. 

178. Board of Governors of the Federal Reserve System, Press Release (Oct. 21, 2016), available at: https://

www.federalreserve.gov/newsevents/pressreleases/other20161021a.htm.
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Clearing and Reporting

Treasury Market Central Clearing

As mentioned above, central clearing for cash Treasury transactions has existed for many years in the 

IDB segment of market. In the late 1980s, firms in the IDB market began clearing through FICC, 

which is overseen by the SEC. FICC’s model for central clearing and the regulatory framework 

surrounding it has worked well for many years. Furthermore, FICC’s largest and most important 

member firms are all registered broker-dealers and are regulated by one or several agencies, including the SEC and the Federal Reserve.

FICC’s model was formulated before the existence of electronic IDB platforms. The advent of electronic platforms enabled new types of participants — namely PTFs — to enter the IDB market in 

the early 2000s and grow rapidly. While the registered broker-dealers that are members of FICC 

clear their transactions through FICC, transactions between PTFs that are not FICC members 

must be settled bilaterally. Transactions by PTFs with other PTFs conducted on electronic IDB 

platforms must clear through the FICC account of the electronic platform179 if they are to be 

centrally cleared.

The ultimate consequence of these changes in clearing practices is twofold. First, there is less 

netting down of settlements than there would be if all interdealer market participants were FICC 

members. Second, if a large PTF with unsettled trading volumes were to fail, the failure could 

introduce risk to the market and market participants.

Despite the disadvantages that result from the bifurcation of clearing and settlement in the Treasury 

IDB market, any effort to include PTFs in FICC’s membership is complicated by the current 

fee structure and capital requirements imposed by FICC on its members, which could pose an 

economic barrier to entry for these firms.

Recommendations

Clearing and settlement arrangements in the Treasury IDB market have evolved greatly in recent 

years and continue to evolve rapidly, particularly those utilized by PTFs. It is important for the 

regulatory regime to keep up with these developments. However, we are at the early stages of this 

work. For example, the fees and other standards that FICC imposes on its members, and how 

those fees compare to fees for similar services in other markets, such as DTCC’s National Securities 

Clearing Corporation (NSCC), are not widely understood, even by many market participants. 

To better understand these arrangements and the consequences of reform options available in 

the clearing of Treasury securities, Treasury recommends further study of potential solutions by 

regulators and market participants. 

179. That is, the platform must act as principal to the trade, rather than in an agency capacity.
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Effect of Regulation on Secured Repurchase Agreement (Repo) Financing

It is generally acknowledged that the interaction of the U.S. banking regulators Basel III capital 

requirement’s supplementary and enhanced supplementary leverage ratios (SLR, eSLR) and other 

rules enacted following the financial crisis have discouraged some banking functions, including the 

provision of secured repo financing. The Banking Report recommended amendments to several 

regulations which, if enacted, would increase the availability of secured repo financing, according 

to market participants generally. 

Specifically, those amendments that would have the most direct impact on repo availability are:

• Adjustments to the SLR and eSLR, namely exceptions from the denominator of total 

exposure for cash on deposit with central banks, U.S. Treasury securities, and initial 

margin for centrally cleared derivatives;

• Recalibration of the U.S. Global Systemically Important Banks (G-SIB) risk-based 

capital surcharge, including its treatment of short-term wholesale funding reliance; and 

• Basing prudential standards for Foreign Banking Organizations on U.S. risk profile 

rather than global consolidated assets, and raising the threshold for Intermediate 

Holding Companies from the current $50 billion level for participation in the U.S. 

Comprehensive Capital Analysis and Review.

Recommendations

Treasury reiterates its recommendations from the Banking Report180 to improve the availability of 

secured repo financing.

180. The Banking Report, at 54, 56, and 70.
Corporate Bond Liquidity

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Overview and Regulatory Landscape

The corporate bond market helps companies borrow to grow their businesses and provides assets 

to fixed income investors. Compared with traditional bank lending that is more prominent internationally, the U.S. corporate bond market allows companies to access a broader spectrum of 

potential lenders as investors in their debt and diversifies the provision of credit in the economy, 

making it more competitive and resilient. This section will discuss the structure of the corporate 

bond market, challenges to liquidity, and our recommendations.

Market Structure and Intermediation

The market structure of the corporate bond market differs greatly from the equities and Treasury 

markets covered earlier in this report. The corporate bond market consists of tens of thousands of 

distinct securities, as companies have issued bonds at different times, with different tenors, and in 

different structures. Issuance in the corporate bond market has hit record highs 5 years running, 

with over $1.5 trillion issued in 2016. After issuance, corporate bonds trade “over-the-counter” 

(OTC) in the secondary market; some corporate bonds (often the largest and most recently issued 

securities) trade frequently, while most rarely trade.

Because of the vast array of distinct securities, corporate bond intermediation has traditionally 

centered on bank dealers making markets on a principal basis (i.e., buying and selling for their 

own account to make markets for customers). Treasury believes that market making serves a critical 

function in financial markets. Market making may include, from time to time, absorbing temporary order imbalances, such as buying a large amount of bond inventory that a customer wants to 

Source: FINRA TRACE

Figure 13: Trade Frequency (Total 29,363 Bonds)

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Number of Bonds

Number of Trade Days

1 28 55 82 109 136 163 190 217 244
A Financial System That Creates Economic Opportunities • Capital Markets

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sell, with the intention of selling the bonds as soon as possible. In this way, market makers play an 

important role in the secondary market as a provider of liquidity and facilitator of capital markets 

activity. In the decade leading up to the financial crisis, corporate bond dealers supported their 

market making business with significant inventories and were generally able to offer customers 

immediate liquidity. 

In the past decade there has been a significant shift away from market making based on principal 

intermediation and toward agency intermediation, where dealers connect buyers and sellers but do 

not take risk themselves.181 This shift has been driven both by regulations such as the Volcker rule 

and bank capital requirements as well as by market forces, as banks that suffered losses on large 

inventories in the financial crisis look to better manage their risks. Accordingly, dealer inventories 

have declined dramatically and now stand at about half the levels seen before the financial crisis.182

Despite this shift in intermediation and reduction in inventories, secondary market trading volumes in the corporate bond market have actually doubled since the financial crisis,183 suggesting 

improvements in dealer efficiency.

Another significant trend has been the growth of electronic trading of corporate bonds, which has 

grown to about 19% for investment grade securities and 8% for high yield securities.184 However, 

most of the activity has been on request for quote (RFQ) based trading platforms where instead of 

calling a dealer for a quote, the customer can solicit a quote electronically. These platforms create 

operational efficiencies, but they do not fundamentally change the nature of corporate bond liquidity because they rely on the same dealers and customers interacting through a different medium. 

Platforms that use central limit order books or more fundamental changes in intermediation have 

not yet gained significant market share.

Liquidity

Liquidity has been challenged in parts of the corporate bond market, especially for the least-traded 

securities. Though definitions of liquidity differ, most observers agree that a central element of 

liquidity is the ability to buy or sell a financial instrument quickly, in large volumes, at a low 

cost, without materially changing the price of the instrument. In corporate bonds, the different 

181. Hendrik Bessembinder et al, Capital Commitment and Illiquidity in Corporate Bonds, Journal of Finance 

(forthcoming Aug. 2017), draft available at: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2752610 (showing for the most active dealers the share of agency intermediated trades has roughly doubled from 7% to 

14% since the pre-crisis period); Larry Harris, Transactions Costs, Trade Throughs, and Riskless Principal 

Trading in Corporate Bonds Markets, working paper (Oct. 2015), available at: https://papers.ssrn.com/sol3/

papers.cfm?abstract_id=2661801 (estimating the total agency trading rate to be as high as 42%).

182. Federal Reserve Bank of New York, Primary Dealer Statistics, available at: https://www.newyorkfed.org/markets/gsds/search.html. It should be noted that the data pre- and post- April 2013 is not directly comparable as 

prior to April 2013 reported inventories included commercial paper, CMOs and REMICs issued by entities other than federal agencies and GSEs. Comparable figures have been estimated by industry.

183. SIFMA US Corporate Bond Issuance and Trading Volume (July 2017), available at: http://www2.sifma.org/

research/statistics.aspx.

184. Greenwich Associates, Corporate Bond Electronic Trading Continues Growth Trend (July 28, 2016), 

available at: https://www.greenwich.com/fixed-income-fx-cmds/corporate-bond-electronic-trading-continues-growth-trend.
A Financial System That Creates Economic Opportunities • Capital Markets

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measures of liquidity tell a mixed story.185 Record trading volumes and low bid-ask spreads indicate 

good liquidity, while reduced frequency of block trades suggest more difficulty in moving large 

blocks of risk. However, these oft-cited measures do not capture the full story. For example, bid-ask 

spreads have decreased primarily for retail investors, rather than for institutional investors.

Figure 14: Corporate Bond Bid-Ask Spreads (Percent of Par)

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017

Retail

Institutional

3.5

3

2.5

2

1.5

1

0.5

0

Source: Federal Reserve Bank of New York staff calculations, based on Supervisory TRACE data.

Notes: The chart plots 21-day moving averages of realized bid-ask spreads for retail (under $100,000) and institutional 

($100,000 and more) trades of corporate bonds. Originally published at: http://libertystreeteconomics.newyorkfed.org

/2017/06/market-liquidity-after-the-financial-crisis.html.

Moreover, measures of trading activity only capture activity that has occurred, not trades foregone 

by market participants because liquidity was not available or the cost was too high. Liquidity 

metrics also generally do not convey the reduction in immediately available trading opportunities. 

Such opportunities have declined as more dealers act as agents, and accordingly customers must 

wait until the opposite side of the trade has been found. Finally, market participants report that 

dealer willingness to make markets in size, take on risk, and provide firm quotes have all declined. 

Issues and Recommendations

While these changes in liquidity and market structure have many causes, regulatory changes are 

likely a contributing factor. As detailed in the Banking Report, the Volcker rule’s market-making 

exception has not been implemented effectively, and firms are hesitant to make markets, especially 

185. See DERA (2017).
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in illiquid securities where predicting near-term customer demand is difficult. Although findings 

are still preliminary, some research has found that the Volcker rule has reduced market-making 

activity and liquidity in times of stress.186 In addition, heightened capital and liquidity standards 

have combined to further disincentivize market-making and liquidity provision by banks. Liquidity 

will offer the greatest benefit to our capital markets if it is resilient and available during times of 

stress. If liquidity vanishes during periods of market stress, it can exacerbate significant price movements and reduce confidence in our markets.

Recommendations

Treasury reiterates its recommendations from the Banking Report to improve secondary market 

liquidity.187

186. Jack Bao, Maureen O’Hara, and Alex Zhou, The Volcker Rule and Market Making in Times of Stress, 

Finance and Economics Discussion Series Paper No. 2016-102, Board of Governors of the Federal 

Reserve System (Sept. 2016), available at: https://www.federalreserve.gov/econresdata/feds/2016/files/2016102pap.

pdf.

187. The Banking Report, at 14-15.
Securitization

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Securitization • Overview

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Overview

The practice of securitizing cash flows through the issuance of associated debt obligations has 

existed as a successful financing tool for centuries.188 Modern securitization, characterized by more 

complex cash flow structuring, is a relatively recent development dating to the 1970s. Problems 

related to certain types of securitized products, primarily those backed by subprime mortgage 

loans, contributed to the financial crisis that precipitated the Great Recession.189 As a result, the 

securitization market has acquired a popular reputation as an inherently high-risk asset class and 

has been regulated as such through numerous post-crisis statutory and rulemaking changes.190

Such treatment of this market is counterproductive, as securitization, when undertaken in an 

appropriate manner, can be a vital financial tool to facilitate growth in our domestic economy. 

Securitization has the potential to help financial intermediaries better manage risk, enhance access 

to credit, and lower funding costs for both American businesses and consumers. Rather than restrict 

securitization through regulations, policymakers and regulators should view this component of our 

capital markets as a byproduct of, and safeguard to, America’s global financial leadership. 

Securitization in its simplest form is the process by which cash flows from individual, often 

homogeneous illiquid assets are aggregated, referred to as “pooling,” and sold as a new financial 

instrument to investors. By pooling cash flows and creating new, more readily tradable securities, 

these vehicles are able to diversify the credit risk associated with the underlying collateral and 

facilitate improved liquidity. Greater liquidity and risk diversification may attract a deeper pool 

of investor capital, with the resulting cost savings ultimately flowing to borrowers in the form of 

lower financing costs. 

Securitization involves numerous financial actors across its supply chain. In a simplified example 

(see Figure 15), a securitizer or sponsor, which may include the loan originator, will arrange for 

the sale or transfer of a group of loans to a newly created, bankruptcy-remote trust referred to as 

a special purpose vehicle, or SPV.191 This SPV has a balance sheet comprised of assets (the underlying loans or leases) funded by a combination of debt and equity. A structuring agent will tailor 

the mix and structure of debt and equity of the SPV, which sells or issues asset-backed securities 

(ABS) to investors from across the capital markets depending on their individual risk tolerance. 

188. Bonnie Buchanan, Back to the Future: 900 Years of Securitization, 15 The Journal of Risk Finance 316 

(2014).

189. Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report: Final Report of the National 

Commission on the Causes of the Financial and Economic Crisis in the United States (Jan. 2011) 

(“FCIC Report”).

190. The securitization market referenced here generally refers to the structured finance market exclusive of 

mortgage-backed securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac.

191. See Board of Governors of the Federal Reserve System, Report to the Congress on Risk Retention (Oct. 

2010), available at: https://www.federalreserve.gov/boarddocs/rptcongress/securitization/riskretention.pdf (“Board 

Report”).
A Financial System That Creates Economic Opportunities • Capital Markets

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Originator/Aggregator

(Sponsor)

Special Purpose Vehicle

(Issuer)

Collateral Cash Flow

Credit Losses 

Underlying Assets (Collateral) 

Loan #1 Loan #2 Loan (n)

Servicer / 

Trustee & Admin Fees 

Collateral

Pool Principal

and Interest

Cash Flow

Proceeds

Assets

Proceeds

Issue

Securities

Capital Markets Investors 

Asset-backed Securities

Senior Notes (AAA)

Mezzanine Notes (BBB)

Junior Tranche (Unrated)

Figure 15: Simplified Illustrative Securitization Structure 

In an illustrative senior-subordinate ABS, the issuer will sell numerous classes, or tranches, of 

notes to match the specific needs of ABS investors. In a complex deal, there may be many classes 

of notes issued to investors. Generally, tranches are divided into senior, mezzanine, and junior 

classes. Senior and mezzanine classes typically carry an investment-grade rating by a nationally 

recognized statistical rating organization (NRSRO), with the senior bond often carrying a AAA 

rating. The junior, or subordinate, class is typically unrated. Principal and interest payments from 

the underlying collateral “waterfall” down the capital structure of the SPV’s balance sheet, while 

losses associated with the default of the underlying assets are absorbed beginning with the most 

junior, or first-loss, classes. More senior classes typically do not bear credit-related cash shortfalls 

until the credit enhancement from subordinate classes is exhausted.192 

By creating tranches with various risk profiles from the same pool of underlying assets, a securitization vehicle allows investors to purchase assets most suited to their risk profile. For instance, asset 

managers at insurance companies may prefer the relative security of the senior securitized tranches, 

while hedge funds seeking higher returns may prefer the higher risk of the junior or mezzanine 

tranches. By attracting capital from such a wide range of investors, a well-functioning securitization market provides lenders another source of funding outside of corporate debt, or in the case of 

banks, customer deposits, giving originators greater ability to make new loans. 

Modern securitization markets emerged in the 1970s, first at Ginnie Mae and subsequently at 

Freddie Mac and Fannie Mae (the government-sponsored enterprises, or GSEs).193 Mortgagebacked securities (MBS) with a credit guaranty from these entities are commonly referred to as 

192. Suleman Baig and Moorad Choudhry, The Mechanics of Securitization (2013).

193. See Thomas N. Herzog, A Brief History of Mortgage Finance with an Emphasis on Mortgage Insurance, 

available at: https://www.soa.org/library/monographs/finance/housing-wealth/2009/september/mono-2009-mfi09-herzoghistory.pdf.
A Financial System That Creates Economic Opportunities • Capital Markets

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agency MBS.194 Agency MBS are backed by hundreds of individual mortgage loans to U.S. borrowers. In their more common form, these securities are referred to as pass-throughs, as the cash 

flow from the principal and interest on the mortgages underlying the securities, less applicable fees, 

are passed through pro rata to the end investor. Ginnie Mae provides a guaranty backed by the 

full faith and credit of the United States for the timely payment of principal and interest on MBS 

secured by pools of government home loans. The GSEs provide a guaranty for the timely payment 

of principal and interest on MBS secured by pools of home loans that meet their respective credit 

quality guidelines. Although the GSEs’ guaranty obligations are not backed by the full faith and 

credit of the U.S. government, the GSEs receive capital support under agreements with Treasury. 

Agency MBS trade largely in a unique, liquid forward market referred to as the to-be-announced 

(TBA) market. As of the end of 2016, the agency MBS market exceeded $7.5 trillion and represented the largest debt market after U.S. Treasury securities.195 While agency MBS is by far the 

largest and most liquid component of the U.S. securitization market, its unique characteristics 

mean it is often discussed separately from other securitized products that structure credit risk.196

Figure 16: U.S. Securitized Products Outstanding FY 2016 ($ billions)

$13,908

$7,545

$847 $1,330

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

U.S. Treasuries Agency MBS Non-Agency MBS

$529

CMBS Asset-backed

Securities

U.S. Securitization Market = $10-plus trillion

Source: SIFMA US Bond Market Issuance and Outstanding (July 2017)

Securitized products discussed in this chapter comprise a wide range of consumer, commercial, 

and corporate debt obligations. Securities backed by cash flows from consumer loans may be 

divided between structured products comprised of residential mortgage collateral, often referred 

194. See Federal Reserve Bank of New York Staff Reports, TBA Trading and Liquidity in the MBS Market

(Aug. 2010), available at: https://www.newyorkfed.org/medialibrary/media/research/staff_reports/sr468.

pdf.

195. See SIFMA US Bond Market Issuance and Outstanding (July 2017), available at: www.sifma.org/

research.

196. Id.
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to as private-label securities (PLS) given their distinction from the agency MBS market; and ABS, 

typically collateralized by auto loans and leases, student loans, and credit card receivables. The 

largest security classes backed by pools of business and commercial collateral consist of syndicated 

corporate loans through the collateralized loan obligation (CLO) market, or commercial real estate 

loans through the commercial mortgage-backed securities (CMBS) market, but may also comprise 

other commercial credit products, including equipment floorplans and other commercial leases. 

Additionally, tranches of asset-backed securities may themselves be resecuritized to collateralize 

structured credit vehicles as part of the collateralized debt obligation (CDO) market.

Modern computing advances in the 1970s and 1980s catalyzed securitization through the development of computational and analysis software permitting the structuring and analysis of thousands of loans packaged into increasingly complex deals. In the 1980s, as short-term interest rates 

rose, securitization offered banks an attractive method to remove interest rate risk from their balance sheets while reducing regulatory capital requirements.197 By the early 2000s, securitization 

markets were reaching new heights, supported by accommodative monetary policy and an influx 

of capital from emerging economies. By 2007, the U.S. securitized product market exceeded $5 

trillion outstanding, up from $150 billion only twenty years prior.198

Figure 17: U.S. Structured Products Outstanding 1986–2016 ($ billions)

0

1,000

2,000

3,000

4,000

5,000

6,000

PLS

CMBS

CLOs

CDOs

Student Loans

Equipment

Credit Card

Automobile

Other

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Note: Series are cumulative

Sources: Internal Treasury Analysis, SIFMA US Bond Market Issuance and Outstanding (July 2017)

197. FCIC Report.

198. Internal Treasury Analysis. Data from SIFMA US Bond Market Issuance and Outstanding (July 2017), 

available at: www.sifma.org/research.
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The proliferation of securitization combined with a lack of discipline in the loan origination process and improperly aligned incentives across the securitization production chain contributed to 

and exacerbated the severity of the Great Recession. Bank capital requirements for securitization 

exposures based on external ratings and investor reliance on these ratings created perverse incentives for and mechanistic over-reliance on the NRSROs. Originators, incentivized by investor 

demand for loans that could be bought and packaged into securities, expanded underwriting into 

high-risk non-traditional products. Leverage in the system multiplied as issuers developed novel 

securitized products to invest in and gain exposure to existing securitized products through CDOs 

of PLS and other ABS.199

When the credit bubble burst and the inherent weakness in pre-crisis credit underwriting became 

apparent, limited transparency into the quality of the collateral supporting securitizations exacerbated broader capital market illiquidity. Investors were unable to accurately assess their risk exposures and many faced capital shortages as NRSROs downgraded credit ratings across the structured 

product market. Additionally, issuers faced a liquidity crisis as financing for ABS had increasingly 

come to rely on short-term funding vehicles, such as repo lines and asset-backed commercial paper 

collateralized by non-agency MBS and ABS. These lines seized as the value of the collateral became 

less certain. The result was billions of dollars in collateral losses, ratings downgrades, company 

failures, and borrower foreclosures.200

Today, the excesses that precipitated the financial crisis negatively color popular opinion of securitized products. Indeed, numerous statutory and regulatory changes were passed and implemented 

in recent years with the intention to remedy the pre-crisis vulnerabilities and misaligned incentives 

across parties to a securitization. Unfortunately, post-crisis reforms have gone too far toward penalizing securitization relative to alternative, often more traditional funding sources such as bank 

deposits. The result has been to dampen the attractiveness of securitization, potentially cutting off 

or raising the cost of credit to thousands of corporate and retail consumers. 

In its review of the securitization market, Treasury found:

• The current regulatory regime discourages securitization as a funding vehicle, instead 

encouraging lenders to fund loans through more traditional methods such as bank 

deposits;

• Regulatory bank capital requirements treat investment in non-agency securitized instruments punitively relative to investments in the disaggregated underlying collateral;

• Regulatory liquidity standards unfairly discriminate against high-quality securitized 

product classes compared to other asset classes with a similar risk profile;

• The requirement that sponsors retain a residual interest in securitizations adds unnecessary costs to securitization as a funding source, thereby inhibiting the prudent expansion 

of credit through securitized products; and

199. FCIC Report. 

200. Standard & Poors Global Market Intelligence, Ten Years After the Financial Crisis, Global Securitization 

Lending Transformed by Regulation and Economic Growth, (July 21, 2017).
A Financial System That Creates Economic Opportunities • Capital Markets

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• Expanded disclosure requirements, while an important post-crisis reform, are unnecessarily burdensome and could be more appropriately tailored.

Regulatory Landscape

The performance of certain classes of securitized products during the crisis, particularly PLS, demonstrated the need for reforms to the securitization market. Poor underwriting in the mortgage 

market represented one of the most significant drivers of losses for securitized products. In the 

wake of the crisis, Congress mandated, and the Consumer Financial Protection Bureau implemented, an ability to repay (ATR) requirement for residential mortgage loans. This requirement 

specifies certain minimum underwriting and documentation factors for mortgage originators to 

use to determine a borrower’s ability to repay a mortgage and offers a presumption of compliance 

with ATR for loans that meet the definition of a qualified mortgage (QM).201 Treasury articulated 

in the Banking Report its belief that the ATR/QM requirement currently unduly limits access to 

mortgage credit and should be clarified and modified. However, the imposition of this standard 

has helped eliminate the types of non-traditional mortgage products behind many non-agency 

securitizations prior to the crisis. As securitization cannot fundamentally change the aggregate risk 

of the underlying collateral, efforts to improve the quality of the assets going into securitizations 

are essential to improve the securitization market more broadly. 

Additionally, Dodd-Frank eliminated regulatory reliance on NRSRO ratings by requiring that 

references to credit ratings be removed from federal laws and regulations, and that alternative 

measures of creditworthiness be used in their place.202 Today, capital requirements for securitized 

classes are no longer based on the ratings assigned to them by the NRSROs even though ratings 

agencies continue to play an important gatekeeper role in this market.203 Further, Dodd-Frank 

built on the Credit Rating Agency Reform Act of 2006 by enhancing the SEC’s supervisory 

authority over registered NRSROs,204 including new requirements pertaining to internal controls, 

reporting, disclosure, and accountability. Dodd-Frank also established the Office of Credit Ratings 

within the SEC with a mandate to carry out annual compliance examinations of each NRSRO.205

Collectively, these reforms have improved the process by which ratings are assigned to securitized 

products and helped mitigate the systemic risk associated with reliance on such ratings.

Other post-crisis reforms require recalibration. Presently, rules related to capital, liquidity, risk 

retention, and disclosures overly burden activity in securitized products. In response to losses at 

depository banks, regulators introduced complex, increased capital requirements for securitized 

products. Additionally, due to illiquidity attributable to securitization exposures during the financial crisis, banking regulators excluded these assets from eligibility toward post-crisis liquidity standards. Legislation and rulemaking also introduced expanded disclosure requirements in response 

201. 12 C.F.R. Part 1026.

202. See Dodd-Frank § 939A.

203. 12 C.F.R Parts 208, 217, and 225.

204. Public Law No. 109–291.

205. Public Law No. 111–203.
A Financial System That Creates Economic Opportunities • Capital Markets

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to limited transparency of securitized assets, and most notably, imposed requirements for sponsors 

to retain credit risk in securitizations in response to a perceived misalignment of incentives between 

securitizers and investors. As defined currently, these rules add unnecessary cost and complexity to 

the securitization market and apply broadly across securitized product classes, irrespective of their 

differences and performance history. Below, we review securitization regulations for bank capital 

and liquidity, risk retention, and disclosures, and provide recommendations for their recalibration.

Issues and Recommendations

Capital Requirements 

In July 2013, U.S. banking regulators finalized rules implementing the Basel III capital framework206 and Sections 171 and 939A of Dodd-Frank, which prohibited reliance on credit ratings 

and required banking regulators to consider securitized products in establishing risk-based capital 

standards.207 These rules established risk-based capital requirements for the banking book (i.e., 

exposures not captured in the trading book) for U.S. banks.208

Federal banking regulators generally require banking institutions to derive a risk weight for securitization exposures based on a set of prescriptive factors, primarily through what is known as the 

simplified supervisory formula approach (SSFA).209 The SSFA considers risk factors such as the 

capital required of the underlying assets, delinquencies, and the attachment and detachment points 

of the exposure to determine an aggregate risk weight. The SSFA formula additionally imposes a 

supervisory surcharge, referred to as the p factor, which represents the multiple above the disaggregated loan capital charge assigned to hold the collateral as a securitization.210 Under the current 

capital regulation, p is specified at 0.5, which may be interpreted as a 50% surcharge on holding 

the underlying asset in securitized form. In revisions to its capital framework, the Basel Committee 

on Banking Supervision (BCBS) has proposed raising the p-factor for traditional securitizations 

to 1.0.211 Furthermore, SSFA does not recognize unfunded forms of credit support as added credit 

enhancement in determining the attachment point of a securitization interest. As such, a bank is 

not able to recognize added credit protection when it carries or purchases a securitization interest 

at less than its par value.212

206. See Bank for International Settlements, Basel III: A Global Regulatory Framework for More Resilient 

Banks and Banking Systems (Dec. 2010 and revised Jun. 2011), available at: http://www.bis.org/publ/

bcbs189.htm. 

207. See Dodd-Frank §§ 171 and 939A.

208. 12 C.F.R. § 217.142.

209. Id. at § 217.144.

210. Id. at § 217.144(b)(5).

211. See Bank for International Settlements, Revisions to the Securitisation Framework (Dec. 2013), available 

at: http://www.bis.org/publ/bcbs269.pdf (“Basel III Revisions”). 

212. See Regulatory Capital Rules: Regulatory Capital, Implementation of Basel III, Capital Adequacy, 

Transition Provisions, Prompt Corrective Action, Standardized Approach for Risk-weighted Assets, Market 

Discipline and Disclosure Requirements, Advanced Approaches Risk-Based Capital Rule, and Market 

Risk Capital Rule [78 Fed. Reg. 62017, 62120 (Oct. 11, 2013)] (“Bank Capital Rules”).
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In order to mitigate model risk and provide a level of standardization, securitization exposures, 

excluding agency MBS, are subject to a risk-weight floor of 20%.213 While this risk-weight floor, 

finalized in 2013, was consistent with the BCBS’s recommended floor, the BCBS has since revised 

its securitization framework to lower the recommended floor to 15%.214 The European Banking 

Authority has similarly recommended that European regulatory bodies lower the minimum capital 

floor for qualifying senior tranches.215 For U.S. banks, the risk-weight floor remains 20% for structured securities. If this recommendation is adopted, U.S. banks may be placed at a competitive 

disadvantage to their European peers. 

A smaller number of regulated bank holding companies use the supervisory formula approach 

(SFA) under the advanced approach risk-based capital rule.216 The SFA requires additional parameters beyond SSFA.217 While the standard and advanced approaches differ in complexity and 

application, they both, by design, may result in the same higher capital charge for securitized assets 

versus holding the same underlying assets on balance sheet.218

Under bank capital rules, risk-based capital for securitizations is required to be held against consolidated balance sheet assets, as determined by accounting treatment.219 Under generally accepted 

accounting principles implemented in 2010, a bank securitizer may be required to consolidate 

ABS trusts onto its balance sheet if it maintains a controlling financial interest in the vehicle.220 A 

securitization consolidated for accounting purposes on the sponsoring bank’s balance sheet would 

require the sponsor to hold capital against that exposure.221 Thus, for certain securitized asset 

classes, even when risk has been effectively sold or transferred to investors through the issuance of 

asset-backed notes, a sponsoring bank may still be required to hold capital against the underlying 

assets. By tying capital requirements for securitized products to an accounting treatment rather 

than a risk transfer treatment, this practice may result in the financial system holding duplicative 

capital against the same exposure.

Banks have additional capital requirements for securitized products held in their trading books. 

In January 2016, the BCBS issued its final update on the revised minimum capital standard for 

213. 12 C.F.R. § 217.144(c).

214. See Basel III Revisions.

215. See European Banking Authority, Report on Qualifying Securitisation (July 2015), available at: https://www.

eba.europa.eu/documents/10180/950548/EBA+report+on+qualifying+securitisation.pdf. 

216. 12 C.F.R. § 217.143.

217. See Office of the Comptroller of the Currency, Guidance on Advanced Approaches GAA 2015-

01: Supervisory Guidance for Implementation of the Simplified Supervisory Formula Approach for 

Securitization Exposures Under the Advanced Approaches Risk-Based Capital Rule (May 19, 2015), 

available at: https://www.occ.treas.gov/topics/capital/gaa-2015-01.pdf. 

218. See Bank Capital Rules, at 62119.

219. Id. at 62083 [codified at 12 C.F.R. § 217.2].

220. Financial Accounting Standards Board (FASB): Accounting Standards Codification Topic 860, Transfers 

and Servicing (ASC 860, commonly FAS 166); and FASB Accounting Standards Codification Topic 

810, Consolidation (ASC 810, commonly FAS 167).

221. See Board Report.
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market risk, known as the Fundamental Review of the Trading Book (FRTB).222 U.S. banking 

regulators have not announced how they might implement FRTB. The revised standard increases 

capital requirements for securitizations by changing the capital calculation under the current 

trading book capital requirements to a revised standardized approach for market risk. Under this 

approach, banks would be required to hold capital sufficient to withstand large credit spread shocks 

in securitized products held for trading, even if the severity of those shocks are disconnected from 

the credit quality of the underlying collateral. 

The implied capital required under FRTB would make secondary market activity uneconomical 

for many banks, thereby hindering ABS liquidity. Without ABS liquidity, securitization may be a 

far less economical funding proposition. Under FRTB, the additional capital requirements would 

be additive to SSFA requirements. As such, this duplicative capital requirement could dramatically 

exceed the economic exposure on the bond itself. Such requirements would act as a disincentive 

for banks to participate in secondary market trading for securitized products, thereby reducing 

liquidity vital to the success of this market. 

Securitized product liquidity is further hindered by the punitive capital treatment of these products 

under bank stress testing requirements. Comprehensive Capital Analysis and Review (CCAR) and 

Dodd-Frank Act Stress Test (DFAST) regimes were mandated by Dodd-Frank and implemented 

by federal banking regulators to assess capital sufficiency during adverse economic environments.223

Currently, the Federal Reserve’s global market shock assumptions for the trading book require 

banks to apply the peak-to-trough changes in comparable asset valuations from the 2007-09 period 

without sufficiently tailoring such shocks to the collateral quality or safeguards implemented since 

the crisis.224 For example, under CCAR, a AAA-rated non-agency residential security is subject to 

a price shock of 31.5%, regardless of the quality of the mortgages collateralizing the exposure and 

the expected associated price decline.225

The current treatment of securitization exposures in DFAST and CCAR along with punitive treatment under bank capital rules have imposed an outsized cost on market makers for securitized 

products and contributed to these participants reducing their holdings and trading activity of 

structured products. Given the vital role our depositories play in the intermediation of consumer 

and corporate financing, regulations that discourage additional funding sources like securitization 

should be recalibrated. 

Recommendations 

Treasury recommends that banking regulators rationalize the capital required for securitized products with the capital required to hold the same disaggregated underlying assets. Capital requirements 

222. See Basel Committee on Banking Supervision, Fundamental Review of the Trading Book: A Revised 

Market Risk Framework (Oct. 2013), available at: http://www.bis.org/publ/bcbs265.pdf. 

223. 12 U.S.C. § 5365(i).

224. See Board of Governors of the Federal Reserve, 2017 Supervisory Scenarios for Annual Stress Tests 

Required under the Dodd-Frank Act Stress Testing Rules and the Capital Plan Rule (Feb. 2017), available at: https://www.federalreserve.gov/newsevents/pressreleases/files/bcreg20170203a5.pdf.

225. See SIFMA, Rebalancing the Financial Regulatory Landscape (Apr. 2017), available at: https://www.sifma.

org/wp-content/uploads/2017/05/SIFMA-EO-White-Paper.pdf.
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should be set such that they neither encourage nor discourage funding through securitization, 

thereby allowing the economics of securitization relative to other funding sources to drive decision 

making. Rationalizing banking and trading book capital requirements may encourage additional 

bank participation in this asset class.

U.S. banking regulators should adjust the parameters of both the SSFA and the SFA. The p factor, 

already set at a punitive level that assesses a 50% surcharge on securitization exposures, should, at 

minimum, not be increased. Furthermore, SSFA should recognize the added credit enhancement 

that exists when a bank holds a securitization at a discount to par value. 

U.S. banking regulators should align the risk weight floor for securitization exposures with the 

Basel recommendation. In today’s global capital markets, regulations should ensure U.S. banks are 

on a level playing field with their global competitors. 

Additionally, bank capital for securitization exposures should sufficiently account for the magnitude of the credit risk sold or transferred in determining required capital instead of tying capital to 

the amount of the trust that is consolidated for accounting purposes.

Concerning bank trading book requirements, regulators should consider the impact that capital 

standards, such as FRTB, would have on secondary market activity. Capital requirements should 

be recalibrated to prevent the required amount of capital from exceeding the maximum economic 

exposure of the underlying bond.

For stress testing requirements, the Federal Reserve Board should consider adjusting the global 

market shock scenario for trading exposures to more fully consider the credit quality of the underlying collateral and reforms implemented since the crisis.

Liquidity Requirements

Among the Basel III reforms introduced following the financial crisis were two global liquidity 

standards: the Liquidity Coverage Ratio (LCR) and the Net Stable Funding Ratio (NSFR).226

U.S. banking regulators finalized LCR rules in 2013.227 The final LCR was implemented to help 

ensure designated banks maintained a sufficient amount of unencumbered high-quality liquid 

assets (HQLA) to weather cash outflows during a prospective 30-calendar-day period of economic 

stress. Assets deemed to be liquid and readily marketable were designated as HQLA under three 

categories: level 1 liquid assets, level 2A liquid assets, and level 2B liquid assets, with the latter two 

categories subject to haircuts and caps toward total HQLA.228

While the final Basel III LCR rule laid out a framework for national regulators to consider including non-agency residential securities as level 2B HQLA, U.S. banking regulators elected to exclude 

all non-agency securitized products from counting toward a bank’s LCR requirement as HQLA 

226. See Basel Committee on Banking Supervision, Basel III: The Liquidity Coverage Ratio and Liquidity Risk 

Monitoring Tools (Jan. 2013), available at: http://www.bis.org/publ/bcbs238.pdf, and Basel III: The Net Stable 

Funding Ratio (Oct. 2014), available at: http://www.bis.org/bcbs/publ/d295.pdf. 

227. 12 C.F.R. Part 249.

228. Id.
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regardless of their seniority and performance history.229 By excluding even senior tranches of securitizations from LCR, regulators signaled that they consider all securitized products illiquid during 

a period of market stress. This assumption ignores both changes made to the market in recent years 

and the outsized role the lack of transparency into underlying collateral quality played in causing 

illiquidity during the crisis. 

Under the current LCR rule, other asset classes that experienced similar, or worse, illiquidity during the crisis have been made eligible to count toward HQLA. Investment-grade corporate debt, 

for example, experienced price declines of 18% through the financial crisis, greater than both 

AAA auto and card securitizations; yet a depository may count investments in investment-grade 

corporate debt, at a 50% haircut to fair value, as level 2B HQLA for purposes of satisfying the LCR 

requirement.230 To be eligible for treatment as HQLA, these corporate debt securities must meet 

certain requirements, including that the issuing entity’s obligations have a track record of liquidity 

during risk-off markets and that they are not obligations of a regulated financial company.231

Recommendations

High-quality securitized obligations with a proven track record should receive consideration as 

level 2B HQLA for purposes of LCR and NSFR. Regulators should consider applying to these 

senior securitized bonds a prescribed framework, similar to that used to determine the eligibility 

of corporate debt, to establish criteria under which a securitization may receive HQLA treatment. 

Risk Retention 

The imposition of securitizer or sponsor risk retention requirements has generated substantial 

controversy among market participants. Section 941 of Dodd-Frank amended the Exchange Act 

to require the sponsor of an asset-backed security to retain not less than 5% of the credit risk of 

the assets collateralizing the securities.232 Six agencies — the SEC, Office of the Comptroller of 

the Currency, Federal Reserve Board, FDIC, Federal Housing Finance Agency, and Department 

of Housing and Urban Development (HUD) — were required to jointly prescribe regulations to 

implement the Section 941 requirements; the agencies published a final rule in December 2014, 

referred to as the Credit Risk Retention Rulemaking.233 The rule became effective for residentialbacked new issues in December 2015 and for all other classes of ABS in December 2016. Under 

the Credit Risk Retention Rulemaking, sponsors of asset-backed securitizations must retain an 

economic interest in the credit risk of the structure either in the form of an eligible horizontal (first 

loss) interest, an eligible vertical interest, or a combination of both (L-shaped interest). 

229. See Liquidity Coverage Ratio: Liquidity Risk Measurement Standards (Sept. 3, 2014) [79 Fed. Reg. 

61440 (Oct. 10, 2014)].

230. See Structured Finance Industry Group, Regulatory Reform: Securitization Industry Proposals to Support 

Growth in the Real Economy (Apr. 2017), available at: http://www.sfindustry.org/images/uploads/pdfs/SFIG_

White_Paper_-_Regulatory_Reform_%28Digital%29.pdf. 

231. 12 C.F.R. § 249.20(c).

232. 15 U.S.C. § 78o-11. 

233. Credit Risk Retention [79 Fed. Reg. 77602 (Dec. 24, 2014)].
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Dodd-Frank specifically exempts sponsors from risk retention where the collateral satisfies the 

definition, established under joint rulemaking, of a qualified residential mortgage, which the rulemaking agencies aligned with the qualified mortgage definition set by Dodd-Frank amendments 

to the Truth in Lending Act for ATR/QM.234 Section 941 also required the banking agencies to 

include underwriting standards that indicate a low credit risk for commercial mortgages, commercial loans, and automobile loans. As such, the rule-writing agencies could require risk retention 

that is less than 5% if the asset underwriting standards are met.

The banking agencies do not appear to have undertaken a sufficiently robust economic analysis 

on the impact of the thresholds when setting the exemption requirements for commercial loans, 

commercial mortgages, and high-quality automobile loans, with the result that the eligible nonresidential classes seldom qualify for the exemptions provided under the Credit Risk Retention 

Rulemaking. For example, loans backing auto securitizations are required to have a minimum 

10% down payment, among other standards, to qualify for exemption.235 Auto loans, however, 

are often financed with lower down payment requirements (or none at all), rendering even wellunderwritten collateral subject to issuer risk retention.

In the Credit Risk Retention Rulemaking, agencies also subjected managers of CLOs to the risk 

retention rule under the determination that CLO managers fell within the statutory definition of 

securitizers.236 CLOs are structured products backed by leveraged loans from both large and small 

U.S. companies. Unlike other securitized products, where an originator may originate loans with 

the intent to sell them, CLO managers do not originate the underlying loans that they select for 

the CLO vehicle and are typically compensated with management fees contingent on the performance of the underlying loans. These attributes makes CLO managers more like asset managers 

in this regard. The imposition of the retention requirement on CLO managers has the potential 

to create particular burdens given the more limited access to capital for these market participants. 

Furthermore, the departure of smaller CLO managers lacking the ability to raise the necessary 

capital to comply with the retention requirement could force an unhealthy consolidation of the 

number of issuers who are able to service this important sector of corporate borrowing in the 

United States. 

Finally, the Credit Risk Retention Rulemaking required that qualified third-party purchasers and 

sponsors of CMBS horizontal interests, as well as non-QRM residential sponsors, retain their 

interest for a minimum of 5 years, with non-QRM residential sponsors also subject to a minimum 

balance threshold, to allow sufficient time for losses resulting from underwriting defects to become 

evident.237 Other asset-backed securities subject to risk retention require sponsors to hold the 

residual interest for a minimum of two years or until the aggregate unpaid balance of ABS interests 

has been reduced to 33%.

234. 17 C.F.R. § 246.13.

235 Id. at § 246.18.

236. See Credit Risk Retention, 79 Fed. Reg. at 77650.

237. 17 C.F.R. § 246.7(b)(8)(ii)(A) and § 246.12(f)(2)(A).
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Recommendations

Risk retention is an imprecise mechanism by which to encourage alignment of interest between 

sponsors and investors. However, sponsor “skin-in-the-game” can serve as a complement to other 

regulatory reforms, such as enhanced disclosure requirements and underwriting safeguards, to 

provide added confidence to investors in securitized products. Instead of recommending an acrossthe-board repeal of the retention requirement, Treasury recommends that federal banking regulators expand qualifying risk retention exemptions across eligible asset classes based on the unique 

characteristics of each securitized asset class, through notice-and-comment rulemaking.

Well-documented and conservatively underwritten loans and leases, regardless of asset class, should 

not require signaling, through retention, from the sponsor as to the creditworthiness of the underlying collateral. Asset-specific disclosure requirements should provide investors with confidence 

that securitizations of assets that are deemed “qualified” are sound enough to warrant exemption. 

This expanded exemption would reduce the cost to issue and could encourage additional funding 

through securitization. Treasury reiterates the prior recommendations regarding risk retention for 

residential mortgage securitizations, as stated in the Banking Report.238 

Additionally, regulators should review the mandatory five-year holding period for third-party 

purchasers and sponsors subject to this requirement. To the extent regulators determine that the 

emergence period for underwriting-related losses is shorter than five years, the associated restrictions on sale or transfer should be reduced accordingly. 

Regarding the requirement that CLO managers retain risk even though they do not originate the 

loans that they select for inclusion in their securitization, Treasury recommends that the rulemaking agencies introduce a broad qualified exemption for CLO risk retention. CLO managers, like 

other sponsors who are subject to risk retention, do have discretion in the quality of the loans they 

select for their vehicles. In the same vein as the broader recommendation that risk retention not 

be statutorily eliminated but should instead be right-sized, Treasury recommends creating a set 

of loan-specific requirements under which managers would receive relief from being required to 

retain risk. 

Finally, as stated in the Banking Report, Congress should designate a lead agency, from among the 

six that promulgated the Credit Risk Retention Rulemaking, to be responsible for future actions 

related to the rulemaking.239 Designating one agency with responsibility for the rulemaking going 

forward would avoid the challenge of coordinating the agencies to issue interpretative guidance or 

exemptive relief.

Disclosure Requirements

In 2004, the SEC introduced registration, disclosure, and reporting requirements for the rapidly 

growing asset-backed securities market.240 These requirements, known as Regulation AB, implemented changes to the Securities Act and the Exchange Act. Due in part to the lack of transparency regarding the collateral quality of asset-backed securities during the financial crisis, the SEC 

238. The Banking Report, at 101.

239. Id. 

240. See Asset-Backed Securities (Dec. 22, 2004) [70 Fed. Reg. 1506 (Jan. 7, 2005)] (“Regulation AB”). 
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proposed additional ABS disclosure requirements, referred to as Reg AB II, in the aftermath of the 

crisis. The SEC published final rules for certain asset classes in 2014.241

For the ABS market, issuers had historically provided pool-level information rather than detailed 

asset-level information. Issuers provided information at a more granular level for only a small 

number of data fields. A standardized format did not exist, nor did agreed-upon data points across 

issuances, even within the same asset class. Reg AB II, by implementing disclosure requirements 

for registered, public issuances, was intended to provide an additional level of transparency to the 

market to address these perceived shortcomings of the pre-crisis securitization market.

Section 942 of Dodd-Frank required the SEC to adopt disclosure requirements for asset-backed 

securities in order that these securities include “asset-level or loan-level data, if such data is necessary for investors to independently perform due diligence.”242 In its final rules implementing this 

provision and other reforms, the SEC extended loan-level disclosure requirements to ABS backed 

by residential mortgages, commercial mortgages, auto loans or leases, resecuritizations of these 

types of ABS, and securities backed by corporate debt. Specifically, the rule required 270 unique 

asset-level fields for PLS, 152 for CMBS, 72 for auto loan ABS, and 60 for debt security ABS 

resecuritizations.243

In addition to the requirements above, the final Reg AB II rule required that issuers of registered 

securitizations publish this asset-level information at least three days before bringing a deal to market.244 With these rules, the SEC hoped to address a persistent problem in the ABS market prior 

to the crisis, whereby investors felt pressured to forego independent diligence of collateral, amidst 

an aggressive demand for structured products, and instead rely on the credit ratings assigned by 

the NRSROs. 

In both Regulation AB and Reg AB II, the SEC undertook an inherently difficult balancing act 

— weighing the need to provide investors sufficient transparency into the risk profile of the underlying assets against the burden placed upon issuers to furnish detailed, asset-specific information. 

In Regulation AB, the SEC elected to set collateral-specific disclosure requirements at a principlesbased level to prevent “the accumulation of unnecessary detail, duplicative or uninformative disclosure and legalistic recitations of transaction terms that obscures material information.”245 This 

standard is reasonable to measure the adequacy of disclosure requirements. Current regulations 

that require up to 270 unique data fields at the loan level are inconsistent with this goal. 

Investors in securitized products broadly welcomed the enhanced disclosure requirements mandated by Dodd-Frank. However, issuers have stated that the increased cost and compliance burdens, lack of standardized definitions, and sometimes ambiguous regulatory guidance has had a 

negative impact on the issuance of new public securitizations. 

241. See Asset-Backed Securities Disclosure and Registration (Sept. 4, 2014) [79 Fed. Reg. 57184 (Sept. 

24, 2014)] (“Regulation AB II”).

242. See Dodd-Frank § 942(b).

243. See Regulation AB II, 79 Fed. Reg. at 57210, 57222, 57225, and 57229.

244. 17 C.F.R. § 230.424(h)(1).

245. See Regulation AB, 70 Fed. Reg. at 1532.
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Under the final rule, the SEC noted that the proposals to expand asset-level disclosure requirements 

to private placement of securitized products, as 144A offerings, as well as additional securitized 

asset classes in registered offerings, including those structures backed by equipment floorplan leases, 

revolving consumer credit (credit card), and student loans, remained outstanding.246 However, the 

SEC has not taken additional action relative to disclosure requirements for 144a offerings or for 

these additional asset classes.

Recommendations

The scope of asset-level data required by Reg AB II warrants review and recalibration. The number 

of required reporting fields for registered securitizations should be reduced. Additionally, the SEC 

should continue to refine its definitions to better standardize the reporting requirements on the 

remaining required fields. Treasury agrees with the SEC that standardization and transparency can 

better enable the investor community to compare asset quality across deals. However, Treasury 

suggests that a sufficient level of transparency and standardization can be achieved at fewer than 

the current number of required fields. 

Additionally, the SEC should explore adding flexibility to the current asset-level disclosure requirements by instituting a “provide or explain regime” for pre-specified data fields. Under such a 

framework, certain asset-level data fields would be required. However, other fields may be omitted 

provided an issuer identifies the omitted field in the prospectus and includes an explanation for 

the omission. Such opt-out flexibility may lower costs for issuers and incentivize them to bring 

additional deals to market without sacrificing transparency.

In addition, the SEC should review its mandatory three-day waiting period for registered issuance. Issuers face additional risk of price movement during that three-day period, which does not 

include weekends, thus extending the lock-out to five days for offerings that become effective on a 

Thursday or Friday. Proper standardization of required fields should facilitate accelerated analysis 

of the collateral on the part of prospective investors, potentially only requiring one or two business 

days, dependent on securitized asset class, instead of the current three. 

Finally, the SEC should signal that it will not extend Reg AB II disclosure requirements to unregistered 144A offerings or to additional securitized asset classes. ABS collateralized by equipment 

loans or leases, floorplan financings, student loans, and revolving credit card debt lack uniformity 

across the underlying loans and loan terms. As such, while disclosure remains an important tool 

to bolster investor confidence and provide sufficient market transparency, cohort-level or groupedaccount disclosures as currently provided should suffice for these additional asset classes.

246. See Regulation AB II, 79 Fed. Reg. at 57190.

Derivatives

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Overview

Overview of Derivatives and their Uses

In financial markets, “derivatives” are a broad class of financial instruments or contracts whose 

prices or terms of payment are dependent on, or derive from, the value or performance of another 

asset or commodity.247 Unlike stocks and bonds, which are generally used by issuers to raise capital 

for their business and traded by investors hoping to earn a return on their investment, derivatives 

originated primarily for the purpose of managing, or hedging, the risks associated with the underlying assets. Such risks stem from unknown future changes in commodity prices, interest rates, 

foreign currency exchange rates, or other factors. The greater the degree of uncertainty around 

such changes — i.e., the volatility — the greater the risk that must be managed. While their usage 

has grown and become more complex, derivatives have been used in one form or another since 

ancient times, for example by farmers and merchants managing risks regarding the future delivery 

and price of livestock or crops. 

Derivatives are also used for speculative purposes. In contrast to hedgers who seek to manage 

existing risks, speculators use derivatives to take on risk with the aim of profiting from their trading 

activities. Essentially, speculators take on a derivatives position betting either that the price of the 

underlying commodity or reference price will increase or decrease. When speculators correctly 

anticipate price movements, they profit; when prices move against them, speculators incur losses. 

Through their trading activity, speculators provide an important source of liquidity for the markets, 

often taking the opposite side of hedgers’ positions. 

The term derivatives encompasses several specific types of financial instruments — for example, 

forwards, futures, options, and swaps. 

Types of Derivatives

Derivative Features Simplified Example

Forward 

Agreements

n A private agreement to buy or sell a 

commodity or asset at a certain future date 

for a certain price

n Traded bilaterally in the over-thecounter markets, each agreement may 

be customized (e.g., in terms of delivery 

time, or quality and quantity of goods to be 

delivered) 

n Generally not regulated 

A farmer plans to grow 1,000 bushels of 

wheat but wants to be sure he will get a 

good price for his crop. He enters into a 

forward agreement with a grain merchant 

to sell his wheat for an agreed-upon price 

at harvest time. With a locked-in price, the 

farmer is protected if wheat prices fall, but 

he will still only receive the price in the 

agreement even if wheat prices are higher at 

harvest time. 

247. For a full discussion of derivatives, see, e.g., John C. Hull, Options, Futures and Other Derivatives (8th 

edition), Pearson/Prentice Hall (2012); and Robert W. Kolb and James A. Overdahl (eds), Financial 

Derivatives, John Wiley & Sons (2010).
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Types of Derivatives

Derivative Features Simplified Example

Futures 

Contracts248

n A highly standardized, exchange-traded 

contract to buy or sell a commodity for 

delivery in the future

n The exchange specifies certain 

standardized features of the contract, such 

as quality and quantity of goods to be 

delivered

n Both buyer and seller are obligated to 

fulfill the contract at the price agreed at the 

initiation of the contract, whether profitable 

or not

n May be settled by delivery of the 

underlying commodity, by cash, or by 

purchasing an offsetting contract through 

the exchange

n Regulated by the Commodity Futures 

Trading Commission (CFTC) (exclusive 

jurisdiction) 

An airline that expects fuel prices to rise 

wants to hedge its costs for an upcoming 

purchase of jet fuel. To do so, the airline 

takes a long position in exchange-traded, 

cash-settled oil futures contracts that are 

correlated with cash-market jet fuel prices. 

When it is time to purchase the jet fuel, the 

airline takes an offsetting short position in 

the oil futures contracts. If oil prices have 

increased, the airline will earn a profit on 

its oil futures position, which should serve 

to offset the “loss” arising from purchasing 

the jet fuel it needs at the higher price. 

The converse happens if oil prices have 

decreased. The better the correlation 

between the cash and futures markets 

prices, the more effective the hedge will be. 

Options n A contract that gives the buyer the right, 

but not the obligation, to buy (a call option) 

or sell (a put option) a specified quantity 

of a commodity or other instrument at a 

specific price within a specified period of 

time, regardless of the market price of that 

instrument

n The buyer of an option pays a premium for 

the right to buy or sell

n Traded both on exchanges and over-thecounter

n Regulated either by the CFTC or the 

Securities and Exchange Commission, 

depending on underlying asset or index

A currency trader believes the U.S. dollar/

euro exchange rate is trending upward. 

Hoping to profit from her view, she buys 

a call option on euros expiring in three 

months which gives her the right, but 

not the obligation, to buy euros at the 

option’s strike price. The trader has to pay 

a premium for this right. (Conversely, the 

seller of the option receives the premium, 

but is obligated to sell euros at the strike 

price if the trader exercises the option.) 

Three months later, if the U.S. dollar/euro 

exchange rate is above the strike price (i.e., 

the option is in-the-money), the trader will 

exercise the option and realize a gain on 

the currency trade. Her gain, however, is 

offset by the premium she paid for the call 

option. She will not exercise the call option 

at maturity if the U.S. dollar/euro exchange 

rate is below the strike price (it is out-of-themoney), in which case her loss is limited to 

the premium paid.

248. The CFTC and the SEC jointly regulate “security futures,” a statutorily defined separate class of derivatives. Security futures are contracts for the sale or future delivery of a single security or of a narrow-based 

security index and can be based on a variety of reference securities or prices.
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Swaps249 n A contract between two counterparties 

providing for the exchange of cash flows 

based on differences or changes in the 

value or level of the underlying commodity, 

asset, or index 

n Swaps categories: Interest rate swaps, 

credit index swaps, foreign exchange 

swaps, equity index (broad-based) swaps, 

and other commodity swaps

n Previously unregulated. Post-Dodd-Frank, 

regulated by the CFTC (security-based 

swaps regulated by the SEC)

Two companies, each with an outstanding 

five-year $10 million loan, have different 

views of the future path of interest rates. 

Company A, with a floating-rate loan, 

is concerned interest rates will go up, 

leading to higher interest costs on its loan. 

Company B, with a fixed-rate loan, thinks 

interest rates will stay the same or even 

decline over the five years of its loan. The 

two companies enter into a five-year interest 

rate swap under which Company A will pay 

interest to Company B at a fixed rate, and 

Company B will pay interest to Company 

A at a variable rate (for example, prime + 

0.1%) that matches Company A’s floating 

rate loan. Both sets of interest payments 

are calculated based on a principal amount 

of $10 million (but the principal is only 

“notional;” it is not exchanged). Through 

the swap, Company A has transformed its 

floating-rate loan into a fixed-rate liability. For 

Company B, if interest rates go down as it 

anticipates, its payments to Company A will 

be lower while it continues to receive fixed 

payments from Company A.

Derivatives have distinctive attributes depending on whether they are listed and traded on an 

exchange or whether they are trading bilaterally between two parties to the transaction — the socalled “counterparties” — in the over-the-counter (OTC) marketplace. Exchange-traded derivatives — such as futures and options — are highly standardized as to their terms and conditions, 

including the quality, quantity or other specification of the underlying assets.250 Because they are 

standardized, exchange-traded derivatives tend to be more liquid than OTC derivatives and are 

characterized by a higher degree of price transparency. Moreover, the exchanges themselves (as well 

as the exchange intermediaries who carry out trades for customers) are highly regulated entities 

with enforced standards for collateralization and risk management. Because of these protections, 

exchange-traded markets tend to be accessible by a wider range of participants, including so-called 

“retail investors,” such as individuals and small businesses. Finally, exchange-traded derivatives are 

generally cleared through a clearinghouse (often affiliated with the exchange), which mutualizes 

credit and liquidity risk. 

By contrast, OTC derivatives commonly have terms that are privately negotiated between the 

counterparties, and they tend to be less liquid than exchange-traded derivatives. OTC derivatives 

transactions — including forward agreements, swaps, and some options — often are much larger 

than typical trades in exchange-traded markets, and some can be extremely complex. Unless they 

are cleared, OTC derivatives tend to entail a greater degree of bilateral counterparty credit risk. 

249. For a legal definition of “swap,” see 7 U.S.C. § 1a(47) and 17 C.F.R. § 1.3(xxx); for “security-based swap,” 

see 15 U.S.C. § 78c(a)(68).

250. For clarity, options can be listed and traded on an exchange or traded OTC, but “futures” always refers to 

an exchange-traded contract.
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For these reasons, OTC derivatives market participants are generally limited to large institutional 

investors such as banks, insurance companies, pension funds, state and local governments, and 

other eligible nonfinancial end users. Though many OTC derivatives are highly customized to 

meet the needs of a specific party, some types of OTC transactions have become sufficiently standardized to permit centralized clearing and more exchange-like trading. Despite their generally 

greater risks, OTC derivatives have become a significant alternative to exchange-traded products. 

Though the first derivatives originated as a means for farmers and merchants to manage risks in 

agricultural markets, today derivatives are used in virtually every segment of the U.S. and global 

economies, covering nearly every conceivable type of commodity and underlying asset. Highly 

complex financial contracts based on security indexes, interest rates, foreign currencies, Treasury 

bonds, and other products now greatly exceed the agricultural contracts in trading volume.251 It 

is through this growth and innovation that businesses and organizations across every sector of the 

U.S. economy have become users of both exchange-traded and OTC derivatives. Manufacturers of 

nearly every variety, banks, insurance companies, importers and exporters, pension funds, service 

and transportation industries and more use these instruments as a means to manage the underlying 

risks associated with their businesses and operations and benefit from the price discovery function 

they provide. Indeed, derivatives have become essential financial tools that, when used properly, 

allow companies to grow and create jobs, produce goods and services for the economy, and provide 

stable prices for American consumers. 

The Commodity Exchange Act and the Commodity Futures Trading 

Commission 

In the United States, the organized trading of futures contracts originated in the middle of the 19th 

century in Chicago. As with the securities markets, there was no federal regulation or oversight of 

the nascent futures markets. Instead, the markets operated under a form of self-regulation, imposed 

through agreement among the members of an organized exchange. The first such exchange was 

the Chicago Board of Trade, established in 1848. In 1919, the Chicago Mercantile Exchange was 

established. It was not until the 1920s that Congress enacted federal regulation of futures markets. 

The Grain Futures Act of 1922, the first effective federal law to govern trading in grain futures, 

was administered by the Grain Futures Administration, an agency of the U.S. Department of 

Agriculture. In 1936, Congress enacted the Commodity Exchange Act (CEA), broadening the 

types of commodities on which futures contracts could trade and transforming the Grain Futures 

Administration into the Commodity Exchange Authority. 

The CEA, amended and expanded numerous times since 1936, remains today the primary 

federal statute governing U.S. derivatives markets. In 1974, the Commodity Futures Trading 

Commission Act amended the CEA and established several fundamental changes in the regulation 

of U.S. derivatives markets. Most significantly, Congress created the Commodity Futures Trading 

Commission (CFTC) as a new independent federal regulatory agency. Congress transferred the 

authority over the futures markets previously exercised by the Commodity Exchange Authority, 

251. See CFTC 2016 Financial Report, at 18-21.
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the CFTC’s predecessor agency in the Department of Agriculture, to the CFTC.252 In addition, 

Congress mandated the CFTC should have exclusive jurisdiction over futures.253

When the CFTC was established, the majority of derivatives trading consisted of futures contracts on agricultural commodities.254 These contracts gave farmers, ranchers, distributors, and 

end users of products ranging from grains to livestock an efficient and effective set of tools to 

hedge against price risk. Beginning in the 1970s, however, the futures industry began to diversify 

beyond agricultural products. The first futures on financial assets were on foreign currencies, and in 

1975, the newly established CFTC approved the first futures contract on U.S. government debt.255

Ultimately, the markets overseen by the CFTC grew to encompass contracts based on metals, 

energy products, and a long list of other financial products and indexes, providing new opportunities for risk management to a wide range of businesses across the economy. In 2010, Dodd-Frank 

amended the CEA to expand the CFTC’s jurisdiction to include many types of swaps.

The CFTC’s mission is to foster open, transparent, competitive, and financially sound markets 

to avoid systemic risk and protect market users and their funds, consumers, and the public from 

fraud, manipulation, and abusive practices related to derivatives and other products subject to the 

CEA.256 To promote market integrity, the CFTC monitors the markets and participants under its 

jurisdiction for abuses and brings enforcement actions.

The CFTC oversees industry self-regulatory organizations, including traditional organized futures 

exchanges or boards of trade known as designated contract markets (DCMs). The CEA generally 

requires futures contracts to be traded on regulated exchanges, with futures trades cleared and 

settled through clearinghouses, referred to as derivatives clearing organizations (DCOs). 

The Commodity Futures Modernization Act of 2000

In the 1980s and 1990s, the emergence and proliferation of new types of off-exchange derivatives 

tested the CEA and the limits of the CFTC’s jurisdiction. End users often preferred these transactions — broadly referred to as OTC derivatives or swaps — over standardized exchange-traded 

futures and options, since they permitted end users to customize the terms and conditions of the 

transactions with greater precision to meet their specific risk management needs. The markets for 

252. The CFTC was officially established in 1975 when authority for the regulation of futures trading was transferred from the Commodity Exchange Authority, an agency in the Department of Agriculture, to the CFTC.

253. For example, while U.S. states have a role in regulating aspects of the securities markets and banking system, they are precluded by the Commodity Exchange Act from regulating “transactions involving swaps 

or contracts of sale of a commodity for future delivery.” See 7 U.S.C. § 2(a)(1)(A). Section 722 of DoddFrank extended the CFTC’s exclusive jurisdiction to include swaps other than security-based swaps, 

which are regulated by the SEC.

254. The historical link between futures markets and agricultural commodities also helps explain why the 

CFTC’s congressional oversight is carried out through the Senate and House Agriculture Committees.

255. See Timeline of CME Achievements, available at: http://www.cmegroup.com/company/history/timeline-ofachievements.html; and CFTC History in the 1970s, available at: http://www.cftc.gov/About/HistoryoftheCFTC/

history_1970s. 

256. CFTC 2016 Financial Report, at 18. 
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OTC derivatives, however, operated under a cloud of legal uncertainty, because it was unclear 

whether such transactions were subject to the CEA and CFTC regulation.257

In response to these concerns and following the recommendations of the President’s Working Group 

on Financial Markets, Congress passed the Commodity Futures Modernization Act (CFMA) of 

2000 to provide legal certainty for OTC swap agreements.258 The CFMA explicitly prohibited the 

CFTC from regulating the OTC swaps markets and provided that even purely speculative OTC 

derivatives contracts were legally enforceable.259 Though most OTC derivatives market participants 

were regulated, OTC derivatives instruments were shielded from regulation and oversight under 

the CFMA. As a result, volumes in OTC derivatives surged (see Figure 18). According to The 

Financial Crisis Inquiry Report, the 2011 report of the Financial Crisis Inquiry Commission:

At year-end 2000, when the CFMA was passed, the notional amount of OTC derivatives outstanding globally was $95.2 trillion, and the gross market value was $3.2 trillion. In the seven and a half years from then until June 2008, when the market peaked, 

outstanding OTC derivatives increased more than sevenfold to a notional amount of 

$672.6 trillion; their gross market value was $20.3 trillion.260 (Footnotes omitted.)

257. Lynn Stout, Derivatives and the Legal Origin of the 2008 Credit Crisis, 1 Harvard Business Law Review 

1, at 19-20 (2011).

258. See Report of the President’s Working Group on Financial Markets, Over-the-Counter Derivatives 

Markets and the Commodity Exchange Act (Nov. 1999), available at: https://www.treasury.gov/resource-center/

fin-mkts/Documents/otcact.pdf.

259. Lynn Stout, Why We Need Derivatives Regulation, N.Y. Times (Oct. 7, 2009), available at: https://dealbook.

nytimes.com/2009/10/07/dealbook-dialogue-lynn-stout/. The Commodity Futures Modernization Act also prohibited the SEC from regulating OTC swaps.

260. FCIC Report at 49.
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1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

Notional Outstanding ($ Trillion) 

Source: Bank for International Settlements

Figure 18: Global OTC Derivatives by Asset Class 

800

700

600

500

400

300

200

100

0

Commodity

Equity

Credit

Unallocated

FX

Interest Rate

Critics of the CFMA have argued it was overly deregulatory and, as such, helped create the conditions that allowed the financial crisis to occur.261

Challenges During the Financial Crisis

Leading up to the financial crisis, many OTC derivatives were not collateralized, backed by reserves, 

or hedged, resulting in financial vulnerability for market participants and the U.S. financial system. 

More generally, the OTC derivatives markets were characterized by complexity, interconnectivity, 

and lack of transparency, as demonstrated by the case of the Lehman Brothers failure and bankruptcy. At the time of its bankruptcy in September 2008, Lehman had total assets of more than 

$600 billion. The net worth of its total derivatives portfolio amounted to $21 billion, approximately 96% of which represented OTC positions. Lehman’s OTC derivatives portfolio consisted 

of more than 6,000 contracts involving over 900,000 transactions with myriad counterparties. 

As Lehman began to experience trouble, regulators lacked information about Lehman’s claims 

on, and obligations to, its OTC derivatives counterparties. This information was necessary to 

assess the impact of a potential Lehman bankruptcy on its counterparties and the broader financial system. Lehman’s extensive derivatives operations “greatly complicated its bankruptcy, and 

the impact of its bankruptcy through interconnections with derivatives counterparties and other 

261. Ron Hera, Forget About Housing, the Real Cause of the Crisis was OTC Derivatives, Business Insider 

(May 11, 2010), available at: http://www.businessinsider.com/bubble-derivatives-otc-2010-5.
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financial institutions contributed significantly to the severity and depth of the financial crisis.”262

Approximately 80% of Lehman’s derivative counterparties terminated their contracts with Lehman 

following its bankruptcy filing, as permitted by law.263 The spillover effects of these terminations 

resulted in a massive and direct loss of value to counterparties — whose costs included unrecovered 

claims and loss of hedged positions — as well as to Lehman’s bankruptcy estate, not to mention the 

indirect costs including legal and administrative fees and other externalities. 

Interest Rate Benchmark Reform

The London Interbank Offer Rate (LIBOR) is one of the most widely referenced financial 

benchmarks and critical to the functioning of derivatives markets. More than $300 trillion in 

notional value of derivatives contracts are tied to LIBOR, primarily through the floating leg 

of interest rate swaps. LIBOR was famously manipulated in the financial crisis, and despite 

important reforms, its future is increasingly threatened by a long-term decline in unsecured 

bank borrowing underlies the rate. In 2014, following recommendations from the Financial 

Stability Oversight Council and Financial Stability Board, the Federal Reserve convened the 

Alternative Reference Rates Committee (ARRC) to identify an alternative to LIBOR and promote market adoption. As an ex-officio member of the ARRC, Treasury believes the adoption 

of a new reference rate is critical and supports the ARRC’s selection of the Secured Overnight 

Financing Rate. Adoption of a new rate should be market-led, and Treasury encourages market 

participants to provide input and engage in transition planning.

Regulatory Landscape

Dodd-Frank Title VII

Title VII of Dodd-Frank was framed around four principal elements of OTC derivatives reform:

1. Require clearing of standardized OTC derivatives transactions through regulated central 

counterparties.

2. Require trading of standardized transactions on exchanges or electronic trading platforms, where appropriate. 

3. Require regular data reporting so regulators and market participants have greater transparency into market activity.

4. Subject OTC derivatives contracts that are not centrally cleared to higher capital 

requirements. 

Title VII established a comprehensive new regulatory framework for most OTC derivatives, 

including new regulatory oversight for market intermediaries, clearing requirements for certain 

transactions, requirements that trade execution occur on regulated platforms, and trade reporting 

262. FCIC Report, at 343.

263. U.S. Government Accountability Office, Financial Regulatory Reform: Financial Crisis Losses and 

Potential Impacts of the Dodd-Frank Act (Jan. 16, 2013), at 46.
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to provide post-trade transparency to regulators and the public. Title VII also required registration, 

oversight, and business conduct standards for large swap entities, including swap dealers and major 

swap participants, and provided enhanced rulemaking and enforcement authorities for both the 

CFTC and SEC. 

Dodd-Frank divided regulatory jurisdiction over swap agreements between the CFTC and the 

SEC. In addition, the U.S. banking regulators, such as the Federal Reserve, set capital and margin 

requirements for swap entities that are banks. Title VII gave the CFTC authority over the U.S. swaps 

market, representing approximately 95% of the overall U.S. OTC derivatives market and covering 

interest rate swaps, index credit default swaps (CDS), foreign exchange (FX) swaps, certain types 

of equity swaps, and other commodity swaps (including swaps on energy and metals). Dodd-Frank 

directed the CFTC to write rules implementing registration and other regulatory requirements 

for swap dealers, as well as for new market infrastructures such as swap execution facilities (SEFs) 

and swap data repositories (SDRs). Title VII also amended the Exchange Act to provide SEC 

authority to implement parallel reforms for the smaller security-based swaps market. This market 

comprises about 5% of the overall U.S. OTC derivatives market and consists primarily of swaps on 

individual securities or loans. Common security-based swaps include single-name CDS and total 

return swaps.264 The following table shows an overview of the key terms and concepts arising from 

the Title VII derivatives reforms.

Dodd-Frank Title VII – Key Terms and Concepts

What key products are covered under Title VII derivatives reform?

Derivatives n Any financial instrument or contract whose price or terms of payment is 

dependent upon / derived from underlying assets

n Used (a) to hedge risk in underlying asset/commodity, or (b) for speculative 

purposes

n Generic term that includes forwards, futures, options, swaps, etc. 

Swaps n Any agreement, contract, or transaction that is commonly known to the “trade” 

as a swap

n Excludes futures contracts, options on futures, forward contracts on nonfinancial 

commodities, and certain retail transactions

n Swaps asset categories: Interest rate swaps, credit index swaps, foreign 

exchange swaps, equity index swaps (broad-based), and other commodity swaps

n Approximately 95% of U.S. over-the-counter derivatives market

n Regulated by the Commodity Futures Trading Commission

264. The CFTC and SEC share authority over “mixed swaps,” which are security-based swaps that also have 

a commodity component. See U.S. Securities and Exchange Commission, Derivatives (modified May 4, 

2015), available at: https://www.sec.gov/spotlight/dodd-frank/derivatives.shtml.
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Security-based Swaps n Any agreement, contract, or transaction that is a swap AND based on 

• (i) an index that is a narrow-based security index, 

• (ii) a single (non-exempt) security or loan, or 

• (iii) a financial event relating to an issuer or issuers or securities in (i) or (ii) 

above

n Approximately 5% of U.S. over-the-counter derivatives market

n Regulated by the Securities and Exchange Commission

Who are the key market participants?

End-users n A commercial entity that uses swaps to hedge or mitigate commercial risk

n Non-financial end-users are exempt from clearing, margin, etc.

n Non-financial end-users are those that are “not a financial entity” as the latter 

term is defined

Swap Dealers n Any person who:

• Holds itself out as a dealer in swaps, 

• Makes a market in swaps, 

• Regularly enters into swaps as an ordinary course of business for its own 

account, or 

• Is commonly known as a dealer or market maker in swaps

n Subject to certain exceptions, including a de minimis exception

n Regulated by the CFTC

Major Swap Participants n Any person who is not a swap dealer and who: 

• Maintains a “substantial position” in swaps (excluding positions held for 

hedging or mitigating commercial risk),

• Has substantial swaps counterparty exposure that could present a systemic 

risk, or 

• Is a highly-leveraged financial entity that maintains a “substantial position” in 

swaps and not subject to prudential regulation

n Regulated by the CFTC

Security-based Swap 

Dealers and Major 

Security-based Swap 

Participants

n Regulated by the SEC

Clearing Members n A member of a clearing organization or central counterparty, such as brokerdealers, futures commission merchants (FCMs), and swap dealers

n Subject to stringent financial, risk management and operational requirements, 

and monitored for ongoing compliance

n Non-clearing members must clear their trades through a clearing member

n Regulated by the CFTC and SEC
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What are the key swaps and security-based swaps market structures under Title VII?

Derivatives Clearing 

Organizations (DCOs)*

n A clearinghouse, clearing association, or similar entity that:

• Enables each party to a transaction to substitute the credit of the DCO for 

the credit of an individual counterparty, 

• Provides for multilateral settlement or netting of obligations, or

• Otherwise provides for the mutualization or transfer of credit risk 

• Also known as central counterparties, or CCPs

Designated Contract 

Markets (DCMs)

n An organized exchange or other trading facility designated by the CFTC that:

• Facilitates trading of futures, options on futures, and swaps, and

• Permits trading by or on behalf of non-eligible contract participants (retail 

traders)

Swap Execution Facilities 

(SEFs)*

n A trading system or platform that provides multiple participants the ability to 

execute or trade swaps by accepting bids and offers made by multiple participants

n SEFs, unlike DCMs, may not facilitate futures trading or retail trading

Swap Data Repositories 

(SDRs)*

n Any facility that collects, maintains, and disseminates swaps trade data and 

provides a centralized recordkeeping facility for swaps

What activities are taking place under Title VII derivatives reform?*

Clearing n Dodd-Frank requires certain swaps to be submitted to a DCO for clearing, 

which will result in daily margining of all risk positions 

n CFTC must determine which swaps are required to be cleared

n DCOs may determine which swaps to accept for clearing (subject to CFTC 

review)

Uncleared Swaps n Swaps that are not cleared by a DCO

n Under Dodd-Frank, are subject to higher risk management standards (e.g., initial 

margin and variation margin) than cleared swaps

SEF Trading n Swaps subject to mandatory clearing must be traded on a SEF or DCM, unless 

no SEF or DCM makes the swap “available to trade”

Real-time Public 

Reporting

n Dodd-Frank requires real-time public reporting of all swaps, whether cleared or 

uncleared (similar to TRACE in the bond markets)

n Involves reporting swap transaction data (e.g., price, volume) “as soon as 

technologically practicable” after the execution of the swap

Color Key

Term not defined in statute Dodd-Frank definition/concept Existing or amended statutory or 

regulatory term/concept

* Security-based swaps subject to corresponding requirements
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The CFTC has finalized substantially all of its major rulemakings required under Title VII and 

has implemented the major reforms for the swaps market. Although many CFTC rules have been 

implemented smoothly, several are the subject of exemptive, no-action, and interpretive letters or 

are under review by the CFTC. While the SEC has finalized most of its major rulemakings required 

under Title VII, it has not yet finalized certain key Title VII derivatives reforms for security-based swaps. 

CFTC Swaps Framework

Intermediary Oversight — Swap Dealers 

Following the financial crisis, Congress determined to require supervision and oversight of previously unregulated dealers and other intermediaries in the OTC derivatives markets. Title VII 

directed the CFTC to establish rules for the registration and regulation of swap dealers and major 

swap participants. The CFTC completed its swap dealer registration rules in 2012.265 The rules 

provide that certain entities may be exempt from registering as swap dealers if their swap dealing 

activity is below a de minimis threshold.266 Swap dealers must also be registered with the National 

Futures Association, an industry self-regulatory organization, which conducts examinations of 

swap dealers on behalf of the CFTC, among other responsibilities. As of Sept. 26, 2017, 102 swap 

dealers were provisionally registered with the CFTC.267

The CEA and CFTC rules define a swap dealer in part as a market intermediary that holds itself 

out as a dealer in swaps, makes a market in swaps, regularly enters into swaps with counterparties 

in the ordinary course of business for its own account, or engages in any activity causing the person 

to be commonly known in the trade as a dealer or market maker in swaps. To ensure appropriate safeguards over swap dealing activities, the CFTC has adopted rules intended to promote 

strong risk management and high standards of business conduct among swap dealers. For example, 

the CFTC released final rules in January 2016 for initial and variation margin requirements for 

uncleared swaps entered into by swap dealers, and it is currently working to finalize a rule on swap 

dealer capital requirements.268

The CFTC’s business conduct framework for swap dealers establishes both external and internal 

requirements. When dealing with counterparties, for example, swap dealers are prohibited from 

engaging in abusive practices and are required to make disclosures of certain material information 

to counterparties. Swap dealers must also ensure that all counterparties are eligible to enter into 

swaps and must have a reasonable basis to believe that a recommended swap is suitable for a 

265. Registration of Swap Dealers and Major Swap Participants (Jan. 11, 2012) [77 Fed. Reg. 2613 (Jan. 19, 

2012)].

266. Swap dealer registration is based in part on the aggregate gross notional amount of the swaps that an 

entity enters into over the previous 12 months in connection with dealing activities. Currently, the de minimis threshold is $8 billion.

267. U.S. Commodity Futures Trading Commission, Provisionally Registered Swap Dealers (last accessed Sep. 

26, 2017), available at: http://www.cftc.gov/LawRegulation/DoddFrankAct/registerswapdealer.

268. Margin Requirements for Uncleared Swaps for Swap Dealers and Major Swap Participants (Dec. 18, 

2015) [81 Fed. Reg. 636 (Jan. 6, 2016)] (“CFTC Margin Requirements for Uncleared Swaps”); Capital 

Requirements of Swap Dealers and Major Swap Participants (Dec. 2, 2016) [81 Fed. Reg. 91333 (Dec. 

16, 2016)].
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counterparty.269 Internal business conduct requirements include standards for documentation and 

confirmation of transactions, as well as dispute resolution procedures.270 Swap dealers are also 

subject to portfolio reconciliation and portfolio compression requirements to reduce the risks 

arising from multiple transactions.271

Clearing Mandate and Derivatives Clearing Organizations 

Title VII required that certain standardized swaps must be centrally cleared, and it directed the 

CFTC to establish rules implementing this requirement by mandating which swaps must be 

cleared through CFTC-registered derivatives clearing organizations (DCOs). Central clearing, 

which has long been a fundamental feature of CFTC-regulated futures markets, serves to reduce 

the risk that one market participant’s default or failure could have an adverse economic impact on 

its counterparty, other market participants, or the financial system as a whole.272

In 2011, the CFTC finalized rules under Title VII establishing the process the CFTC would use 

to review swaps to determine when swaps are required to be cleared by eligible CFTC-registered 

DCOs.273 Under the rules, a clearing determination takes into consideration five statutory factors 

of the suitability of swaps for mandatory central clearing. In 2013, the CFTC issued its first 

mandatory clearing determination, covering certain types of interest rate swaps denominated in 

U.S. dollars, euros, pounds and yen, as well as credit default swaps on certain North American and 

European credit indexes.274 In 2016, the CFTC expanded the clearing requirement to cover interest rate swaps denominated in nine additional foreign currencies, including the Canadian dollar, 

Hong Kong dollar, and Swiss franc.275 This expanded mandate is being phased in based on the date 

that corresponding clearing requirements go into effect in non-U.S. jurisdictions, or within two 

years, whichever occurs earlier. 

In 2007, only about 15% of swap transactions were cleared.276 By contrast, most new interest rate 

swaps and index credit default swaps are now being cleared through CFTC-registered DCOs. 

Based on data reported to CFTC-registered SDRs, for the year ending June 2017, approximately 

269. Business Conduct Standards for Swap Dealers and Major Swap Participants with Counterparties (Jan. 

11, 2012) [77 Fed. Reg. 9734 (Feb. 17, 2012)].

270. Confirmation, Portfolio Reconciliation, Portfolio Compression, and Swap Trading Relationship 

Documentation Requirements for Swap Dealers and Major Swap Participants (Aug. 24, 2012) [77 Fed. 

Reg. 55904 (Sept. 11, 2012)].

271. Id.

272. Some commenters have raised policy concerns about the fact that central clearing centralizes risk in a 

small number of large entities. These issues are discussed in the Financial Markets Utilities chapter.

273. Process for Review of Swaps for Mandatory Clearing (July 19, 2011) [76 Fed. Reg. 44464 (July 26, 

2011)].

274. U.S. Commodity Futures Trading Commission, Press Release No. 6607-13 (Jun. 10, 2013), available at: 

http://www.cftc.gov/PressRoom/PressReleases/pr6607-13.

275. U.S. Commodity Futures Trading Commission, Press Release No. 7457-16 (Sept. 28, 2016), available at: 

http://www.cftc.gov/PressRoom/PressReleases/pr7457-16.

276. Chairman Timothy Massad, Remarks before the London School of Economics (Jan. 10, 2017), available 

at: http://www.cftc.gov/PressRoom/SpeechesTestimony/opamassad54.
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87% of all new interest rate swap transactions were cleared, while about 79% of index credit 

default swaps were cleared, as measured by notional value (see Figure 19).

Figure 19: Cleared and Uncleared Interest Rate Swaps and Index Credit Default

Swaps ($ billions)

Average daily notional volume, year ending June

Source: SDR data, as compiled by ISDA

6.0

24.0

132.0

419.0

5.9

24.6

109.0

496.0

5.6

20.6

98.0

631.0

Cleared IRS

Uncleared IRS

Cleared CDS

Uncleared CDS

2015 2016 2017

Along with mandatory clearing, CFTC oversight of DCOs was updated in response to other 

Dodd-Frank reforms, including the CFTC’s new regulatory oversight of swaps. These updates 

include adopting regulations to implement preexisting core principles for DCOs,277 and finalizing rules on DCO financial resources and risk-management.278 Currently, there are 16 DCOs 

registered with the CFTC, though not all clear swaps.279 The majority of swaps clearing under the 

CFTC’s oversight is conducted through Chicago Mercantile Exchange, Inc. (CME, Inc.), ICE 

Clear Credit LLC (ICE), and LCH Ltd. 

DCOs, and central counterparties (CCPs) in general, raise a number of policy issues in connection with their activities. As more swaps become subject to mandatory clearing, for example, the 

demand for additional collateral to be pledged for cleared transactions is expected to increase 

significantly. Further, though CCPs mitigate credit risk between counterparties, they essentially 

277. Derivatives Clearing Organization General Provisions and Core Principles (Oct. 18, 2011) [76 Fed. Reg. 

69334 (Nov. 8, 2011)].

278. Enhanced Risk Management Standards for Systemically Important Derivatives Clearing Organizations 

(Aug. 9, 2013) [78 Fed. Reg. 49663 (Aug. 15, 2013)].

279. U.S. Commodity Futures Trading Commission, Derivatives Clearing Organizations, available at: https://sirt.

cftc.gov/sirt/sirt.aspx?Topic=ClearingOrganizations.
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concentrate credit risk exposure, raising questions about their risk-management, as well as their 

resiliency and ability to recover in cases of market stress. These issues are discussed in more detail 

in the “Financial Market Utility” section of this report.

Trading Mandate and Swap Execution Facilities 

Another key tenet of Title VII is to promote trading of standardized derivatives products on regulated platforms. Specifically, Congress required that certain swaps must be traded on a SEF or an 

exchange registered as a DCM. Title VII also provided that SEFs must register with the CFTC and 

comply with a set of 15 statutory core principles that were to be further defined by the CFTC via 

a rulemaking.280 A SEF is defined as “a trading system or platform in which multiple participants 

have the ability to execute or trade swaps by accepting bids and offers made by multiple participants in the facility or system, through any means of interstate commerce.”281 Defined in this way, 

SEFs can facilitate greater pre-trade price transparency and liquidity for market participants, while 

the SEF core principles are designed to promote a more open and competitive marketplace. 

In June 2013, the CFTC finalized its rulemaking on core principles for SEFs, which also established permitted trade execution methods for SEFs.282 Concurrently, the CFTC adopted final rules 

establishing the process by which SEFs and DCMs can make swaps “available to trade.”283 Under the 

core principles, each SEF has a general obligation to comply with Section 5h of the CEA, both 

initially at registration and on an ongoing basis. The core principles cover a number of areas, 

including establishing and enforcing rules for trading and product requirements, compliance by 

market participants, market surveillance obligations, operational capabilities, and financial resource 

requirements. SEFs are also required to provide impartial access to market participants and make 

trading information publicly available.

Trading on SEFs began in October 2013 and soon after, several SEFs filed “made available to 

trade” determinations, leading to the first trade execution mandates. Beginning in February 2014, 

transactions in interest rate swaps and index credit default swaps subject to mandatory clearing 

were required to take place on a SEF or DCM. Other types of swaps, in addition to those that 

are required to trade on SEFs, are also trading on the new platforms, including certain foreign 

exchange swaps. For the year-ended June 2017, the average daily trading volume of interest rate 

swaps across all SEFs amounted to approximately $470 billion, while index credit default swaps 

and FX swaps showed average daily trading volumes of $25 billion and $41 billion, respectively 

(see Figure 20). To date, 25 SEFs are fully registered with the CFTC, though most swap trading 

is concentrated among a few SEFs.284 Nearly 75% of trading in index credit default swaps, for 

280. 7 U.S.C. § 7b-3.

281. 7 U.S.C. § 1a(50).

282. Core Principles and Other Requirements for Swap Execution Facilities (May 17, 2013) [78 Fed. Reg. 

33476 (Jun. 4, 2013)] (known as “SEF Core Principles Rule”).

283. Process for a Designated Contract Market or Swap Execution Facility to Make a Swap Available to Trade, 

Swap Transaction Compliance and Implementation Schedule, and Trade Execution Requirement Under 

the Commodity Exchange Act (May 17, 2013) [78 Fed. Reg. 33606 (Jun. 4, 2013)].

284. U.S. Commodity Futures Trading Commission, Trading Organizations-Swap Execution Facilities (SEF), 

available at: https://sirt.cftc.gov/SIRT/SIRT.aspx?Topic=SwapExecutionFacilities.
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example, occurs on one SEF, with 5 others accounting for most of the remaining volume. In interest rate swaps, 2 SEFs account for more than 50% of trading volume, while 6 more SEFs make up 

most of the balance of trading. Trading in FX swaps is somewhat less concentrated, with more than 

90% of volume taking place on 5 SEFs.285

Figure 20: Swaps Traded on Swap Execution Facilities ($ billions)

Average Daily Volume, Year Ending June

Source: Data reported by SEFs, compiled by FIA

36

30

333

36

31

386

41

25

470

Interest Rate

Swaps

Index CDS

FX

2015 2016 2017

Data Reporting and Swap Data Repositories 

The final element of swaps reform was ongoing reporting of swap activity to achieve greater posttrade transparency for regulators and the public. For this purpose, Title VII established SDRs, 

a new type of market entity under CFTC jurisdiction, and tasked these organizations with the 

responsibility for collecting, maintaining, and disseminating swap trade data. SDRs are subject to 

registration and core principle requirements under CFTC rules.286 The CFTC phased in mandatory reporting of swaps by asset class and type of counterparty between December 2012 and 

August 2013. There are currently four SDRs provisionally registered with the CFTC. 287

Title VII included both regulatory and public reporting requirements for swap transactions. All 

swap trades entered into by U.S. persons must be reported to SDRs, even if they are not cleared or 

executed on a centralized platform. Pricing data and certain other transaction details are publicly 

285. See FIA’s SEF Tracker for detail on SEF trading volumes, available at: https://fia.org/.

286. Swap Data Repositories: Registration Standards, Duties and Core Principles (Aug. 4, 2011) [76 Fed. 

Reg. 54538 (Sept. 1, 2011)].

287. U.S. Commodity Futures Trading Commission, Swap Data Repository Organizations, available at: https://

sirt.cftc.gov/sirt/sirt.aspx?Topic=DataRepositories.
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released. To promote price discovery and market efficiency, the CFTC’s swap data reporting rules 

require real-time public dissemination of much of this data.288 The full scope of swaps trade data 

collected by SDRs is available to the CFTC. This data is used by the CFTC to conduct oversight 

and surveillance of the markets and to carry out its statutory responsibilities. 

SEC Security-based Swaps Framework

The SEC has proposed all of the major rules it is required to complete under Title VII relating 

to the regulation of security-based swaps. While several of these rules have been finalized, several 

critical rulemakings have not yet been finalized. In particular, the SEC has either not finalized or 

not yet fully implemented the following key Dodd-Frank reforms relating to security-based swaps: 

registration and regulation of security-based swap dealers, trade reporting, mandatory central 

clearing of standardized security-based swaps, and trade execution requirements. Key rules relating 

to security-based swaps that the SEC still needs to finalize include:

• regulation of security-based swap dealers and major security-based swap participants, 

including capital, margin, and segregation requirements for security-based swaps;

• security-based swaps clearing, including a clearing mandate for specific instruments (e.g., 

single-name credit default swaps or swaps based on a narrow-based security index) as well 

as an end-user exemption; 

• platform trading of security-based swaps, especially registration and regulation of 

security-based swap execution facilities; and

• rules prohibiting fraud and manipulation in connection with security-based swaps.

Role of Banking Agencies

Many swap dealers and security-based swap dealers are depository institutions or subsidiaries of 

banks and have a prudential regulator in addition to being subject to regulation by the CFTC 

or SEC. Title VII provided a limited role in the regulation of OTC swaps to the U.S. banking 

regulators.289 Specifically, Dodd-Frank — through amendments to the CEA and the Exchange Act 

— gave the banking agencies authority to determine the capital and margin requirements for swap 

dealers and major swap participants that have a prudential regulator.290 The margin requirements 

include both initial and variation margin requirements for swaps and security-based swaps that are 

not centrally cleared. In addition, the prudential regulators, the CFTC, and the SEC are required 

to consult at least annually on minimum capital requirements and minimum initial and variation 

margin requirements to establish and maintain, “to the maximum extent practicable,” comparable 

capital and margin requirements for swap dealers and major swap participants.291 

288. Real-Time Public Reporting of Swap Transaction Data (Dec. 20, 2011) 77 Fed. Reg. 1182 (Jan. 9, 2012). 

A separate rulemaking provides for reporting delays for certain block trades.

289. As used here, the term “prudential regulator,” has the meaning in 7 U.S.C. § 1a(39). The term “U.S. banking agencies” and similar terms are also used to refer to prudential regulators or a subset thereof.

290. 7 U.S.C. §§ 6s(e) and 2(a)(1)(A) (CEA); 15 U.S.C. § 78o-10 (Exchange Act).

291. See 7 U.S.C. § 6s(e)(3)(D) and 15 U.S.C. § 78o-10(e)(3)(D).
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Issues and Recommendations

In general, we have found — and our broad outreach throughout the process of preparing this 

report has confirmed — there to be widespread support for mandated central clearing and platform trading of standardized derivatives, as well as trade reporting. However, there have also been 

criticisms regarding numerous details of how these market modifications have been implemented. 

The challenge now facing the CFTC, the SEC and other regulators is to identify problem areas 

and seek solutions that level the playing field for market participants and ensure healthy, fair, 

and robust derivatives markets. Though the specific issues in the following discussion are varied, 

and some are quite technical, they tend to fall into several broad categories including regulatory 

harmonization, cross-border issues, capital treatment of derivatives, end-user issues, and market 

infrastructure. 

Regulatory Coordination and Harmonization

Harmonization Between CFTC and SEC 

The regulatory distinction between “swaps” and “security based swaps” did not reflect previous 

market practice, and the resulting split jurisdiction between SEC and CFTC has posed challenges 

for market participants. 

In a few areas, such as further defining entities and product terms, the CFTC and SEC issued joint 

rules. In other areas, Dodd-Frank required the CFTC and SEC to consult and coordinate with one 

another, and with the prudential regulators, in a number of areas “for purposes of assuring regulatory consistency and comparability, to the extent possible.”292 Despite CFTC and SEC efforts in 

this regard, important differences in their Title VII rules remain. 

Examples touch all areas of Dodd-Frank OTC derivatives reforms, and include differences in trade 

reporting requirements, trading and clearing rules, compliance requirements for registration for 

swap dealers and security-based swap dealers, and capital and margin requirements, among others. 

Sometimes, these differences in approach might not be incompatible, but more frequently they are 

inconsistent with or duplicative of one another, increasing the cost and complexity of compliance 

programs. Consequently, many market participants are or will be required to comply with different 

requirements to address the same regulatory goals, sometimes for the same entity, depending on 

the products they transact, even within the same asset classes, such as credit derivatives. 

One area of concern, for example, is the SEC’s security-based swap dealer registration rules, which 

market participants say contain certain compliance requirements that have no comparable requirement under the CFTC’s rules. As another example, key requirements of the two agencies’ trade 

reporting rules diverge in several respects, including the timing by which swap data repositories 

may publicly disseminate trade data. Even in areas where there was broad agreement between the 

two agencies, for example in the joint CFTC-SEC product definitions, improvements could be 

made. For example, market participants have noted the need for a clearer and simpler distinction 

292. Dodd-Frank §712(a)(1)-(2).
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between “swaps” and “security-based swaps,” and have suggested that the term “mixed swap” be 

eliminated so every swap is subject either to CFTC or SEC jurisdiction, but not both. 

CFTC Chairman Christopher Giancarlo and SEC Chairman Jay Clayton both have expressed 

support for resolving unnecessary divergences, complexity, and duplication in their respective rules 

and reducing compliance burdens in areas of jurisdictional overlap.293

Recommendations

• Treasury recommends that the CFTC and the SEC undertake and give high priority to 

a joint effort to review their respective rulemakings in each key Title VII reform area. 

The goals of this exercise should be to harmonize rules and eliminate redundancies to the 

fullest extent possible and to minimize imposing distortive effects on the markets and 

duplicative and inconsistent compliance burdens on market participants. 

− As part of this review, the SEC should finalize its Title VII rules with the goal of 

facilitating a well-harmonized swaps and security-based swaps regime. 

− This effort should also include consideration of the prospects for alternative compliance regimes — for example, a framework of interagency substituted compliance or 

mutual recognition — for any areas in which effective harmonization is not feasible.

− Public comment should be part of this process. 

• Congress should consider further action to achieve maximum harmonization in the 

regulation of swaps and security-based swaps.

Margin Requirements for Uncleared Swaps

One of the key reforms of Title VII was to require that standardized OTC derivatives be centrally 

cleared through a CCP. However, not all swaps can be sufficiently standardized to be suitable for 

central clearing. Rather than prohibiting such transactions, Title VII determined to treat such 

uncleared swaps in accordance with risks associated with such transactions. Dodd-Frank Section 

731 directed that capital requirements and initial margin294 and variation margin295 requirements 

should be imposed on all swaps not cleared by a DCO or other CCP, and that such requirements 

293. CFTC Chairman Giancarlo letter to Treasury Secretary Mnuchin (May 15, 2017); Chairman Jay Clayton, 

Remarks at the Economic Club of New York (Jul. 12, 2017), available at: https://www.sec.gov/news/speech/

remarks-economic-club-new-york. Though committed to harmonization with the CFTC, Chairman Clayton further made the practical and cautionary observation that “all such efforts will need to take into account statutory variances as well as differences in products and markets.” 

294. Initial margin refers to funds put up as collateral at the time a derivatives transaction or contract is established (and adjusted during the life of the transaction as needed) to minimize losses if a derivatives counterparty defaults on its obligations under the terms of the transaction. Initial margin reflects the potential 

future exposure of a swap transaction.

295. Variation margin is the amount paid by one swap counterparty to another to reflect daily changes in the 

mark-to-market value of the transaction after it has been executed. Variation margin reflects the current 

exposure of a swap transaction. Variation margin is usually paid in cash or other high-quality and liquid 

collateral.
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should be “appropriate for the risk associated with” the uncleared swaps.296 Margin requirements 

on uncleared swaps are intended, in general, to reduce systemic risk by requiring collateral to be 

available to offset any losses arising from the default of a swap counterparty, limiting contagion and 

spillover effects. Further, margin requirements, by reflecting the generally higher risk associated 

with uncleared swaps, are intended to promote central clearing. 

The U.S. banking agencies and the CFTC finalized margin rules for the uncleared swaps of bankaffiliated swap dealers in November 2015 and nonbank swap dealers in January 2016, respectively.297 Market participants argue that U.S. regulators have taken a stricter approach than non-U.S. 

jurisdictions with respect to many of the particular requirements of the uncleared margin rules, 

and as a result, U.S. firms are placed at a competitive disadvantage relative to their non-U.S. 

competitors. Moreover, non-U.S. firms may decide not to transact with U.S. firms, so long as these 

transactions are subject to the more stringent requirements. 

Among these differences in approach are the treatment of interaffiliate transactions, the timing of 

margin settlement, and the scope of end-user entities subject to the requirements.

Interaffiliate transactions. Many banks and other companies use swaps transactions between affiliates 

(“interaffiliate swaps”) as a means to centralize their company-wide risk management activities.298

The CFTC has exempted interaffiliate transactions from its initial margin requirements and its 

mandatory clearing requirements — conditioned, in part, on the “market facing” affiliates collecting initial margin or centrally clearing their swaps with unaffiliated counterparties.299 By contrast, 

the U.S. banking regulators imposed initial margin requirements for interaffiliate transactions 

of prudentially regulated swap dealers. Differences between CFTC and U.S. banking regulators’ 

margin requirements run counter to the goal of regulatory harmonization. While posting of initial 

margin between affiliates of a bank or bank holding company may help in the case of a resolution, 

it also creates additional liquidity demands and locks up margin that could be deployed for more 

productive uses. The International Swaps and Derivatives Association (ISDA) estimates that the 

14 largest derivatives dealers have posted $29 billion of initial margin for interaffiliate swaps.300

296. 7 U.S.C. § 6s(e)(2)-(3). Analogous requirements for security-based swaps are contained in 15 U.S.C. § 

78o-10(e).

297. Prudential Regulators, Margin and Capital Requirements for Covered Swap Entities [80 Fed. Reg. 

74840 (Nov. 30, 2015)] ( “Prudential Regulators Margin and Capital Requirements”); CFTC Margin 

Requirements for Uncleared Swaps. The SEC initially proposed its margin rules for uncleared security-based swaps in 2012 before the release of the framework of the Basel Committee on Banking 

Supervision-International Organization of Securities Commissions (BCBS-IOSCO) and has not yet reproposed or finalized its rules in this area.

298. In general, counterparties are considered “affiliated” if one counterparty, directly or indirectly, holds a 

majority ownership interest in the other counterparty, or a third party, directly or indirectly, holds a majority 

ownership interest in both counterparties. See 17 C.F.R. § 50.52(a)(1).

299. 17 C.F.R. § 23.159 (special initial margin rules for affiliates); 17 C.F.R. § 50.52 (clearing exemption for 

swaps between affiliates).

300. Some market participants claim that for some banking groups, the margin held internally due to the initial 

margin requirements on interaffiliate transactions exceeds the initial margin held for all third-party-facing 

transactions.
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Market participants argue that interaffiliate swaps are risk-reducing, internally insulated, and do 

not present systemic risk. Moreover, market participants observe that the U.S. banking regulators’ initial margin requirements diverge from the Basel Committee on Banking SupervisionInternational Organization of Securities Commissions (BCBS-IOSCO) international framework 

on which they were based, as well as from analogous rules being implemented in the European 

Union (EU). This difference puts U.S. bank swap dealers at a disadvantage to both domestic and 

non-U.S. competitors.

Sizing of margin requirements. Under the rules of the CFTC and banking regulators (and based 

on the BCBS-IOSCO international framework), the size of required initial margin for uncleared 

swaps is based on a 10-day market move, in comparison to a 5-day move for cleared swaps.301

While the higher margin requirement is meant to reflect the greater risk of uncleared swaps and 

encourage clearing where possible, market participants have pointed out that the 10-day window 

is arbitrary and not well tailored to the risk of specific products and counterparties. For example, 

certain swaps such as equity index total return swaps, which are primarily uncleared, could easily 

be liquidated well within a 10-day window.

Timing of margin settlement. Under the rules of the CFTC and the U.S. banking regulators, any 

initial margin and variation margin payments that must be posted to a swap counterparty must 

be settled within one business day (called “T+1” settlement). This timing requirement can place 

a significant burden on smaller U.S. entities such as pension funds and other asset managers that 

lack the operational or funding capability of larger swaps counterparties to settle within a single 

business day. Moreover, the U.S. T+1 settlement requirement is more stringent than in non-U.S. 

jurisdictions, such as the European Union, which typically allow two days for more margin settlement. This difference in timing potentially puts U.S. firms at a disadvantage to non-U.S. firms, 

particularly when dealing with counterparties in widely dispersed time zones or when the collateral 

being posted is denominated in different currencies. 

Scope of end users. The initial and variation margin requirements of the uncleared swap margin 

rules issued by the CFTC and the U.S. banking regulators are generally applicable to swaps in 

which both counterparties are swap dealers, major swap participants, or financial end users. The 

rules generally do not apply to a swap in which one of the counterparties is a nonfinancial end user 

that qualifies for the end-user exception to the clearing mandate in Section 2(h)(7) of the CEA.302

The U.S. margin rules define “financial end user” by enumerating the various types of entities the 

CFTC and the U.S. banking regulators intended to cover.303 This list is expansive, and market 

participants argue it goes far beyond analogous requirements in the uncleared margin rules of 

non-U.S. jurisdictions. 

301. See Prudential Regulators Margin and Capital Requirements; CFTC Margin Requirements for Uncleared 

Swaps.

302. 7 U.S.C. § 2(h)(7). This exemption is further available to certain small financial institutions and captive 

finance companies, certain cooperative entities that qualify for an exemption from the clearing requirements, and certain treasury affiliates acting as agent and that satisfy the criteria for an exception from 

clearing in section 2(h)(7)(D) of the CEA.

303. See, e.g., 17 C.F.R. § 23.151.
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Recommendations

Treasury recommends that U.S. regulators take steps to harmonize their margin requirements for 

uncleared swaps domestically and cooperate with non-U.S. jurisdictions that have implemented 

the BCBS-IOSCO framework to promote a level playing field for U.S. firms. 

• The U.S. banking agencies should consider providing an exemption from the initial margin requirements for uncleared swaps for transactions between affiliates of a bank or bank 

holding company in a manner consistent with the margin requirements of the CFTC 

and the corresponding non-U.S. requirements, subject to appropriate conditions.304

• The CFTC and U.S. banking agencies should work with their international counterparts 

to amend the uncleared margin framework so it is more appropriately tailored to the 

relevant risks.

• Where warranted based on logistical and operational considerations, the CFTC and 

the U.S. banking agencies should consider amendments to their rules to allow for more 

realistic time frames for collecting and posting margin. 

• The CFTC and the U.S. banking agencies should reconsider the one-size-fits-all treatment of financial end users for purposes of margin on uncleared swaps and tailor their 

requirements to focus on the most significant source of risk.

• Consistent with these objectives, the SEC should re-propose and finalize its proposed 

margin rule for uncleared security-based swaps in a manner that is aligned with the 

margin rules of the CFTC and the U.S. banking regulators. 

CFTC Use of No-Action Letters

Throughout the process of implementing the swaps reforms of Dodd-Frank, CFTC staff made 

frequent use of no-action letters and other guidance to smooth the implementation of the new 

requirements. CFTC staff issues written guidance concerning the CEA and CFTC regulations, 

principally in the form of responses to requests for exemptive, no-action, and interpretative letters. 

CFTC Regulation 140.99 defines three types of staff letters — exemptive letters,305 no-action 

304. With regard to interaffiliate transactions generally, Treasury sees value in preserving the flexibility of regulators in this area. While Treasury is not at this time prepared to recommend a statutory amendment to 

exclude interaffiliate swap transactions from the requirements of Dodd-Frank Title VII, as some have proposed, we support the CFTC’s use of its exemptive and rulemaking authorities to provide targeted exemptions for interaffiliate transactions. Treasury calls on the CFTC and SEC to consider further actions to provide appropriate relief to interaffiliate transactions that are consistent with the public interest.

305. Under CFTC Regulation 140.99(a)(1), “exemptive letter” means “a written grant of relief issued by the 

staff of a Division of the Commission from the applicability of a specific provision of the Act or of a rule, 

regulation or order issued thereunder by the Commission. An exemptive letter may only be issued by staff 

of a Division when the Commission itself has exemptive authority and that authority has been delegated by 

the Commission to the Division in question. An exemptive letter binds the Commission and its staff with 

respect to the relief provided therein. Only the Beneficiary may rely upon the exemptive letter.” 17 C.F.R. § 

140.99(a)(1).
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letters,306 and interpretative letters307 — that differ in terms of scope and effect. Before DoddFrank, CFTC staff generally issued a relatively small number of no-action and interpretive letters 

each year. Since 2012, CFTC staff has typically issued dozens of such letters each year, including 

160 staff letters issued in 2014 alone.308 These figures include the many no-action letters issued 

during this period that have been extended multiple times.

The CFTC has been criticized for over-relying on relief granted to market participants through 

no-action letters (which are frequently extended), rather than codifying the relief granted through 

the rulemaking process. Taking such a step through formal rulemaking would provide an updated 

estimate of costs and benefits and allow affected market participants to comment on the proposals. 

A rulemaking codifying previously issued no-action letters would also simplify and clarify the 

obligations currently stated in a number of interlocking no-action letters and provide permanent, 

rather than temporary, relief from certain obligations. 

Market participants have raised a number of additional concerns about the CFTC’s reliance on 

no-action letters. These include concerns that reliance on no-action letters can facilitate regulatory 

capture and undermine regulatory quality, and that no-action letters can impose substantive new 

requirements that should appropriately be introduced through notice and comment rulemaking 

under the Administrative Procedures Act.309 No-action letters also fail to provide regulatory certainty to market participants on which to make business decisions. 

No-action letters and other forms of written guidance are nevertheless important regulatory 

tools. In implementing the Dodd-Frank swaps reforms, the CFTC was operating under tight 

statutory time frames to impose a wholly new regulatory framework essentially from scratch. This 

course of action inevitably compelled the CFTC to make extensive use of regulatory guidance 

and no-action relief. Yet had it not had these tools, the resulting market disruptions could have 

been more consequential. Several years into the implementation phase of the new swaps reforms, 

it is now incumbent on the CFTC to provide certainty for market participants by reviewing staff 

306. Under CFTC Regulation 140.99(a)(2), “no-action letter” means “a written statement issued by the staff 

of a Division of the Commission or of the Office of the General Counsel that it will not recommend 

enforcement action to the Commission for failure to comply with a specific provision of the Act or of a 

Commission rule, regulation or order if a proposed transaction is completed or a proposed activity is conducted by the Beneficiary. A no-action letter represents the position only of the Division that issued it, or 

the Office of the General Counsel if issued thereby. A no-action letter binds only the issuing Division or 

the Office of the General Counsel, as applicable, and not the Commission or other Commission staff. 

Only the Beneficiary may rely upon the no-action letter.” 17 C.F.R. § 140.99(a)(2).

307. Under CFTC Regulation 140.99(a)(3), “interpretive letter” means “written advice or guidance issued by 

the staff of a Division of the Commission or the Office of the General Counsel. An interpretative letter 

binds only the issuing Division or the Office of the General Counsel, as applicable, and does not bind the 

Commission or other Commission staff. An interpretative letter may be relied upon by persons in addition 

to the Beneficiary.” 17 C.F.R. § 140.99(a)(3).

308. An archive of CFTC staff letters is available on the CFTC website: http://www.cftc.gov/LawRegulation/

CFTCStaffLetters/index.htm.

309. See Hester Peirce, Regulating through the Back Door at the Commodity Futures Trading Commission, 

Mercatus working paper (Nov. 2014), at 50, available at: https://www.mercatus.org/system/files/Peirce-Back-DoorCFTC.pdf; see also Donna M. Nagy, Judicial Reliance on Regulatory Interpretations in SEC No-Action 

Letters: Current Problems and a Proposed Framework, 83 Cornell Law Review 921, 957 (1998).
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guidance and no-action relief issued over the past several years to determine which rule changes 

might be warranted or which relief might be made permanent. 

Recommendations

• Treasury recommends that the CFTC take steps to simplify and formalize all outstanding 

staff guidance and no-action relief that has been used to smooth the implementation of 

the Dodd-Frank swaps regulatory framework. This should include, where necessary and 

appropriate, amendments to any final rules that have proven to be infeasible or unworkable, necessitating broadly applicable or multiyear no-action relief. 

Cross-border Issues 

Cross-border issues are in many ways about cooperation with foreign authorities that are implementing OTC derivatives reforms in their own jurisdictions. Such international cooperation is 

critical given the global nature of the OTC derivatives markets. The goal is to achieve efficient and 

fair treatment of U.S. and foreign firms and to promote a level playing field. While cross-border 

issues impact many of the key issues discussed elsewhere in this chapter, we address them here as 

a separate set of issues. 

Dodd-Frank established the scope of the CFTC’s and the SEC’s jurisdiction over cross-border 

swaps and security-based swaps, respectively. Specifically, Dodd-Frank provided that the swap 

provisions of the CEA enacted by Title VII “shall not apply to activities outside the United States 

unless those activities: (1) have a direct and significant connection with activities in, or effect on, 

commerce of the United States; or (2) contravene such rules or regulations as the [CFTC] may 

prescribe or promulgate as are necessary or appropriate to prevent the evasion of any provision” of 

Title VII.310 Similarly, Dodd-Frank provided that the new security-based swaps provisions of the 

Securities Exchange Act do not apply “to any person insofar as such person transacts a business 

in security-based swaps without the jurisdiction of the United States, unless such person transacts 

such business in contravention of such rules and regulations as the [SEC] may prescribe as necessary or appropriate to prevent the evasion of any provision” of Title VII.311

Beginning in 2013, the CFTC issued a series of interpretive guidance, staff advisories, and rulemakings laying out various aspects of its approach to the cross-border implementation of its swaps 

rules. This included the CFTC’s July 2013 Cross-Border Guidance, which addressed the scope of 

the term “U.S. person”; swap dealer registration requirements, including aggregation of dealing 

activity; and the treatment of swaps involving certain foreign branches of U.S. banks or nonU.S. counterparties guaranteed by a U.S. person.312 The Cross-Border Guidance also laid out 

the permissible scope and procedures for the CFTC’s substituted compliance framework, which 

permits certain non-U.S. swap dealers to comply with a foreign jurisdiction’s law and regulations 

governing swaps transactions in lieu of compliance with the corresponding CFTC requirements. 

For purposes of substituted compliance determinations, the Cross-Border Guidance divided the 

310. Dodd-Frank § 722 [codified at 7 U.S.C. § 2(i)].

311. Dodd-Frank § 772 [codified at 15 U.S.C. § 78dd(c)].

312. Interpretive Guidance and Policy Statement Regarding Compliance with Certain Swap Regulations (July 

17, 2013) [78 Fed. Reg. 45292 (Jul. 26, 2013)] (the “Cross-Border Guidance”).
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CFTC’s swaps provisions applicable to swap dealers into two sets, “entity-level requirements,” 

which apply to a swap dealer or firm as a whole, and “transaction-level requirements,” which apply 

on a transaction-by-transaction basis.313

Following the Cross-Border Guidance, the CFTC issued a staff advisory in November 2013 concluding that CFTC transaction-level requirements (clearing, trading, margin, etc.) apply to a swap 

between a non-U.S. swap dealer and a non-U.S. person if personnel in the United States regularly 

arrange, negotiate, or execute (ANE) swaps.314 The staff advisory on so-called “ANE transactions” 

prompted immediate alarm among market participants engaged in cross-border swaps, and less 

than two weeks later, CFTC staff granted time-limited no-action relief with respect to the staff 

advisory.315 Since then, this no-action relief — which was initially available through Jan. 14, 2014 

— has been extended several times and was extended again for the sixth time on July 25, 2017.316

Another publication that has impacted how market participants must comply with CFTC requirements in the context of cross-border swaps is the CFTC’s November 2013 staff guidance on swap 

execution facilities. Among other things, this guidance addressed registration requirements under 

CFTC rules for platforms located outside the U.S. “where the trading or executing of swaps on 

or through the platform creates a ‘direct and significant’ connection to activities in, or effect on, 

commerce of the United States.”317 This guidance, combined with other aspects of the CFTC’s 

final SEF rules, prompted non-U.S. trading platforms to exclude U.S. persons to avoid falling 

under the CFTC’s SEF registration and other regulatory requirements, contributing to market 

fragmentation in certain products. 

The SEC issued a comprehensive cross-border proposed rule in May 2013 but subsequently 

determined to implement the cross-border aspects of its security-based swaps rules concurrently 

with completing its separate rulemakings. For example, the SEC finalized a rulemaking in August 

2014 defining “U.S. person” and stipulating rules for determining which cross-border securitybased swap transactions have to be counted toward the security-based swap dealer registration 

313. Entity-level requirements include capital adequacy, chief compliance officer duties and requirements, risk 

management policies and procedures, books and records requirement, and reporting to swap data repositories, among other requirements. Transaction-level requirements include, for example, required clearing 

and swap processing, margining and segregation of collateral for uncleared swaps, mandatory trade execution, and external business conduct requirements.

314. Division of Swap Dealer and Intermediary Oversight, U.S. Commodity Futures Trading Commission, Staff 

Advisory No. 13-69 - Applicability of Transaction-Level Requirements to Activity in the United States

(Nov. 14, 2013), available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/13-69.pdf.

315. Staff of the U.S. Commodity Futures Trading Commission, Letter No. 13-71, No-Action Relief: Certain 

Transaction-Level Requirements for Non-U.S. Swap Dealers (Nov. 26, 2013), available at: http://www.cftc.

gov/idc/groups/public/@lrlettergeneral/documents/letter/13-71.pdf.

316. Staff of the U.S. Commodity Futures Trading Commission , Letter No. 17-36, Extension of No-Action 

Relief: Transaction-Level Requirements for Non-U.S. Swap Dealers (Jul. 25, 2017), available at: http://

www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/17-36.pdf.

317. Division of Market Oversight, U.S. Commodity Futures Trading Commission, Guidance on Application of 

Certain Commission Regulations to Swap Execution Facilities (Nov. 15, 2013), available at: http://www.

cftc.gov/idc/groups/public/@newsroom/documents/file/dmosefguidance111513.pdf.
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threshold.318 More recently, the SEC has adopted final rules on business conduct standards for 

security-based swap dealers, and final rules pertaining to reporting and dissemination of securitybased swap data, each addressing the cross-border application of the rules and the availability of 

substituted compliance.319 Compliance with these rules, however, has yet to go into effect pending 

finalization by the SEC of its rules pertaining to registration and regulation of security-based swap 

dealers.

Market participants and non-U.S. regulators, among others, have raised concerns that the application of U.S. rules to cross-border swaps activities has led to conflicts and inefficiencies between 

U.S. and non-U.S. compliance regimes, in turn causing considerably higher operational costs and 

decreased competitiveness of U.S. entities in relation to foreign entities. More broadly, they argue, 

the cross-border application of U.S. rules has contributed to market fragmentation, diminished 

liquidity, and other distortive effects as foreign entities avoid trading with U.S. counterparties for 

fear of being captured by the U.S. regulatory regime. The CFTC, in particular, has been subject 

to criticism that it has misinterpreted the scope of its cross-border mandate under CEA Section 

2(i)320 and has inappropriately dismissed the mandate not to apply CEA swaps reforms to nonU.S. transactions, “unless those activities...have a direct and significant connection with activities 

in, or effect on, commerce of the United States.” Consequently, these critics allege, the CFTC has 

significantly over-reached in applying its rules to certain non-U.S. and cross-border transactions. 

Likewise, market participants have raised concerns with aspects of the SEC’s cross-border rules, 

and have highlighted those that conflict with privacy, blocking and secrecy laws in non-U.S. jurisdictions. The SEC’s security-based swap dealer registration rules, for example, require entities to 

provide certification and opinion of counsel regarding SEC access to their books and records as a 

condition of registration. Many non-U.S. security-based swap dealers may not be able to comply 

with this requirement without violating local laws.

Recommendations

Treasury recommends that CFTC and the SEC should: (1) make their swaps and security-based 

swaps rules compatible with non-U.S. jurisdictions, (2) adopt outcomes-based substituted compliance regimes, and (3) reconsider their approaches to transactions that are arranged, negotiated, or 

executed by personnel in the United States. These recommendations are described in more detail 

below. 

• Cross-border Application and Scope: Treasury recommends that the CFTC and the SEC 

provide clarity around the cross-border scope of their regulations and make their rules 

compatible with non-U.S. jurisdictions where possible to avoid market fragmentation, 

318. Application of ‘‘Security-Based Swap Dealer’’ and ‘‘Major Security-Based Swap Participant’’ Definitions to 

Cross-Border Security-Based Swap Activities (June 25, 2014) [79 Fed. Reg. 47278 (Aug. 12, 2014)].

319. Business Conduct Standards for Security-Based Swap Dealers and Major Security-Based Swap 

Participants (Apr. 14, 2016) [81 Fed. Reg. 29960 (May 13, 2016)]; and Regulation SBSR—Reporting 

and Dissemination of Security-Based Swap Information (July 14, 2016) [81 Fed. Reg. 53546 (Aug. 12, 

2016)].

320. 7 U.S.C. § 2(i).
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redundancies, undue complexity, and conflicts of law. Examples of areas that merit 

reconsideration include: 

− whether swap counterparties, trading platforms, and CCPs in jurisdictions compliant 

with international standards should be required to register with the CFTC or the 

SEC as a result of doing business with a U.S. firm’s foreign branch or affiliate;

− whether swap dealer registration should apply to a U.S. firm’s non-U.S. affiliate on 

the basis of trading with non-U.S. counterparties if the U.S. firm’s non-U.S. affiliate 

is effectively regulated as part of an appropriately robust regulatory regime or otherwise subject to Basel-compliant capital standards, regardless of whether the affiliate is 

guaranteed by its U.S. parent;

− whether U.S. firms’ foreign branches and affiliates, guaranteed or not, should be 

subject to Title VII’s mandatory clearing, mandatory trading, margin, or reporting 

rules when they trade with non-U.S. firms in jurisdictions compliant with international standards; and

− providing alternative ways for regulated entities to comply with requirements that 

may conflict with local privacy, blocking, and secrecy laws.

• Substituted Compliance: Treasury recommends that effective cross-border cooperation 

include meaningful substituted compliance programs to minimize redundancies and 

conflicts. 

− The CFTC and SEC should be judicious when applying their swaps rules to activities outside the United States and should permit entities, to the maximum extent 

practicable, to comply with comparable non-U.S. derivatives regulations, in lieu of 

complying with U.S. regulations.

− The CFTC and the SEC should adopt substituted compliance regimes that consider 

the rules of other jurisdictions, in an outcomes-based approach, in their entirety, 

rather than relying on rule-by-rule analysis. They should work toward achieving 

timely recognition of their regimes by non-U.S. regulatory authorities. 

− The CFTC should undertake truly outcomes-based comparability determinations, 

using either a category-by-category comparison or a comparison of the CFTC regime 

to the foreign regime as a whole.

− Meaningful substituted compliance could also include consideration of recognition 

regimes for non-U.S. CCPs clearing derivatives for certain U.S. persons and for 

non-U.S. platforms for swaps trading.

• ANE Transactions: Treasury recommends that the CFTC and the SEC reconsider any 

U.S. personnel test for applying the transaction-level requirements of their swaps rules.

− The CFTC should provide certainty to market participants regarding the guidance 

in the CFTC ANE staff advisory (CFTC Letter No. 13-69), which has been subject 

to extended no-action relief, either by retracting the advisory or proceeding with a 

rulemaking. 
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− In particular, the CFTC and the SEC should reconsider the implications of applying 

their Title VII rules to transactions between non-U.S. firms or between a non-U.S. 

firm and a foreign branch or affiliate of a U.S. firm merely on the basis that U.S.-

located personnel arrange, negotiate, or execute the swap, especially for entities in 

comparably regulated jurisdictions.

Capital Treatment in Support of Central Clearing 

As discussed in Banking Report, “the supplementary leverage ratio (SLR) imposes significant capital requirements requirements on initial margin for centrally cleared derivatives. Banks that hold 

segregated customer client margin through their affiliates that are futures commission merchants 

(FCMs) incur higher capital charges via the SLR as a result of the FCMs’ clearing services. These 

higher capital costs, in turn, discourage FCMs from clearing derivatives transactions for clients. 

In recognition of these disincentive effects, the Banking Report recommended deducting initial 

margin for centrally cleared derivatives from the leverage ratio denominator.

Beyond initial margin, however, the SLR has other distorting effects related to derivatives exposures, 

notably through its use of the current exposure method (CEM) to measure derivatives exposures. 

CEM is insensitive to risk and results in higher leverage ratio capital requirements for certain 

derivatives products (including exchange-traded derivatives) relative to risk-based measures. The 

CEM model, for example, requires options contracts to be sized on their notional face value rather 

than allowing for a risk adjustment to notional to reflect the actual exposure associated with these 

derivatives. Specifically, CEM does not permit a delta adjustment for the notional value measurement of options. 

Moreover, the CEM methodology measures exposures on a gross basis and is, therefore, overly 

restrictive in permitting netting and the offsetting of long and short positions. Typically, for 

example, market makers and others who maintain hedged positions will execute and clear offsetting trades. When done through the same CCP, the risk of such hedged positions is reduced, or 

even eliminated. CEM, however, applies separately — on a gross basis — to each of the offsetting 

positions, compounding the capital that hedged traders’ FCMs must set aside, even though the 

hedged position has reduced exposure overall. By contrast, a trader with an unhedged, directional 

position — by definition more risky than a hedged position — will, from a CEM perspective, have 

less exposure than a hedger with two offsetting trades. 

In light of these issues, in 2014, the Basel Committee on Banking Supervision (BCBS) developed 

the Standardized Approach for Counterparty Credit Risk (SA-CCR) as a replacement for CEM for 

certain capital calculations.321 SA-CCR was supposed to become effective in 2017, but adoption in 

the United States has been delayed. Even though SA-CCR improves on many of the shortcomings 

of CEM, market participants note that it requires certain modifications before implementation to 

fully support central clearing. Market participants have commented, for example, that SA-CCR 

should be modified to ensure appropriate calibration and full recognition of initial margin, 

321. Basel Committee on Banking Supervision, The Standardised Approach for Measuring Counterparty 

Credit Risk Exposures (Mar. 2014 and rev. Apr. 2014), available at: http://www.bis.org/publ/bcbs279.pdf.
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recognition of the risk-reducing offsets between diversified but correlated products, and appropriate calibration of add-on calculations, including supervisory factors.322

Many market participants and observers have noted the decline in the number of CFTC-registered 

FCMs in recent years. In a speech given this past May, CFTC Chairman Christopher Giancarlo 

stated: “The FCM marketplace has declined from 100 CFTC-registered entities in 2002 to 55 at 

the beginning of 2017. Of these 55, just 19 were holding customer funds for swaps clearing. Many 

large banks have exited the business, including State Street, Bank of New York-Mellon, Nomura, 

Royal Bank of Scotland and Deutsche Bank.”323 The decline in the number of FCMs is due to 

multiple factors, including increased regulatory burden as well as factors such as consolidations 

and pricing pressures.324 Moreover, FCM client clearing activity is concentrated in a few large 

firms. Market participants claim that of the currently registered FCMs, only about eight to 12 

firms are capable of clearing the types of swaps subject to mandatory clearing under Dodd-Frank. 

In the market for listed options, there are even fewer choices, with only three large FCMs clearing 

for market makers and other customers.325

The ability to quickly and easily transfer customer positions has long been an indispensable feature 

of the central clearing model, and has allowed for the continued smooth functioning of the cleared 

derivatives markets even when one or more clearing firms fail, such as happened during the financial crisis. The decline in the number of FCMs, however, means that clearing customers have fewer 

options for their business and makes it more difficult for customers of a defaulting clearing firm to 

move their positions and collateral to another firm. In addition, market participants have widely 

reported that the current SLR framework and the CEM model have harmed market liquidity and 

adversely impacted the ability and willingness of FCMs to clear for end users, limiting their access 

to markets and ability to hedge risks. FCMs have reportedly dropped out of the clearing business 

due to it being a low-margin business, driven in part by the capital costs. Meanwhile, remaining 

FCMs are hesitant to take on new business due to the capital costs, and in some cases they are 

addressing the costs of current clients’ activity by placing limits on their risk exposures. Some 

FCMs reportedly assess each of their clearing clients on a regular basis to determine whether or 

not to keep their business.

Another issue raised by U.S. clearing members and market participants was whether U.S. banking regulators would permit variation margin to be treated as the settlement of the exposure of 

certain centrally cleared derivatives when calculating the potential future exposure amounts used 

to determine regulatory capital requirements. In response to this issue, the U.S. banking regulators 

322. Vijay Albuquerque et al, Repeal CEM; Reform SA-CCR, Risk.net, (Jul. 24, 2017), available at: http://www.

risk.net/regulation/5307456/repeal-cem-reform-sa-ccr.

323. Acting Chairman J. Christopher Giancarlo, Remarks before the International Swaps and Derivatives 

Association 32nd Annual Meeting (May 10, 2017), available at: http://www.cftc.gov/PressRoom/

SpeechesTestimony/opagiancarlo-22.

324. See, e.g., Hester Peirce, Dwindling Numbers in the Financial Industry, Brookings (May 15, 2017), available at: https://www.brookings.edu/research/dwindling-numbers-in-the-financial-industry/.

325. Some observers have noted that the FCM business is not highly concentrated by certain metrics—such 

as the Herfindahl-Hirschman Index—or as compared with other industries. See, e.g., Tod Skarecky, The 

Truth about FCM Concentration, Clarus Financial Technology blog (Apr. 4, 2017), available at: https://www.

clarusft.com/the-truth-about-fcm-concentration/.
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issued guidance in August 2017 about the treatment of cleared “settled-to-market contracts” under 

the agencies’ regulatory capital rules.326 Specifically, the guidance clarified that the existing capital 

rules, under certain conditions, recognize that daily variation margin for certain centrally cleared 

derivatives constitutes a settlement of exposure, potentially providing significant capital relief for 

banks.327

Overall, one of the CEM’s methodological shortcomings is that it requires FCMs and other CCP 

clearing members to maintain significantly more capital relative to the actual risks arising from 

their customers’ derivatives activities. The CEM may be responsible for a corresponding reduction 

in banks’ ability and willingness to facilitate access for their market maker clients who are the 

primary liquidity providers in these markets. End users face increased risk of being unable to 

transfer their positions and margin to another FCM if their FCM defaults or exits the business. In 

a period of market stress, this risk would be exacerbated and could become systemic. 

Recommendations

Treasury recommends that regulators properly balance the post-crisis goal of moving more derivatives into central clearing with appropriately tailored and targeted capital requirements.

• As a near-term measure, Treasury:

− reiterates the recommendation of the Banking Report and calls for the deduction of 

initial margin for centrally cleared derivatives from the SLR denominator;328 and 

− recommends a risk-adjusted approach for valuing options for purposes of the capital 

rules to better reflect the exposure, such as potentially weighting options by their 

delta.

• Beyond the near term, Treasury recommends that regulatory capital requirements transition from CEM to an adjusted SA-CCR calculation that provides an offset for initial 

margin and recognition of appropriate netting sets and hedged positions. 

• In addition, Treasury recommends that U.S. banking regulators and market regulators 

conduct regular comprehensive assessments of how the capital and liquidity rules impact 

the incentives to centrally clear derivatives and whether such rules are properly calibrated.

326. Board of Governors of the Federal Reserve, Office of the Comptroller of the Currency, and Federal 

Deposit Insurance Corporation, Guidance: Regulatory Capital Treatment of Certain Centrally-cleared 

Derivative Contracts under the Board’s Capital Rule (Aug. 14, 2017), available at: https://www.federalreserve.

gov/supervisionreg/srletters/sr1707.pdf. 

327. Banks would have to ensure, for example, that settlement of any outstanding exposure would generally 

involve “a clear and unequivocal transfer of ownership of the variation margin from the transferor to the 

transferee, the transferee taking possession of the variation margin, and termination of any claim of the 

transferor on the variation margin transferred, including any security interest in the variation margin.” Id. 

at 3.

328. The Banking Report, at 54.
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End-user Issues

Swap Dealer De Minimis Threshold 

Under CFTC rules, a person must register as a swap dealer if its swap dealing activity exceeds an 

aggregate gross notional amount threshold of $3 billion over the previous 12-month period (the 

“de minimis” threshold).329 When the rule was finalized, the de minimis threshold was set at a 

phase-in level of $8 billion through December 2017, but in October 2016 the CFTC extended 

the $8 billion phase-in level through Dec. 31, 2018. Unless the CFTC takes action before Dec. 31, 

2018, to set a different termination date or to modify the de minimis exception, the swap dealer 

registration de minimis threshold will drop to $3 billion. 

A 2016 CFTC staff report on this issue found that lowering the swap dealer registration threshold 

to $3 billion would provide “insignificant additional regulatory coverage” for dealing activity in 

interest rate swaps and index credit default swaps as compared to the $8 billion level. Specifically, 

lowering the threshold to $3 billion would require an estimated 58% increase in registered swap 

dealers while capturing less than 1% of additional notional activity.330 Moreover, the staff analysis 

found that at the current $8 billion threshold, 98% of interest rate swaps, 99% of credit default 

swaps, and 89% of nonfinancial commodity swaps reported to swap data repositories during the 

period reviewed for the report involved at least one CFTC-registered swap dealer.331

Market participants argue that the de minimis threshold is appropriately set at $8 billion and 

should not be lowered.332 Moreover, they report that uncertainty about what future actions, if any, 

the CFTC will take regarding the de minimis level is causing many market participants to limit 

their U.S. trading activity to avoid the swap dealer designation and related regulatory requirements. Not only does this potentially result in fewer counterparties, increased costs, and reduced 

liquidity in the swaps markets, it has adverse effects on certain commercial market participants’ 

willingness to enter into risk-hedging transactions. 

Recommendations

• Treasury recommends that the CFTC maintain the swap dealer de minimis registration 

threshold at $8 billion and establish that any future changes to the threshold will be 

subject to a formal rulemaking and public comment process.

329. 17 C.F.R. § 1.3(ggg).

330. Staff of the U.S. Commodity Futures Trading Commission, Swap Dealer De Minimis Exception Final Staff 

Report (Aug. 15, 2016), at 21, available at: http://www.cftc.gov/idc/groups/public/@swaps/documents/file/dfreport_

sddeminis081516.pdf. Table 1 in the CFTC staff report shows that “potential swap dealing entities” would 

increase by approximately 84 entities, from 145 at the $8 billion threshold level to 229 if the threshold 

were lowered to $3 billion, a change of 58%.

331. Id. at 22.

332. Of the 24 comment letters the CFTC received on a preliminary version of its staff report, 20 supported 

either maintaining the $8 billion threshold or raising it.
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Definition of Financial Entity

Title VII’s swaps clearing mandate provides an exception for nonfinancial entities using swaps to 

hedge or mitigate commercial risk.333 Nonfinancial end users eligible for the clearing exception are 

also exempted from the margin requirements for uncleared swaps.334

The types of nonfinancial entities Congress had in mind when providing this exception were farmers, ranchers, energy producers, manufacturers and other end users of derivatives, whose activities 

did not contribute to the crisis and who rely on the swaps markets to help manage the risks arising 

from their businesses. Using swaps and other risk management tools helps these end users supply 

food, energy, and other consumer necessities for American consumers at stable prices. Congress 

excluded nonfinancial end users from the Dodd-Frank swaps clearing requirement in acknowledgement that failure to do so would increase their costs and lead to higher and more volatile 

prices in the economy. Relief from the clearing exception is also provided for certain affiliates of 

nonfinancial end users, subject to specific criteria.335

The CEA does not define the term “nonfinancial entity.” Instead, CEA Section 2(h)(7)(C) defines 

the term “financial entity” to describe the universe of entities that cannot take advantage of the 

clearing exception. Swap dealers, major swap participants, commodity pools, private funds, and 

employee benefit plans are among the types of financial entities that are specifically ineligible for 

the exception to the clearing mandate. However, the definition of financial entity also includes 

a broader, catch-all prong. Persons “predominantly engaged in activities that are in the business 

of banking, or in activities that are financial in nature, as defined in section 1843(k) of title 12” 

are also defined as financial entities and cannot take advantage of the clearing exception.336 CEA 

Section 2(h)(7)(C) also permits the CFTC to exclude certain entities from the definition of financial entity, potentially making them eligible for the clearing exemption. Specifically, the CFTC is 

given authority to exempt small financial institutions from the definition of financial entity — that 

is, “small banks, savings associations, farm credit system institutions, and credit unions” with $10 

billion or less in total assets.337 Finally, the definition of financial entity does not include certain 

333. Dodd-Frank § 723 [codified at 7 U.S.C. § 2(h)(7)]. An analogous exception for clearing security-based 

swaps is provided in the Exchange Act. This discussion, therefore, is applicable both to swaps and security-based swaps. However, because the SEC has not yet implemented a clearing mandate for securitybased swaps, the Report focuses on swaps.

334. 7 U.S.C. § 6s(e)(4). Section 731 of Dodd-Frank added section 4s(e) to the CEA to require capital 

requirements and margin requirements for uncleared swaps for swaps dealers and major swap participants. Subclause (4) of section 4s(e), providing an explicit exemption for the margin requirements for certain end users, was added by the Terrorism Risk Insurance Program Reauthorization Act of 2015 (Public 

Law No. 114-1).

335. 7 U.S.C. § 2(h)(7)(D).

336. 7 U.S.C. § 2(h)(7)(C)(i)(VIII).

337. 7 U.S.C. § 2(h)(7)(C)(ii).
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entities whose primary business is providing financing and who use derivatives to hedge certain 

commercial risks within their corporate structure. 338

Since passage of Dodd-Frank, there have been numerous proposals to modify the definition of 

financial entity and clarify the scope of the exception for nonfinancial end users’ affiliates. Market 

participants from various industries, including insurance, equipment financing, foreign exchange, 

and payments processing, among others, argue that the definition of financial entity is too broad 

and unfairly captures the hedging activities of certain end users, preventing these entities from 

qualifying for the clearing exception. Moreover, it is not always clear which entities are “predominantly engaged” in activities that are financial in nature and therefore captured under the financial 

entity definition. For example, certain commercial enterprises use special purpose vehicles and 

similar subsidiary structures to engage in derivatives transactions. Market participants argue that 

enterprises using such structures, which are ostensibly financial in nature, should nonetheless be 

deemed nonfinancial end users and therefore eligible for the clearing exception. Market participants also cite a competitiveness issue, pointing out that certain non-U.S. jurisdictions, such as 

the European Union, have de minimis tests to ensure that certain entities are afforded exemptions 

based on their derivatives activities and not simply because they are financial in nature.

Some of these proposals for further clarification of the scope of the clearing exception have met 

with both legislative and regulatory success. The Consolidated Appropriations Act of 2016, for 

example, amended CEA Section 2(h)(7)(D) to expand and clarify the scope of entities that may 

qualify as affiliates of nonfinancial end users and be eligible for the clearing exception.339 The 

CFTC also has taken steps to accommodate certain end users. In its final rule on the end-user 

exception to the clearing requirement, for example, the CFTC exempted small financial institutions from the definition of financial entity, permitting those entities to avail themselves of the 

clearing exception.340 The CFTC has issued staff no-action relief from the clearing requirement for 

swaps entered into by eligible treasury affiliates.341 These affiliates, also known as “central treasury 

units” (CTUs), are centralized corporate affiliates of commercial end users that aggregate and 

manage the company-wide need for treasury services and risk-management. 

Despite these developments, many market participants continue to raise concerns about the scope 

of the financial entity definition and seek further rulemaking or statutory solutions. Some market participants report, for example, that they have corporate policies that preclude them from 

relying on the CFTC’s no-action relief for CTUs, because these are staff letters and not formal 

Commission-sponsored rulemakings. 

338. 7 U.S.C. § 2(h)(7)(C)(iii). Specifically, this provision states that the definition of financial entity “shall not 

include an entity whose primary business is providing financing, and uses derivatives for the purpose of 

hedging underlying commercial risks related to interest rate and foreign currency exposures, 90 percent or 

more of which arise from financing that facilitates the purchase or lease of products, 90 percent or more 

of which are manufactured by the parent company or another subsidiary of the parent company.”

339. Public Law No. 114–113, Title VII (Financial Services) § 705 (Dec. 18, 2015).

340. End-User Exception to the Clearing Requirement for Swaps (July 10, 2012) [77 Fed. Reg. 42560, 42587-

42588 (Jul. 19, 2012)].

341. Division of Clearing and Risk, U.S. Commodity Futures Trading Commission, Letter No. 14-144, 

No-Action Relief from the Clearing Requirement for Swaps Entered into by Eligible Treasury Affiliates

(Nov. 26, 2014), available at: http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/14-144.pdf.
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Recommendations

• To provide regulatory certainty and better facilitate appropriate exceptions from the 

swaps clearing requirement for commercial end users engaged in bona fide hedging or 

mitigation of commercial risks, Treasury would support a legislative amendment to CEA 

Section 2(h)(7) providing the CFTC with rulemaking authority to modify and clarify the 

scope of the financial entity definition and the treatment of affiliates.

− Such authority should include consideration of non-prudentially regulated entities 

that currently fall under subclause VIII of CEA Section 2(h)(7)(c)(i)—i.e., entities 

that are “predominantly engaged... in activities that are financial in nature”—but 

which might warrant exception from the clearing requirement if they engage in swaps 

primarily to hedge or mitigate the business risks of a commercial affiliate. 

− Such authority should also be flexible enough to permit, for example, the CFTC to 

formalize its no-action relief for CTUs in a rulemaking.

− Further, any exceptions provided by the CFTC under such authority should be 

subject to appropriate conditions and allow the CFTC to appropriately monitor 

exempted activity. The conditions could include, for example, making the exception 

dependent on the size and nature of swaps activities, demonstration of risk-management requirements in lieu of clearing, and reporting requirements.

• Any legislative amendment should provide the SEC analogous rulemaking authority 

under Exchange Act Section 3C(g) with respect to exceptions from the clearing requirement for security-based swaps.

Position Limits 

Position limits refer to the maximum position that a trader or group of traders working together 

is permitted to hold in a given contract. Such limits have long been used in the futures markets to 

prevent speculators from amassing positions that can potentially have undue influence on market 

prices or deliverable supply to the detriment of commercial end users seeking to hedge risks arising 

from their business activities. In the futures markets, position limits are set by the DCMs (i.e., 

the exchanges) or by the CFTC itself. An exemption from speculative position limits is generally 

available for bona fide hedgers and certain other market participants who meet the eligibility 

requirements of the DCM and CFTC rules. 

The CEA gives the CFTC statutory authority to set speculative position limits. Dodd-Frank 

expanded this authority by requiring the CFTC to establish, as necessary and appropriate, aggregate position limits on all physical commodity derivative positions across U.S. futures exchanges, 

foreign boards of trade providing “direct access” to U.S. entities, and swaps that are “either economically equivalent” to a commodity futures contract or that serve a “significant price discovery 

function.”342 However, the CEA’s intent is not to unduly restrict legitimate speculation, which 

342. Dodd-Frank § 737 [amending 7 U.S.C. § 6a].
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serves valuable functions such as “assuming price risks, discovering prices, or disseminating pricing 

information through trading in liquid, fair and financially secure trading facilities.”343

The CFTC finalized a position limits rule pursuant to Dodd-Frank in November 2011,344 but it 

was vacated in September 2012 by the U.S. District Court for the District of Columbia345 after a 

legal challenge brought by the International Swaps and Derivatives Association and other plaintiffs, 

who argued the CFTC misinterpreted its statutory authority and failed to properly consider the 

rule’s costs and benefits. Since that time, the CFTC has undergone several rounds of proposals and 

comments on a new position limits rule but has yet to take final action. The lack of a clear definition of “excessive speculation” has impeded progress on what specific limits should be established. 

Appropriately tailored position limits protect market participants from real threats of manipulation, cornering, and other disruptive practices but avoid hindering legitimate speculative activity. 

Moreover, any rule must not unnecessarily constrain end users in their ability to hedge. If end users 

are unable to hedge in an efficient and effective way, they may be discouraged from hedging at all. 

Recommendations

• Treasury recommends that the CFTC complete its position limits rules as contemplated 

by its statutory mandate, with a focus on detecting and deterring market manipulation 

and other fraudulent behavior. Among the issues to consider in completing a final position limits rule, the CFTC should:

− ensure the appropriate availability of bona fide hedging exemptions for end users and 

explore whether to provide a risk management exemption; 

− consider calibrating limits based on the risk of manipulation, for example, by 

imposing limits only for spot months of physical delivery contracts where the risk of 

potential market manipulation is greatest; and

− consider the deliverable supply holistically when setting the limits (e.g., for gold, 

consider the global physical market, not just U.S. futures).

Market Infrastructure

SEF Execution Methods and MAT Process 

Under the CEA, as amended by Dodd-Frank, certain swaps are subject to a “trade execution 

requirement,” and must be executed on a SEF or a DCM. Swaps subject to the trade execution 

requirement are those that (1) the CFTC has determined are subject to mandatory clearing, and 

343. 7 U.S.C. § 5(a).

344. Position Limits for Futures and Swaps (Oct. 18, 2011) [76 Fed. Reg. 71626 (Nov. 18, 2011)]. The associated proposed rule issued by the CFTC in January 2011 drew more than 15,000 comments from the 

public. According to the CFTC, only about 100 comments overall provided “detailed comments and recommendations” regarding the proposals. Approximately 55 comments requested that the CFTC either significantly alter or withdraw the proposal. The majority of the more than 15,000 comments consisted of 

submissions by individuals in one or more form letter formats and generally supported the proposed position limits.

345. The rule’s amendments to CFTC Regulation §150.2 were excepted from the court’s action.
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(2) have been “made available to trade” by a SEF (or a DCM).346 The CEA defines a SEF as “a 

trading system or platform in which multiple participants have the ability to execute or trade swaps 

by accepting bids and offers made by multiple participants in the facility or system, through any 

means of interstate commerce” (emphasis added).347 The determination by which certain swaps 

have been “made available to trade” by a SEF is known as a “MAT determination.” 

Under CFTC rules, swaps subject to the trade execution requirement are known as “required 

transactions.” Required transactions must be traded on a SEF through an order book or through a 

request-for-quote system that operates in conjunction with an order book.348 A request-for-quote 

(RFQ) system means a trading system or platform in which a market participant transmits a 

request for a quote to buy or sell a specific instrument to one or more market participants in the 

trading system or platform, to which all such market participants may respond. The CFTC’s SEF 

rules impose an “RFQ-3” requirement, meaning that requests for quotes must be transmitted to at 

least three other market participants in the SEF.349 In contrast to required transactions, “permitted 

transactions” are swap transactions that may be executed on SEFs but are not subject to the trade 

execution requirement.350

Market participants have raised the concern that limiting trading to order book and RFQ-3 methods is overly restrictive, undermines Congressional intent, discourages trading swaps on SEFs, 

and harms pre-trade price transparency. CFTC Chairman Giancarlo echoed these concerns in a 

January 2015 white paper, shortly after he joined the CFTC as a commissioner. The white paper 

cautioned that the “avoidance by non-U.S. person market participants of the CFTC’s ill-designed 

U.S. swaps trading rules is fragmenting global swaps markets between U.S. persons and non-U.S. 

persons and driving away global capital. Global swaps markets have divided into separate liquidity 

pools: those in which U.S. persons are able to participate and those in which U.S. persons are 

shunned.”351

CFTC rules permit a SEF to make a MAT determination on consideration of six specified factors, 

which triggers the trade execution requirement for a class of swaps.352 Many market participants 

346. U.S. Commodity Futures Trading Commission, Fact Sheet: Final Rulemaking Regarding Core Principles 

and Other Requirements for Swap Execution Facilities ( “SEF Core Principles Fact Sheet”), available at: 

http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/sef_factsheet_final.pdf.

347. 7 U.S.C. § 1a(50).

348. “Order book” is defined to mean an electronic trading facility or trading facility (as such terms are defined 

in Section 1a of the CEA), or a trading system or platform in which all market participants in the trading 

system or platform have the ability to enter multiple bids and offers, observe or receive bids and offers 

entered by other market participants, and transact on such bids and offers. 17 C.F.R. § 37.3(a)(3).

349. 17 C.F.R. § 37.9(a)(3).

350. SEF Core Principles Fact Sheet.

351. Commissioner J. Christopher Giancarlo, Pro-Reform Reconsideration of the CFTC Swaps Trading Rules: 

Return to Dodd-Frank (Jan. 29, 2015), at 49, available at: http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/sefwhitepaper012915.pdf (“Giancarlo White Paper”).

352. For a discussion of the MAT determination process, see U.S. Commodity Futures Trading Commission, 

Fact Sheet: Process for a Designated Contract Market or Swap Execution Facility to Make a Swap 

Available to Trade under Section 2(h)(8) of the Commodity Exchange Act, available at: http://www.cftc.gov/

idc/groups/public/@newsroom/documents/file/mat_factsheet_final.pdf.
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have commented that the six factors that SEFs must consider before making a MAT determination 

are not robust enough to demonstrate sufficient liquidity for mandatory trading. CFTC Chairman 

Giancarlo has stated that, “Since the MAT process is platform-controlled, a nascent SEF attempting to gain a first-mover advantage in trading liquidity may force certain swaps to trade exclusively 

through the SEF’s restrictive methods of execution (i.e., order book or RFQ-3 system), potentially 

before sufficient liquidity is available to support such trading.”353 Commenters have recommended 

giving the CFTC greater control over the MAT determination process by empowering the CFTC, 

rather than SEFs, to trigger the trade execution requirement.

Finally, when the CFTC finalized its SEF rules in June 2013, it was clear that SEFs temporarily 

registered with the CFTC would have to come into full compliance with all applicable SEF rules 

beginning on Oct. 2, 2013, to the extent that they traded swaps subject to the trade execution 

requirement. However, the preamble of the final SEF rules included a footnote — namely, footnote 88 — that essentially required all multiple-to-multiple trading platforms to register as SEFs, 

even if they only offered for trading swaps not subject to the trading mandate, i.e., “permitted 

transactions.”354 This interpretation caused most non-U.S. trading platforms to exclude U.S. participants for fear of falling under the CFTC’s SEF registration and other regulatory requirements, 

resulting in fragmented markets and separate liquidity pools and prices for similar transactions.355

Recommendations

Treasury recommends that the CFTC: 

• consider rule changes to permit SEFs to use any means of interstate commerce to execute 

swaps subject to a trade execution requirement that are consistent with the “multipleto-multiple” element of the SEF definition (CEA Section 1a(50)).356 Such rule changes 

should be undertaken in recognition of the statutory goals of impartial access for market 

participants and promoting pre-trade price transparency in the swaps market;357

• reevaluate the MAT determination process to ensure sufficient liquidity for swaps to 

support a mandatory trading requirement; and

• consider clarifying or eliminating footnote 88 in its final SEF rules to address the associated market fragmentation. 

353. Giancarlo White Paper, at 30.

354. Specifically, footnote 88 of the SEF Core Principles Rule states “The Commission notes that it is not 

tying the registration requirement in CEA section 5h(a)(1) to the trade execution requirement in CEA section 2(h)(8), such that only facilities trading swaps subject to the trade execution requirement would be 

required to register as SEFs. A facility would be required to register as a SEF if it operates in a manner 

that meets the SEF definition even though it only executes or trades swaps not subject to the trade execution mandate.” 

355. ISDA, Footnote 88 and Market Fragmentation: An ISDA Survey (Dec. 2013), available at: http://www2.

isda.org/attachment/NjE3Nw==/Footnote%2088%20Research%20Note%2020131218.pdf.

356. 7 U.S.C. § 1a(50).

357. 7 U.S.C. § 7b-3(f)(2)(B); 7 U.S.C. § 7b-3(e).
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Swap Data Reporting

One of the key goals of Dodd-Frank was to promote post-trade transparency for both market 

participants and regulators through the establishment of SDRs and trade reporting requirements. 

The full potential of swaps market transparency has been impeded, however, by the technical complexity of the CFTC’s rules, which imposes unnecessary burdens on market participants, as well as 

by the failure of the CFTC to standardize reporting fields across SDRs and harmonize reporting 

requirements with other regulators, among other issues. Market participants have raised concerns, 

for example, about the numerous types of reporting required for each transaction, including realtime, primary economic terms, confirmation, snapshot, and valuation reporting, and the burdens 

that such requirements have imposed on reporting parties. 

The current swap data reporting framework has resulted in an infusion of data accessible by both 

regulators and the public, but this data is often of questionable quality, making it difficult for regulators to make efficient use of it in overseeing the markets. Market participants have questioned, 

for example, whether the CFTC currently has the ability to manage and process the large volume 

of data collected and to extract useful information from it. Market participants have also called for 

greater harmonization of swap data reporting and swap data repository requirements between the 

SEC and CFTC, as well as between the United States and EU. 

The CFTC has previously attempted to address some of these data quality issues, but these efforts 

were unrealized.358 Most recently, the CFTC announced in July 2017 that it was launching a new 

review of the swap data reporting regulations in Parts 43, 45, and 49 of the CFTC’s Regulations.359

The CFTC’s review is focused on two goals: “(a) to ensure that the CFTC receives accurate, 

complete, and high quality data on swaps transactions for its regulatory oversight role; and (b) 

to streamline reporting, reduce messages that must be reported, and right-size the number of 

data elements reported to meet the agency’s priority use-cases for swaps data.”360 The CFTC also 

announced a “Roadmap to Achieve High Quality Swaps Data” in July 2017, which will address 

SDR operations and the confirmation of data accuracy by swap counterparties. The Roadmap will 

also address reporting workflows generally, including standardization of data fields and potential 

delayed reporting deadlines.361

While the post-crisis establishment of SDRs and swaps data reporting requirements has brought 

much-needed post-trade transparency to the previously opaque OTC derivatives market, full 

realization of the benefits of post-trade transparency by both market participant and regulators is 

unlikely without high-quality and timely data. 

358. The CFTC’s Technology Advisory Committee, for example, initiated an SDR data harmonization effort in 

April 2013. Further, in 2014, data experts from the Office of Financial Research teamed with CFTC staff 

to address additional data quality issues.

359. U.S. Commodity Futures Trading Commission, Press Release No. 7585-17 (Jul. 10, 2017), available at: 

http://www.cftc.gov/PressRoom/PressReleases/pr7585-17.

360. Id.

361. U.S. Commodity Futures Trading Commission, Roadmap to Achieve High Quality Swaps Data (Jul. 10, 

2017), available at: http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/dmo_swapdataplan071017.pdf.
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Recommendations

Treasury supports the CFTC’s newly launched “Roadmap” effort as announced in July 2017 to 

standardize reporting fields across products and SDRs, harmonize data elements and technical 

specifications with other regulators, and improve validation and quality control processes.

• Treasury recommends that CFTC secure and commit adequate resources to complete the 

Roadmap review, undertake notice and comment rulemaking, and implement revised 

rules and harmonized standards within the timeframe outlined in the Roadmap.

• Treasury recommends that CFTC leverage third-party and market participant expertise 

to the extent necessary to develop a coherent, efficient, and effective reporting regime.

Financial Market Utilities

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Overview and Regulatory Landscape

Financial Market Utilities (FMUs) exist in many markets to support and facilitate the transfer, 

clearing, or settlement of financial transactions. Their smooth operation is integral to the soundness of the financial system and the overall economy. FMUs cover a large number of systems and 

a larger number of system operators. 

This section is organized around nine FMUs – eight of which have been designated by the Financial 

Stability Oversight Council as systemically important financial market utilities (SIFMUs) and 

a ninth that accounts for a substantial share of activity in its respective markets. These include 

central counterparties (Chicago Mercantile Exchange, Inc.’s (CME, Inc.) CME Clearing division; Depository Trust and Clearing Corporation’s (DTCC) Fixed Income Clearing Corporation 

and the National Securities Clearing Corporation; Intercontinental Exchange, Inc.’s ICE Clear 

Credit LLC; LCH, Ltd., the only FMU covered that is not FSOC designated; and the Options 

Clearing Corporation); a central securities depository (Depository Trust Company), and payment 

and settlement systems (CLS Bank International and The Clearing House Payments Company, 

L.L.C.). 

Treasury has arrived at the following conclusions:

• Each FMU is distinct, with its own market segment, products, business model, ownership, and governance structures.

• The regulatory reforms after the financial crisis, such as the Dodd-Frank clearing 

mandate and capital treatments for cleared derivatives, are only part of several reasons 

why FMUs, and in particular central counterparties (CCPs), are critical financial infrastructures. FMUs have historically played important roles in financial markets through 

clearing and other related functions, even decades before Dodd-Frank’s enactment. There 

are also a number of economic incentives inherent to CCPs’ business models that may 

contribute to a market participant’s motivations to clear. 

• Certain FMUs are highly interconnected to other U.S. financial institutions and facilitate 

significant transaction volumes and values. Risk concentrations in some FMUs have risen 

dramatically following the passage of Dodd-Frank. Distress at or failure of one of these 

FMUs could pose systemic risk. Because of this risk, the FSOC has designated eight as 

SIFMUs. However, the regulatory oversight and resolution regime for these institutions 

remains insufficient.

• SIFMUs may be authorized to access the Federal Reserve discount window in unusual 

or exigent circumstances under Dodd-Frank. As set forth in the Executive Order, our 

financial regulatory system must avoid creating moral hazard.362 Private firms can not 

anticipate provisioning of emergency liquidity from the Federal Reserve in their risk 

management planning. Accordingly, while SIFMUs may be authorized to access the 

discount window in unusual or exigent circumstances under Dodd-Frank, a SIFMU 

must exhaust credible private sources of borrowing first.

362. Exec. Order No. 13772 [82 Fed. Reg. 9965 (Feb. 8, 2017)].
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Core Functions and History

FMUs have been important infrastructures in financial markets for many years. The existence 

of clearinghouses dates back to the late 19th century when they were used to net payments in 

commodities futures markets.363 In the United States, the New York Stock Exchange (NYSE) 

established a clearinghouse in 1892; outside the United States, securities exchanges established 

clearinghouses later in the 20th century.364 Central securities depositories, which facilitate the 

safekeeping of securities, have existed in the United States since at least the 1970s.365

Today, FMUs are in place in nearly all major securities markets. A wide range of market participants, 

from end users using derivatives for hedging to institutional investors and large broker-dealers, use 

FMUs to mitigate risks in a variety of currency, securities, and derivative transactions, among other 

purposes. Because of the level and concentration of financial transactions handled by FMUs and 

their interconnectedness to the rest of the financial system, FMUs represent a significant systemic 

risk to the U.S. financial system. Much of this systemic risk is the result of inherent interdependencies, either directly through operational, contractual, or affiliation linkages or indirectly through 

payment, clearing, and settlement processes.366 367

Central Counterparties

CCPs are a type of FMU that serve important risk-mitigating functions and have long been core 

components in a range of markets including exchange-traded derivatives and cash markets. CCPs 

simplify and centralize risk management for particular financial markets by assuming the role of 

buyer to every seller and seller to every buyer. CCPs are the counterparty for their direct clearing members, which include major derivatives dealer banks and other large financial institutions. 

These clearing members interact directly with the CCP both as principal and as agent for their 

clients, which range from smaller financial institutions to insurance companies and nonfinancial 

firms. In addition, a CCP reduces risks to individual participants through multilateral netting of 

trades, imposing risk controls on clearing members, and maintaining financial resources commensurate with risks it carries. Clearing organizations and their members must work together to 

strike an appropriate balance between the clearing organization’s resources (“skin-in-the-game”) 

and mutualized resources of clearing members.

363. Amandeep Rehlon, Central Counterparties: What Are They, Why Do They Matter and How Does the 

Bank Supervise Them?, The Bank of England Quarterly Bulletin, (2013 Q2), at 2, available at: http://www.

bankofengland.co.uk/publications/Documents/quarterlybulletin/2013/qb1302ccpsbs.pdf.

364. Asaf Bernstein, Eric Hughson, and Marc D. Weidenmier, Counterparty Risk and the Establishment of the 

New York Stock Exchange Clearinghouse, NBER Working Paper Series (Sept. 2014), at 5, available at: 

http://www.nber.org/papers/w20459.

365. Bank for International Settlements, Payment, Clearing and Settlement Systems in the United States 

(2012), available at: https://www.bis.org/cpmi/publ/d105_us.pdf.

366. Authority to Designate Financial Market Utilities as Systemically Important (July 20, 2011) [76 FR 44763 

(July 27, 2011)] (“FSOC FMU Final Rule”).

367. Unless otherwise noted, information regarding the history, structure, governance, and volume figures for 

each FMU was received directly from the respective FMU.
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CME Group Inc.: Chicago Mercantile Exchange, Inc. 

CME Clearing, a division of the CME, Inc., operates one of the largest central counterparty clearing services in the world and provides clearing services for futures, options, and over-the-counter 

interest rate swaps and CDS.368 Its futures and options are linked to interest rates, equities, foreign 

exchange, energy, agricultural commodities, and metals. CME, Inc. maintains three default funds 

for clearing members, one for futures and options, one for cleared interest rate swaps, and one for 

cleared CDS.369 CME, Inc. was designated as a SIFMU by the FSOC in 2012. 

Transaction volume has seen steady growth as the notional value and volume of contracts cleared 

at CME Clearing has risen every year over the past few years.

CME Clearing 2010 2016

Annual Volume (# of Futures Contracts Traded) 2,638 MM 3,153 MM

Annual Volume (# of Options Contracts Traded) 442 MM 789 MM

Annual Volume (# of Swaps Contracts Traded) 195 238,518

Annual Value (Notional Value of Swaps Contracts in USD) $1,037 MM $29,476,885 MM

Peak Daily Volume (# of Futures Contracts Traded) 22 MM 36 MM

Peak Daily Volume (# of Options Contracts Traded) 4 MM 8 MM

Peak Daily Volume (# of CDS Contracts Traded) 20 393

Peak Daily Volume (# of IRS Contracts Traded) 15 3,158

Peak Daily Volume (Notional Value of CDS Contracts in USD) $15 MM $2,361,639 MM

Peak Daily Value (Notional Value of IRS Contracts in USD) $267 MM $2,380,701 MM

Data as of year-end 2010 and 2016. Figures include index and single-name credit default swaps. Multi-lateral compression is reflected in the 2016 annual notional value of swaps contracts in USD and 2016 peak daily notional value of IRS contracts in USD.

The Chicago Mercantile Exchange was founded in 1898 as a not-for-profit corporation. In 2000, 

the Chicago Mercantile Exchange demutualized, adopting a for-profit structure and the members 

exchanged their ownership interests for stock in the newly formed CME, Inc. In 2002, Chicago 

Mercantile Exchange Holdings Inc. completed an initial public offering, the first U.S. exchange to 

be publicly traded. 

CME Group, Inc., the parent company of Chicago Mercantile Exchange Inc., also owns four 

futures exchanges: Chicago Mercantile Exchange Inc., Board of Trade of the City of Chicago, Inc., 

368. On September 14, 2017, CME Group Inc. announced that it will exit the CDS clearing business by 

mid-2018.

369. CME Group Inc., Annual Report 2016, at 48, available at: http://investor.cmegroup.com/investor-relations/secfiling.cfm?filingID=1156375-17-16.
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New York Mercantile Exchange, Inc., and Commodity Exchange, Inc. The CME organization 

offers trade repository services in the United States and around the world. 

Depository Trust and Clearing Corporation: Fixed Income Clearing 

Corporation / National Securities Clearing Corporation

Fixed Income Clearing Corporation (FICC), a subsidiary of DTCC, plays a prominent role in the 

fixed-income market as the sole clearing agency in the United States, acting as central counterparty 

and provider of significant clearing and settlement services for cash settled U.S. Treasury and 

agency securities and the agency mortgage-backed securities market. FICC provides clearing, settlement, risk management, central counterparty services, and guarantee of trade completion. FICC 

was established in 2003 through a combination of previous government and mortgage-backed 

securities (MBS) clearing organizations. The company operates these clearing services through 

two divisions, the Government Securities Division (GSD) and the Mortgage Backed Securities 

Division (MBSD). 

National Securities Clearing Corporation (NSCC), another subsidiary of DTCC, plays a prominent role in providing clearing, settlement and central counterparty services for nearly all brokerto-broker equity as well as corporate and municipal debt trades executed on major U.S. exchanges 

and other venues. Established in 1976, NSCC guarantees the settlement of matched trades, and 

as a central counterparty, is the legal counterparty to all of its members’ net settlement obligations. Allowing market participants to settle on a net basis (rather than sending and receiving 

payments for each individual trade) reduces the value of payments that need to be exchanged by 

about 98%.370 These efficiencies reduce the risks of settlement and the amount of liquidity in the 

settlement process and create a more uniform approach to managing counterparty risk. FICC and 

NSCC were designated as SIFMUs by the FSOC in 2012. 

Transaction volumes for FICC and NSCC have been consistently high or increasing since the 

financial crisis. But, in contrast to derivatives clearing organizations that clear interest rate swaps 

and CDS, FICC and NSCC are not directly affected by the Dodd-Frank swaps clearing mandate. 

FICC and NSCC have nearly exclusive market share for the services they provide, and a large 

number of members are dependent on their services. 

FICC (Fixed Income Clearing Corporation) 2010 2016

Annual Volume (# of GSD Contracts Traded) 34 MM 40 MM

Annual Volume (# of MBSD Contracts Traded) 3.2 MM 3.8 MM

Annual Value (Notional Value of GSD Contracts in USD) $779,168 B $761,323 B

Annual Value (Notional Value of MBSD Contracts in USD) $104,245 B $74,402 B

Peak Daily Volume (# of GSD Contracts Traded) 255,617 375,031

Peak Daily Volume (# of MBSD Contracts Traded) 23,098 26,308

370. See http://www.dtcc.com/about/businesses-and-subsidiaries/nscc.
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Peak Daily Value (Notional Value of GSD Contracts in USD) $4,058 B $3,831 B

Peak Daily Value (Notional Value of MBSD Contracts in USD) $920 B $673 B

Data as of year-end 2010 and 2016. 

NSCC (National Securities Clearing Corporation) 2010 2016

Annual Volume (# of Contracts Traded) 20,538 MM 25,771 MM

Annual Volume (Notional Value in USD) $219,411 B $243,627 B

Peak Daily Volume (# of Contracts Traded) * 177 MM

Peak Daily Value (Notional Value in USD) * $1,911 B

Data as of year-end 2010 and 2016. 

* Denotes a data point that the DTCC was unable to provide.

As noted above, FICC and NSCC are subsidiaries of DTCC, which has a range of operations, 

including securities depository services, clearing services, trade matching and settlement, trade 

repository, and data services. In total, DTCC handles on a consolidated basis over $1 quadrillion 

in transactions every year.371

Intercontinental Exchange, Inc./ ICE Clear Credit LLC

In 2009, ICE launched its CDS clearing business with ICE Clear Credit LLC’s predecessor, 

ICE Trust U.S., then a New York limited liability trust company, clearing North American CDS 

indexes and later adding liquid single-names and sovereign CDS. In 2011, ICE Trust converted 

to a limited liability company, became registered with both the CFTC and the SEC, and began 

operating under the name ICE Clear Credit LLC (ICE Clear Credit). Today, ICE Clear Credit is 

ICE’s largest wholly owned U.S. based subsidiary by volume and notional value of cleared trades, 

clearing a majority of the CDS products in the United States that are eligible for clearing by a 

central counterparty, including the active North American CDS indexes and certain liquid single 

names.372 ICE Clear Credit was designated as a SIFMU by the FSOC in 2012. 

As discussed earlier, the Dodd-Frank clearing mandate applies directly to clearing for certain CDS 

indexes.373 ICE Clear Credit is dominant in market share in the U.S. index and single-name CDS 

cleared market. ICE Clear Credit handles a large volume of transactions, in terms of both volume 

and transaction value, which have markedly increased since 2010. 

371. See DTCC press releases for a description of the company, including volume figures, available at: http://www.dtcc.com/news/2017/august/29/

major-japanese-trust-banks-adopt-dtccs-omgeo-alert-to-automate-replace-post-trade-processes.

372. ICE Clear Credit also clears certain European, Asian-Pacific, and emerging market CDS. 

373. U.S. Commodity Futures Trading Commission, Press Release No. 6607-13 (Jun. 10, 2013), available at: 

http://www.cftc.gov/PressRoom/PressReleases/pr6607-13; U.S. Commodity Futures Trading Commission, Press 

Release No. 7457-16 (Sept. 28, 2016), available at: http://www.cftc.gov/PressRoom/PressReleases/pr7457-16.
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ICE (Intercontinental Exchange) Clear Credit 2010 2016

Annual Volume (# of Contracts Traded) 143,653 359,600

Annual Volume (Notional Value in USD) $5,452 MM $5,999 MM

Peak Daily Volume (# of Contracts Traded) 1,428* 2,782

Peak Daily Value (Notional Value in USD) $43,046* MM $104,053 MM

Data as of year-end 2010 and 2016. Figures include USD index and single-name credit default swaps.

* These figures are approximate peaks. ICE provided peak weekly information for 2010, and a daily figure was calculated by dividing 

the weekly figure by five.

ICE Clear Credit’s ultimate parent is Intercontinental Exchange, Inc., a publicly traded company 

that operates a number of futures exchanges, clearinghouses, and other post-trade services. ICE 

was established in 2000 as an OTC energy marketplace listing OTC energy contracts (oil, natural 

gas, and power), providing an alternative to what was then a fragmented and opaque market 

structure.374 ICE completed its initial public offering in 2005. Today, ICE’s exchanges include 

futures, cash equities, equity options, and bond exchanges. ICE’s other U.S. clearinghouse is ICE 

Clear U.S., originally established in 1915 as the New York Cotton Exchange Clearing Association. 

ICE Clear U.S. provides post-trade services across a wide range of products, including agricultural, 

currency, metals, credit, and domestic and equity index futures contracts. ICE also operates OTC 

markets for physical energy, swaps and CDS trade execution, and fixed income, and it offers a 

range of data services for global financial and commodity markets.375

London Stock Exchange Group Plc: LCH, Ltd.

LCH, Ltd. (LCH) is one of three clearinghouses that are part of LCH Group, a U.K.-based subsidiary of the London Stock Exchange Group (LSEG). LCH offers clearing services for major 

exchanges and platforms and several OTC markets.376 LCH clears a variety of products through 

a number of clearing services, including LCH SwapClear (interest rate swaps), LCH RepoClear 

(repo and cash bond markets), LCH ForEx Clear (FX nondeliverable forward contracts in emerging market currencies), and listed derivatives and cash equities (including London Stock Exchange 

Derivatives Market, Euronext Derivatives Market, and NASDAQ’s NLX). LCH is a registered 

374. See biographical background of Jeffrey C. Sprecher describing the founding and growth of 

the Intercontinental Exchange, Inc., available at: https://www.sec.gov/rules/other/2016/ice-trade-vault/

ice-trade-vault-form-sdr-ex-c.1.pdf. 

375. For the list of products for which ICE operates OTC Markets, see: https://www.theice.com/products/OTC.

376. See http://www.lch.com/documents/731485/762550/2016_Group_Accounts_for_website.pdf/4d998b1e-9843-4104-

93da-5e52e140e2c6. LCH LLC, established after Dodd-Frank, is the company’s U.S.-based clearinghouse, 

but it has not cleared trades since June 2016. See http://www.lch.com/documents/731485/762550/2016_

Group_Accounts_for_website.pdf/4d998b1e-9843-4104-93da-5e52e140e2c6. LCH SA is the firm’s Frenchbased clearinghouse, which acts as the clearinghouse for markets across Europe in CDS, equities and bonds, rates and commodity futures, equity and index futures and options, and OTC 

bonds and repo. See http://www.lch.com/documents/731485/762550/2016_Group_Accounts_for_website.

pdf/4d998b1e-9843-4104-93da-5e52e140e2c6.
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derivatives clearing organization since 2001 with the CFTC but is not an FSOC designated 

SIFMU.

The LCH Group was formed in 2003 following the merger of LCH, which was established in 

1888 in London to clear commodity contracts, and Clearnet, which was established in 1969 in 

Paris to clear commodity contracts, forming LCH.Clearnet.377 At the time, it was owned by clearing members and exchanges. In 2013, LSEG acquired a majority stake in LCH Group. 

The Dodd-Frank clearing mandate applies to certain interest rate swaps.378 LCH, through the 

SwapClear service, clears more than 90% of the cleared U.S. dealer market in interest rate swaps 

and 89% of the cleared U.S. client market in interest rate swaps (measured by cleared gross 

notional).379 In swaps denominated in most major currencies, LCH’s SwapClear platform clears 

more than 75% of the cleared market.380

LCH 2010 2016

Annual Volume (# of Contracts Traded) 766,000 4 MM

Annual Volume (Notional Value in USD) $185,800 B $666,000 B

Peak Daily Volume (# of Contracts Traded) 7,000 30,000

Peak Daily Value (Notional Value in USD) $1,400 B $5,600 B

Data as of year-end 2010 and 2016. 

LCH Group’s majority shareholder, LSEG, is a publicly traded company with four core divisions, 

including capital markets, post-trade services, information services, and technology.

Options Clearing Corporation

Options Clearing Corporation (OCC) was founded in 1973 and is the largest clearing organization for equity derivatives. It clears U.S.-listed options and futures on various types of financial 

assets such as common stocks, stock indexes, ETFs, certain American Depository Receipts, and 

commodities. OCC also serves as the only U.S. central counterparty for securities lending transactions. OCC’s primary business is clearing; in 2016, 92% of the firm’s revenue came from clearing 

fees.381 OCC was designated by the FSOC as a SIFMU in 2012.

OCC handles a large volume of transactions, specifically in the equity options and futures markets. 

OCC is not active in the OTC derivatives market, and it has been less affected by the Dodd-Frank 

clearing mandate than other CCPs. 

377. See http://www.cftc.gov/files/tm/tmlchappendixa.pdf.

378. U.S. Commodity Futures Trading Commission, Press Release No. 6607-13 (Jun. 10, 2013), available at: 

http://www.cftc.gov/PressRoom/PressReleases/pr6607-13.

379. LSEG, Presentation to U.S. Treasury, LSEG U.S. Operations (July 2017), at 11.

380. See http://www.lch.com/en/asset-classes/swapclear.

381. Options Clearing Corporation annual report. The reduction in clearing fees to total revenue in 2016 was 

largely due to higher revenue in the form of investment income in 2016.
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OCC (Options Clearing Corporation) 2010 2016

Annual Volume (# of Futures Contracts Traded) 27 MM 105 MM

Annual Volume (# of Options Contracts Traded) 3,899 MM 4,063 MM

Open Volume as of 12/31/2016 (# of Open Interest Futures 

Contracts) * $15 B

Value Exchanged During the Year (Premium Value from Options in 

USD) $1,213 B $1,214 B

Peak Daily Volume (# of Futures Contracts Traded) * 1MM

Peak Daily Volume (# of Options Contracts Traded) 31 MM 30 MM

Peak Daily Open Interest Value (# of Open Interest Futures 

Contracts) * *

Peak Daily Premium Value Exchanged (Premium Value of Options in 

USD) * *

Data as of year-end 2010 and 2016. 

* Denotes a data point that the OCC was unable to provide.

Central Securities Depository

A central securities depository is a facility or an institution that holds securities, which enables 

securities transactions to be processed by book-entry. Physical securities may be immobilized by 

the depository or securities can be dematerialized. In addition to safekeeping, they may also incorporate comparison, clearing, and settlement functions.382

Depository Trust and Clearing Corporation: Depository Trust Corporation

Depository Trust Company (DTC), a subsidiary of DTCC, provides depository and asset servicing 

for a wide range of instruments, such as money market instruments, equities, warrants, rights, corporate debt, municipal bonds, government securities, asset-backed securities and mortgage-backed 

securities. DTC’s custodial services include safekeeping of instruments, record keeping, book entry 

transfer, and pledge of securities among DTC’s participants. For example, DTC provides services 

to securities issuers, such as maintaining current ownership records and distributing payments 

to shareholders. DTC substantially eliminates the physical movement of securities by providing 

book-entry delivery of securities, which transfers ownership electronically among broker-dealers 

on behalf of beneficial owners of securities. This process improves the efficiency of post-trade 

operations, compared to the previous process of paper certificate delivery. DTC was established in 

1973 as a central securities depository in response to issues inherent with paper securities settlement. At its inception, DTC was organized as a limited purpose trust company in New York.383

382. Assessment of the Compliance of the Fedwire Securities Service with the Recommendations for 

Securities Settlement Systems (Revised August 2009), Glossary of Terms, available at: https://www.treasury.

gov/resource-center/international/standards-codes/Documents/Securities%20Settlement%20Self-Assessment%208-09.pdf.

383. See http://www.dtcc.com/about/businesses-and-subsidiaries/dtc.aspx.
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In 1999, DTC became a wholly owned subsidiary of DTCC, administered as an industry-owned 

utility. Before the efficiencies that DTC created, the New York Stock Exchange had to close each 

Wednesday to allow for securities settlement. In addition to its depository and asset servicing 

activities, DTC also serves as a swap data repository. DTC was designated by the FSOC as a 

SIFMU in 2012.

DTC (Depository Trust Company) 2010 2016

Annual Volume (# of Contracts Traded) 198 MM 244 MM

Annual Volume (Notional Value in USD) $137,248 B $142,227 B

Peak Daily Volume (# of Contracts Traded) 1.3 MM 1.6 MM

Peak Daily Volume (Notional Value in USD) $716 B $800 B

Data as of year-end 2010 and 2016. 

Payment and Settlement Systems 

Payment settlement systems communicate information about individual transfers of funds and 

settle the actual transfers. Settlement means the receipt by the payee’s depository institution of 

acceptable final funds, which irrevocably extinguish the obligation of the payor’s depository institution. Settlement can occur on a gross basis, with each transfer being settled individually, or 

periodically on a net basis, with credits and debits offsetting each other.384 Settlement systems are 

a critical component of the infrastructure of global financial markets. Settlement systems broadly 

include the full set of institutional arrangements for the confirmation, clearance, and settlement 

of trades and safekeeping of securities. The importance of settlement systems is highlighted by the 

fact that market liquidity is critically dependent on confidence in the safety and reliability of the 

settlement arrangements. Traders may be reluctant to trade if they have significant doubts about 

whether the trade will, in fact, settle.

The Clearing House: CHIPS

The Clearing House Interbank Payment System (CHIPS) is one of the two primary systems for 

interbank, large-value payment transfers; the other is Fedwire.385 CHIPS is owned and operated 

by The Clearing House Payments Company, L.L.C. (TCH) and has 48 participants who, in turn, 

have correspondent banking relationships with many banks across the country and world. In 

January 2001, CHIPS began functioning as a real time, prefunded settlement system that takes 

advantage of a proprietary multilateral netting algorithm that allows for payments to be netted and 

settled more efficiently by tying up less liquidity. CHIPS accepts payments for 20 hours per day (9 

p.m. to 5 p.m. ET). At the start of each day, CHIPS requires that each bank prefund, via FedWire, 

384. Comptroller’s Handbook: Payment Systems and Funds Transfer Activities (March 1990), at 1-2, available 

at: https://www.occ.treas.gov/publications/publications-by-type/comptrollers-handbook/payment-sys-funds-transfer-activities/pub-ch-payment-sys-funds-transfer-activities.pdf.

385. See FFIEC: http://ithandbook.ffiec.gov/it-booklets/wholesale-payment-systems/interbank-payment-and-messaging-systems/

fedwire-and-clearing-house-interbank-payments-system-(chips).aspx.
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an account at the Federal Reserve Bank of New York before sending or receiving payments. This 

account is managed by TCH. Once the processing day begins, banks begin submitting payments 

into a central queue for processing. Using an algorithm, CHIPS matches, nets, and releases the 

payments to receiving banks, with approximately 90% of payments released within one minute. 

At the end of the processing day, unmatched payments may remain. These unreleased payments 

are aggregated and netted to determine a final closing position for each bank. Any bank that 

has a closing position requirement must at that time transfer funds into the CHIPS account via 

FedWire.386 TCH, on the basis of its role as operator of the CHIPS system, was designated by the 

FSOC as a SIFMU in 2012.

CHIPS and FedWire compete for market share in the USD payments market, with FedWire representing approximately 60% market share and CHIPS 40%. While CHIPS uses multilateral netting, FedWire is a real-time gross settlement system. This means each transaction must be funded, 

cleared, and settled individually. 

CHIPS (Clearing House Interbank Payments System) 2010 2016

Annual Volume (Total Transaction Value in USD) $ 365 T $ 364 T

Avg Daily Volume (Transaction Value in USD) $ 1.4 T $ 1.5 T

Avg Dollar Amount per Each Transaction $ 4.0 MM $ 3.3 MM

Annual Volume (# of Transactions) 90.9 MM 110.8 MM

Avg Daily Volume (# of Transactions) 360,805 441,616

Data as of year-end 2010 and 2016387

CHIPS is owned by TCH, which was established as a check clearinghouse in 1853. TCH operates 

four distinct payment systems: CHIPS, a real time payments system that is being launched, a 

check image exchange, and an automated clearing house. TCH is mutually owned by 25 of the 

largest domestic and international commercial banks.

CLS Bank 

CLS Bank International (CLS) focuses on facilitating efficient and effective settlement in the foreign exchange market and was launched in 2002 to address settlement risk in the FX market.388

Settlement risk in the FX market, where each trade is an exchange of one currency for another, 

386. See generally: TCH at https://www.theclearinghouse.org/payments/chips; and FFIEC IT Examination Handbook 

(CHIPS)at http://ithandbook.ffiec.gov/it-booklets/wholesale-payment-systems/interbank-payment-and-messaging-systems/

fedwire-and-clearing-house-interbank-payments-system-(chips)/chips.aspx.

387. See https://www.theclearinghouse.org/-/media/tch/pay%20co/chips/reports%20and%20guides/chips%20volume%20

through%20july%202017.pdf?la=en.

388. See https://www.cls-group.com/about-us/.
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represents the risk that a counterparty may not deliver the promised currency per the terms of the 

trade, on the specified date (generally two or more days after the economic terms of the trade are 

agreed). CLS provides trade matching, confirmation, and payment services that facilitate settlement. CLS’s services allow each member to pay only the net amount it owes in each currency, 

rather than fund each trade individually, which makes settlement more efficient. CLS does not 

act as a central counterparty, nor does it, except in the most extreme cases, assume the risks of 

its members failing to perform. CLS is an Edge Act corporation based in New York. CLS was 

designated by the FSOC as a SIFMU in 2012.

CLS handles the equivalent of approximately $1.6 trillion in transactions every day or the equivalent of more than $403 trillion in transactions every year.389 Transaction volumes handled by CLS 

grew significantly from its launch in 2002 until the financial crisis and have been roughly flat since 

the passage of Dodd-Frank. CLS handles a large volume of transactions, in both terms of trade 

count and transaction value. 

CLS 2010 2016

Annual Volume (Total Transaction Value in USD) $ 386 T $ 400 T

Annual Volume (# of Transactions) 101.2 MM 130.3 MM

Avg Daily Volume (Total Transaction Value in USD) $ 1.5 T $ 1.5 T

Avg Daily Volume (# of Transactions) 389,000 501,000

Peak Daily Volume (Total Transaction Value in USD) $2.2 T $2.1 T

Peak Daily Volume (# of Transactions) 0.8 MM 1.1 MM

Data as of year-end 2010 and 2016.

Ownership and Governance

Historically, exchanges and clearinghouses were organized as mutual nonprofit associations.390

Demutualization in the industry occurred in the 2000s, with exchanges transforming from mutual 

associations of their members to a for-profit shareholder-owned model. Today, the major U.S. 

FMUs are organized either as mutual enterprises that are member-owned (where participants and 

shareholders overlap) directly or indirectly via a parent holding company, or shareholder-owned, 

(where the parent is a publicly traded company) with membership and ownership separate.391

Participants of the FMUs generally have a voice in the governance of the FMU through membership on the board of directors and risk committees of the FMU, although the extent of member 

participation can vary between FMUs.

389. See https://www.cls-group.com/news/cls-fx-trading-activity-june-2017/.

390. See Paolo Saguato, The Ownership of Clearinghouses: When “Skin in the Game” Is Not Enough, the 

Remutualization of Clearinghouses, 34 Yale Journal on Regulation 601 (2017).

391. Id.
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Financial Market Utility (FMU) Ownership And Governance

FMU Business Ownership Type Parent Company Member Participation 

CHIPS Payment system Member-owned TCH (private) Board of Directors, 

Supervisory Boards

CLS Bank Payment system Member-owned CLS Group Holdings 

(private) Board of Directors

CME, Inc. CCP Shareholder-owned CME Group, Inc. (public) Multiple Risk 

Committees

DTC CSD Member-owned DTCC (private) Board of Directors, 

Risk Committee

FICC CCP Member-owned DTCC (private) Board of Directors, 

Risk Committee

ICE CC CCP Shareholder-owned ICE, Inc. (public)

(ultimate parent)

Board of Managers, 

Risk Committee

LCH SC CCP Shareholder-owned LSEG (public)

(ultimate parent)

Board of Directors, 

Risk Committee

NSCC CCP Member-owned DTCC (private) Board of Directors, 

Risk Committee

OCC CCP Member-owned

(by exchanges) OCC Board of Directors, Board Committees

Source: Company filings, and data provided by the firms.

Regulation and Oversight of FMUs

Contagion and panic accelerated during the financial crisis due to losses connected to derivatives, 

particularly with respect to certain types of swaps, and the fear that losses would ripple throughout 

the financial system. While financial reforms such as mandatory central clearing of standardized 

derivatives were intended to increase transparency and reduce risk relative to the pre-crisis regime, 

they have also concentrated risk and increased the importance of CCPs in the U.S. financial system. 

Problems at one FMU may trigger significant liquidity and credit disruptions at other FMUs or 

financial institutions.392 As a result of the actions taken to address underlying causes of the crisis, 

clearinghouses assumed an even greater importance to the global financial system. For example, 

while approximately 15% of the swaps market was cleared in 2007, approximately 75% was cleared 

by 2016.393

Central clearing has long been a feature of risk management in the U.S. financial system, and 

strong risk management is key to the management of CCPs. The statutory framework for CCP 

392. FSOC FMU Final Rule.

393. U.S. Commodity Futures Trading Commission, Press Release No. 7409-16 (July 21, 2016), available at: 

http://www.cftc.gov/PressRoom/PressReleases/pr7409-16.
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regulation has not adequately addressed the systemic risks previously noted, and instead mandated 

that additional products, which CCPs historically had little expertise in clearing, be centrally 

cleared. The eight FMUs that are designated as systemically important are subject to a heightened 

regulatory and supervisory regime.394 The Federal Reserve, CFTC, and SEC have prescribed risk 

management standards governing the operations related to the payment, clearing, and settlement 

activities of the SIFMUs, to promote robust risk management, enhance safety and soundness, 

reduce systemic risk, and support the stability of the broader financial system.395 These standards 

address risk management policies and procedures, margin and collateral requirements, participant 

or counterparty default policies and procedures, the ability to complete timely clearing and settlement of financial transactions, and capital and financial resource requirements.396 SIFMUs are also 

required to provide notice of material changes to their rules, procedures, or operations to regulators 

for their review.397 Despite this acknowledgement of the systemic importance of SIFMUs, further 

changes are needed in the statute to establish an appropriate regulatory environment. In addition, 

appropriate regulatory resources need to be dedicated to supervising SIFMUs. 

It is imperative that our financial regulatory system prevent taxpayer-funded bailouts and limit 

moral hazard by addressing the systemic risks presented by FMUs. Under Dodd-Frank, the 

Federal Reserve may authorize a Federal Reserve Bank to establish and maintain an account for 

a SIFMU to deposit cash and provide certain additional services to the SIFMU.398 Traditionally, 

such accounts were available to depository institutions. Through Title VIII, the authority was 

extended to SIFMUs given their importance to the financial system. While these accounts allow 

a SIFMU to deposit funds, they do not confer borrowing privileges and should not be considered 

implicit backing of an institution by the Federal Reserve. The Federal Reserve may also authorize 

a Federal Reserve Bank to provide a SIFMU with certain discount and borrowing privileges.399

This action may occur only in “unusual or exigent circumstances,” on the vote of a majority of the 

Board of Governors then serving, after consultation with the Treasury Secretary, and on a showing 

by the FMU that it is unable to secure adequate credit accommodations from other banking institutions.400 As a result, while SIFMUs may be authorized to access the discount window in unusual 

or exigent circumstances under Dodd-Frank, a SIFMU shall exhaust credible private sources of 

borrowing before turning to the central bank to borrow in such exigent circumstances. 

FMUs, specifically CCPs, are critical infrastructures in the U.S. financial system that continue 

to pose systemic risks, in part due to the regulatory reforms following the financial crisis, but 

also other factors. First, CCPs and other FMUs have been significant market participants for 

many years, even before Dodd-Frank, and are uniquely interconnected with other U.S. financial 

394. See https://www.treasury.gov/initiatives/fsoc/Documents/2012%20Appendix%20A%20Designation%20of%20

Systemically%20Important%20Market%20Utilities.pdf.

395. Dodd-Frank § 805(b) [codified at 12 U.S.C. § 5464(b)].

396. See, e.g., Dodd-Frank § 805(c) [codified at 12 U.S.C. § 5464(c)], 12 C.F.R. § 234.6(c) (Federal 

Reserve), 17 C.F.R. § 40.10 (CFTC), and 17 C.F.R. § 240.19b-4 (SEC).

397. Dodd-Frank § 806(e) [codified at 12 U.S.C. § 5465(e)].

398. Dodd-Frank § 806(a) [codified at 12 U.S.C. § 5465(a)].

399. 12 U.S.C. § 5465(b).

400. Id.
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institutions. Second, while FMUs have always dealt with high transaction volumes and values, 

as depicted above, these have remained high or continued to increase. This has had the effect of 

continuing, or increasing, the systemic risk posed by these institutions. Finally, a number of factors 

inherent to the business model of major CCPs contribute to the incentives for market participants 

to clear, including mutualization of clearing members’ risk, multilateral netting of exposures, and 

enhanced transparencies. However, these same advantages exacerbate the interconnecting risks 

these institutions pose.

Issues and Recommendations

‘Advance Notice’ Review Process

As previously noted, Dodd-Frank mandates that a SIFMU must provide notice 60 days in advance 

“to its Supervisory Agency of any proposed change to its rules, procedures, or operations that 

could, as defined in rules of each Supervisory Agency, materially affect, the nature or level of risks 

presented by the designated financial market utility.”401 Under this provision, any objection must 

be made by the supervisory agency within 60 days from the later of when the notice was filed, 

or when additional information was requested.402 If there is no objection, the change may take 

effect; however, the supervisory agency may further extend the review period for an additional 60 

days for novel or complex issues.403 The Federal Reserve, CFTC, and SEC have each promulgated 

regulations implementing the advance notice statutory requirements.404

However, based on feedback from market participants provided during outreach meetings by 

Treasury, the process of obtaining federal regulatory approval for changes to a SIFMU’s rules, 

procedures, and operations can take much longer than 60 days. Many changes to firms’ rulebooks, 

procedures, and operations — even seemingly smaller changes — are submitted for approval 

through the advance notice review process, and the regulators have extended the review period 

well past the 60-day period specified in the statute. These review extensions can hamper the ability 

of the SIFMUs to bring new innovations to market, leaving the firms at a competitive disadvantage 

as they await approval from regulators.

Recommendations

Given their importance to the financial system and broader economy, it is important that SIFMUs 

be subject to heightened regulatory and supervisory scrutiny, and changes to their rules, operations, and procedures that may present material risks need to be closely reviewed by regulators. 

Accordingly, Treasury recommends that the agencies that supervise SIFMUs (the Federal Reserve, 

CFTC, and SEC) bolster resources devoted to these reviews. In particular, Treasury recommends 

that additional resources be allocated to the CFTC to enhance its supervision of CCPs. 

401. Dodd-Frank § 806(e).

402. Id.

403. Id.

404. See, e.g., 12 C.F.R. § 234.6(c) (Federal Reserve); 17 C.F.R. § 40.10 (CFTC); 17 C.F.R. § 240.19b-4 

(SEC).
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Treasury also recommends that the agencies that supervise SIFMUs study how they can streamline 

the existing review process to be more efficient and appropriately tailored to the risk that a particular change may pose. This study may result in a number of potential process improvements that 

benefit innovation while still protecting financial stability. For example, the agencies might decide 

that when extending the review period because of novel or complex issues to provide, to the extent 

possible based on available information, an expected timeline for completion of their review. The 

agencies might also more closely coordinate throughout the review process to ensure one agency 

does not lag behind another in their review. 

Federal Reserve Bank Account Access 

As noted, Dodd-Frank provides that the Federal Reserve may authorize the Federal Reserve Banks 

to establish and maintain a central bank account for, and services to, each SIFMU.405 The ability 

to deposit client margin at a Federal Reserve Bank is an important systemic risk mitigation tool. 

FMUs without such account access rely on a number of other alternatives for cash management, 

such as money market funds, repurchase agreements, and deposits at commercial banks. These 

private sources may be less reliable in times of market stress. Moreover, lack of access to a Federal 

Reserve Bank account means large amounts of U.S.-dollar margin may not be maximally safeguarded during times of market stress. Federal Reserve Bank account access may also provide an 

economic advantage to SIFMUs due to the more favorable interest rate (currently 1.25%406) which 

the Federal Reserve Banks may pay407 compared to that paid by commercial banks. 

Recommendations

It is recommended that the Federal Reserve review: (1) what risks may be posed to U.S. financial 

stability by the lack of Federal Reserve Bank deposit account access for certain FMUs with significant shares of U.S. clearing business, and an appropriate way to address any such risks; and 

(2) whether the rate of interest paid on SIFMUs’ deposits at the Federal Reserve Banks may be 

adjusted based on a market-based evaluation of comparable private sector opportunities. 

Resilience, Recovery, and Resolution 

Resilience refers to the ability of a CCP to withstand clearing member failures and other market 

stress events.408 Within the framework of resilience, CCP stress testing involves estimating potential losses under a variety of extreme but plausible market conditions, helping firms and regulators 

determine whether CCPs are maintaining sufficient financial resources to withstand stress events. 

CCPs also use stress tests to calibrate or adjust initial margin and guaranty fund requirements. If 

the stress test identifies a potential shortfall, a reduction in exposure or an increase in financial 

resources may be warranted. CFTC regulations require derivatives clearing organization (DCOs) 

405. Dodd-Frank § 806(a).

406. See https://www.federalreserve.gov/monetarypolicy/reqresbalances.htm.

407. See Regulation HH, 12 C.F.R. § 234.6.

408. See Bank For International Settlements, Committee On Payments and Market Infrastructures, and 

Board of the International Organization of Securities Commission, Final Report : Resilience of Central 

Counterparties (CCPs), Further Guidance on the PFMI (July 2017), available at: http://www.bis.org/cpmi/

publ/d163.pdf.
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that are also SIFMUs, or those that voluntarily comply with the rules for systemically important 

DCOs and that clear products with a complex risk profile, to meet the “Cover 2” standard, as set 

out in the Committee on Payments and Market Infrastructures and the Board of the International 

Organization of Securities Commissions (CPMI-IOSCO) Principals for Financial Market 

Infrastructures.409 The SEC has similar regulations with respect to clearing agencies. The principals 

also include minimum standards for initial margin collected by clearinghouses.410 In November 

2016, CFTC staff published a report on its first supervisory stress tests of the five largest DCOs 

registered with the CFTC and their largest clearing members that found the DCOs could withstand extremely stressful market scenarios and that risk was diversified across clearing members.411

Recovery refers to the ability of a CCP to continue to provide services to markets following a stress 

event without the direct intervention of a public sector resolution authority.412 CFTC regulations 

require each DCO to maintain viable plans for: (1) recovery or orderly wind down necessitated by 

uncovered credit losses or liquidity shortfalls; and, separately, (2) recovery or orderly wind down 

necessitated by general business risk, operational risk, or any other risk that threatens the DCO 

as a going concern. The preparation of these recovery plans and wind-down plans requires DCOs 

to “identify scenarios that may potentially prevent [the DCO] from being able to meet its obligations, provide its critical operations and services as a going concern and assess the effectiveness of 

a full range of options for recovery or orderly wind-down.”413

Resolution is the next step when recovery is unachievable.414 If a SIFMU is resolved under Title 

II of Dodd-Frank, the FDIC would be the resolution authority. For CCPs, many issues related 

to the strategy for addressing CCP failure are still under discussion domestically and internationally. Cross-border crisis management groups (CMGs), which are comprised of CCP home and 

host supervisory and resolution authorities, have begun meeting to develop resolution planning 

and resolvability assessments for CCPs considered to be systemic in more than one jurisdiction. 

Earlier this year, the FDIC and CFTC participated in the first U.S. CMGs for CME, Inc. and 

ICE, to begin the resolution planning and information sharing process for these institutions. They 

have also participated in CMGs for LCH and its French affiliate, LCH S.A. Internationally, U.S. 

regulators, including the FDIC, CFTC, SEC, and Federal Reserve, have been active in developing 

granular guidance on CCP recovery and resolution through CPMI-IOSCO and Financial Stability 

Board (FSB) working groups. 

409. See, e.g., U.S. Commodity Futures Trading Commission, Press Release (Feb. 10, 2016), available at: 

http://www.cftc.gov/PressRoom/PressReleases/cftc_euapproach021016.

410. Committee on Payment and Settlement Systems and Technical Committee of IOSCO, Principles for 

Financial Market Infrastructures (Apr. 2012), available at: http://www.bis.org/cpmi/publ/d101a.pdf.

411. Staff of the U.S. Commodity Futures Trading Commission, Supervisory Stress Test of Clearinghouses 

(Nov. 2016), available at: http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/cftcstresstest111516.pdf.

412. See Committee on Payment and Settlement Systems and Board of IOSCO, Recovery of Financial Market 

Infrastructures (Oct. 2014), available at: http://www.bis.org/cpmi/publ/d121.pdf (“CPSS-IOSCO Recovery 

Guidance”).

413. 17 C.F.R. § 39.39(b)(2)(c)(1).

414. See CPSS-IOSCO Recovery Guidance.
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Recommendations

In the context of resilience, the CFTC’s supervisory stress tests of five registered DCOs was an 

important first step in promoting resilience of CCPs. However, that exercise focused only on 

credit risk relating to the default of a clearing member. It is recommended that future exercises 

incorporate additional products, different stress scenarios, liquidity risk, and operational and cyber 

risks, which can also pose potential risks to U.S. financial stability.

The primary focus of recovery and resolution efforts must be the recovery of the CCP, such that the 

CCP can continue to provide critical services to financial markets, and the matched book of the 

failing CCP can be preserved. To this end, Treasury encourages the CFTC and FDIC to continue 

to coordinate on the development of viable recovery wind-down plans for CCPs that are SIFMUs. 

Furthermore, there have been notable efforts, both domestically and internationally, by regulators 

and market participants to prepare for the default of large clearing members. However, there may 

also be instances where a CCP experiences significant non-default losses, such as operational or 

business failures, including cyber, custodial failures, or investment losses. Accordingly, U.S. regulators, in coordination with their international counterparts, need to focus additional recovery and 

resolution planning efforts on non-default scenarios. In addition, U.S. regulators must continue 

to take part in CMGs to share relevant data and consider the coordination challenges that domestic and foreign regulators may encounter during cross-border resolution of CCPs. Finally, U.S. 

regulators must continue to advance American interests abroad when engaging with international 

standards-setting bodies such as CPMI-IOSCO and FSB. 

Regulatory Structure and Process

Overview

The financial regulatory system in the United States consists of multiple federal agencies, as well 

as state regulators and self-regulatory organizations (SROs). In the Banking Report, Treasury provided a brief overview of the U.S. financial regulatory structure and its components. The analysis 

and recommendations in that report, however, were focused on banking regulation. 

This chapter focuses primarily on the regulatory structure of U.S. capital markets. U.S. capital 

markets are distinct from, but interconnected with, the banking system. These capital markets 

consist, broadly speaking, of two segments: (1) the securities markets, which help foster capital 

formation by bringing together entities seeking capital with investors in the equity and fixed 

income markets, and (2) the derivatives markets, which facilitate the transfer and management of 

financial and commercial business risks through the use of futures, options, swaps, and other types 

of derivative instruments, as well as speculative risk-taking. 

The U.S. capital markets regulatory system includes two federal regulators, the SEC and the 

CFTC.415 Some industry participants are subject to regulation by SROs overseen by the SEC or 

CFTC. State securities regulators also play an important role in regulating the securities markets.416

In addition, federal, state, and local prosecutors may engage in enforcement of criminal laws related 

to the capital markets.

Securities Laws and the SEC

Securities and Exchange Commission

Established in 1934, the SEC’s mission is to protect investors, maintain fair, orderly, and efficient 

markets, and facilitate capital formation. This three-part mission reflects the economic purpose of 

securities markets, which is to promote long-term economic development by bringing together 

issuers of securities, i.e., borrowers or users of capital, and those with capital to invest. This transfer 

of resources is facilitated in part by requiring that offerings of securities be registered and that 

issuers disclose information that is material to investment decisions. These investor protections are 

intended to give investors sufficient insight into the operations of an issuer, and the risks of the 

investment, so that investors can make an informed decision to put their capital at risk in exchange 

for the opportunity to share in the borrower’s success. The SEC is overseen in Congress by the 

House Financial Services and Senate Banking Committees.

In addition to regulating securities offerings, the SEC regulates market participants, including 

investment advisers, mutual funds and exchange-traded funds, broker-dealers, municipal advisors, and transfer agents. The agency also oversees 21 national securities exchanges, ten credit 

rating agencies, and seven active registered clearing agencies, as well as the Financial Industry 

Regulatory Authority (FINRA) and the Municipal Securities Rulemaking Board (MSRB). The 

415. Market participants that operate as part of a bank or thrift holding company may be subject to additional 

regulation under consolidated supervision by the Federal Reserve.

416. State securities regulators are generally responsible for regulating investment advisers with less than 

$100 million in assets under management. States also may also require the licensing of certain financial professionals, including registered representatives and investment adviser representatives, and retain 

antifraud enforcement authority. States also regulate and require the registration of certain securities 

offerings.

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SEC is responsible for selectively reviewing the disclosures and financial statements of public companies.417 Of the top 100 public companies in the world, 77 have reporting requirements to the 

SEC.418

The SEC administers the federal securities laws, which consist of several major pieces of legislation 

and amendments to them that have been enacted over the last 85 years.

Federal Securities Laws

Securities Act of 1933 Requires that issuers provide financial and other important information concerning 

securities being offered for public sale and prohibits deceit, misrepresentations, 

and other fraud in the offer and sale of securities. Offers and sales of securities 

must be registered with the SEC unless an exemption applies.

Securities Exchange Act of 

1934

Empowers the SEC with broad authority over the securities industry, including 

the regulation of brokers, dealers, transfer agents, clearing agencies, and selfregulatory organizations. Prohibits fraudulent and manipulative conduct in 

securities markets and provides the SEC with disciplinary powers over regulated 

entities and persons associated with them. Also empowers the SEC to require 

periodic reporting of information by companies with publicly traded securities and 

to regulate proxy solicitations and tender offers.

Investment Company Act of 

1940

Regulates investment companies (such as mutual funds that engage primarily in 

investing, reinvesting, and trading of securities) and their offerings of securities. 

Addresses conflicts of interest that arise in the operations of investment 

companies. Requires periodic investor disclosures by investment companies.

Investment Advisers Act of 

1940

Requires that persons compensated for advising others about securities 

investments must register with the SEC and conform to regulations designed to 

protect investors. Since the Act was amended in 1996 and 2010, generally only 

advisers who have at least $100 million of assets under management or advise a 

registered investment company register with the SEC.

Sarbanes-Oxley Act of 2002 Mandated reforms to enhance corporate responsibility, enhance financial 

disclosures, and combat corporate and accounting fraud. Authorized the Public 

Company Accounting Oversight Board to oversee the activities of auditing firms.

Dodd-Frank Wall Street 

Reform and Consumer 

Protection Act of 2010 

Among other provisions, established the Financial Stability Oversight Council; 

removed certain exemptions from registration for advisers to hedge funds and 

certain other funds; regulated the swaps markets; created the SEC Office of the 

Investor Advocate; and amended the securities laws for enforcement, credit rating 

agencies, corporate governance and executive compensation, securitization, and 

municipal securities. 

Jump-start Our Business 

Startups Act of 2012

Created the initial public offering on-ramp for emerging growth companies, 

removed prohibition on general solicitation and advertising for certain private 

offerings, permitted crowdfunding, and amended provisions for Regulation A and 

Section 12(g) of the Exchange Act.

417. See 15 U.S.C. § 7266 (codifying Section 408 of the Sarbanes-Oxley Act, which mandated that the SEC 

review reports filed under the Exchange Act by public companies on no less than a three year cycle).

418. U.S. Securities and Exchange Commission, Fiscal Year 2018 Congressional Budget Justification and 

Annual Performance Plan, at 3, available at: https://www.sec.gov/reports-and-publications/budget-reports/secfy18congbudgjust (“SEC 2018 Budget Request”).
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Financial Industry Regulatory Authority

FINRA’s mission is to provide investor protection and promote market integrity through effective 

and efficient regulation of its member broker-dealers. FINRA adopts rules and regulations that 

apply to its members, including rules for business conduct, supervisory responsibility, finance 

and operations, and anti-money laundering.419 FINRA administers exams for individuals seeking 

to work in the industry as a broker, such as the Series 7 exam to be a licensed general securities 

representative. FINRA operates the Central Registration Depository, which serves as the central 

licensing and registration system for broker-dealers and their registered representatives. FINRA 

examines its member broker-dealers for compliance with FINRA rules, the federal securities laws, 

and the MSRB rules and engages in surveillance of market activities to detect suspicious activities 

such as insider trading, fraud, and other misconduct. FINRA also operates the Trade Reporting 

and Compliance Engine which facilitates mandatory reporting of over-the-counter secondary 

market transactions in eligible fixed income securities.

Municipal Securities Rulemaking Board

The mission of the MSRB is to protect investors, state and local government issuers, other municipal entities and the public interest by promoting a fair and efficient market for municipal securities, 

through (1) the establishment of rules for dealers and municipal advisors; (2) the collection and 

dissemination of market information; and (3) market leadership, outreach, and education.420 The 

MSRB supports market transparency by making trade data and disclosure documents available 

through its Electronic Municipal Market Access program. The MSRB relies on the SEC, FINRA, 

and federal bank regulators to conduct examinations and enforcement actions with respect to its 

rules. 

Derivatives Regulation and the CFTC

Commodity Futures Trading Commission

The CFTC’s mission is to foster open, transparent, competitive, and financially sound markets, 

to avoid systemic risk, and to protect market users and their funds, consumers, and the public 

from fraud, manipulation, and abusive practices related to derivatives and other products that are 

subject to the Commodity Exchange Act. The regulation of futures markets has its origins in 1922, 

when Congress acted in response to abuses in grain futures markets. Federal regulation was carried 

out by various agencies within the Department of Agriculture until legislation establishing the 

CFTC as an independent federal regulatory agency was enacted in 1974. 

Today, the CFTC oversees the markets for futures, options on futures, and (since 2010) swaps under 

the authority of the CEA.421 The CFTC’s mission is to promote the integrity of these markets to 

avoid systemic risk and protect against fraud, manipulation, and abusive practices. The derivatives 

markets allow risks to be shifted from one party to another. Such risks may arise from uncertainty 

with regard to the cost or supply of physical commodities, energy, foreign exchange, interest rates, 

or other economic factors. Further, derivatives markets provide a critical price signaling function 

419. Rules applicable to FINRA members are available at: http://finra.complinet.com.

420. Municipal Securities Rulemaking Board, Annual Report 2016, available at: http://www.msrb.org/msrb1/pdfs/

MSRB-2016-Annual-Report.pdf.

421. Equity options, however, are regulated by the SEC.
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for related cash commodity markets. The CFTC is overseen by the House and Senate Agriculture 

Committees. The CFTC has exclusive jurisdiction over the markets for commodity futures and 

options on futures.

The CFTC oversees derivatives clearinghouses, futures exchanges, swap dealers, swap data repositories, swap execution facilities, futures commission merchants, and other intermediaries. To promote market integrity, the CFTC polices the markets and participants under its jurisdiction for 

abuses and brings enforcement actions. The CFTC oversees industry self-regulatory organizations, 

including traditional organized futures exchanges or boards of trade known as designated contract 

markets. 

By facilitating the hedging of price, supply, and other commercial risks, derivatives markets help 

to free up capital for more productive uses and complement the securities markets in supporting 

the broader economy.

National Futures Association

The National Futures Association (NFA) is a self-regulatory organization whose mission is to 

provide regulatory programs and services that ensure futures industry integrity, protect market participants, and help NFA members meet their regulatory responsibilities. The NFA establishes and 

enforces rules governing member behavior including futures commission merchants, commodity 

pool operators, commodity trading advisors, introducing brokers, designated contract markets, 

swap execution facilities, commercial firms, and banks.422 NFA’s responsibilities include registration of all industry professionals on behalf of the CFTC, monitoring members for compliance 

with its rules, and taking enforcement actions against its members that violate NFA’s rules. NFA 

also reviews all disclosure documents from commodity pool operators (CPOs) and commodity 

trading advisers, annual commodity pool financial statements, and the policies and procedures that 

swap dealers are required to file with the CFTC.

Security Futures, Swaps, and Security-based Swaps

The CFTC and the SEC jointly regulate security futures products, which generally refer to futures 

on single securities and narrow-based security indexes.423 Title VII of Dodd-Frank authorized the 

CFTC to regulate swaps and the SEC to regulate security-based swaps. The agencies share authority over mixed swaps. Title VII generally (1) provides for the registration and regulation of swap 

dealers and major swap participants, (2) imposes mandatory clearing requirements on swaps but 

exempts certain end users, (3) requires swaps subject to mandatory clearing to be executed on 

an organized exchange or swap execution facility, and (4) requires all swaps to be reported to a 

registered swap data repository and subject to post-trade transparency requirements.424 A report by 

the Government Accountability Office found that, while the CFTC and the SEC have worked to 

422. See https://www.nfa.futures.org/about/index.html.

423. U.S. Government Accountability Office, Financial Regulation: Complex and Fragmented Structure Could 

Be Streamlined to Improve Effectiveness (Feb. 2016), at 23 (“GAO Report (2016)”).

424. Id. at 44.
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harmonize some of the Title VII rules and related guidance, substantive differences exist between 

other rules.425 The agencies have issued joint rules regarding mixed swaps.426

Regulatory Fragmentation, Overlap, and Duplication

A strong financial regulatory framework is vital to promote economic growth and financial stability 

and to protect the safety and soundness of U.S. financial institutions. Regulatory fragmentation, 

overlap, and duplication, however, can lead to ineffective regulatory oversight and inefficiencies 

that are costly to the taxpayers, consumers, and businesses. The convergence of the futures and 

securities markets has made coordinated oversight and regulation more critical.427

As more financial products have been developed that contain elements of both securities and 

derivatives, it has become increasingly difficult to distinguish between the two.428 In addition, market participants are increasingly involved in both securities and derivatives markets. Institutional 

investors dominate trading in both markets, and financial intermediaries in the two markets, such 

as broker-dealers and futures commission merchants, are often affiliated.429 The growth of the 

derivatives markets and the introduction of new derivative instruments further highlight the need 

to address gaps and inconsistencies between securities and derivatives regulation.430 On the global 

regulatory front, having separate agencies for securities and derivatives regulation complicates 

discussions with foreign regulators, because other countries generally have a single regulator overseeing both markets; it also complicates discussions within global bodies such as the FSB.431

425. U.S. Government Accountability Office, Dodd-Frank Regulations: Regulators’ Analytical and 

Coordination Efforts (Dec. 2014), at 37-41.

426. Further Definition of ‘‘Swap,’’ ‘‘Security-Based Swap,’’ and ‘‘Security-Based Swap Agreement’’; Mixed 

Swaps; Security-Based Swap Agreement Recordkeeping (July 18, 2012) [77 Fed. Reg. 48208 (Aug. 13, 

2012)].

427. For example, MF Global Holdings Ltd., which had both commodity and securities brokerage operations, 

filed for bankruptcy in 2011. The company’s collapse resulted in a $1.6 billion shortfall in customer funds. 

A congressional staff investigation found that although regulated by both the SEC and the CFTC, the 

agencies failed to share critical information about MF Global with each other, leaving each regulator with 

an incomplete understanding of MF Global’s financial health. See Staff Report Prepared for Rep. Randy 

Neugebauer, Chairman, Subcommittee on Oversight & Investigations, Committee on Financial Services, 

112th Congress (Nov. 15, 2012), available at: https://financialservices.house.gov/uploadedfiles/256882456288524.

pdf (“House Staff Report on MF Global”).

428. See, e.g., GAO Report (2016), at 42.

429. See U.S. Department of the Treasury, Blueprint for a Modernized Financial Regulatory Structure (Mar. 

2008), at 106-109, available at: https://www.treasury.gov/press-center/press-releases/Documents/Blueprint.pdf 

(“Treasury Blueprint (2008)”).

430. U.S. Department of the Treasury, Financial Regulatory Reform: A New Foundation (June 17, 2009), at 

49-51, available at: https://www.treasury.gov/press-center/press-releases/Pages/20096171052487309.aspx (“Treasury 

Foundation (2009)”).

431. Only the SEC is a member of the FSB. The CFTC is not a member but participates in select FSB 

activities.
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SEC and CFTC — Moving Beyond The Merger Debate

The division between the SEC and CFTC, which regulate securities and derivatives markets, 

respectively, is a unique feature of the U.S. financial regulatory system. By contrast, other 

major market centers typically have a single markets regulator with jurisdiction over both 

securities and derivatives markets. In recent years, regulation of U.S. securities and derivatives 

markets has increasingly overlapped as financial products and the market participants who 

trade them have converged. While the SEC and the CFTC have often worked well together, 

including engaging in several joint rulemakings required by Dodd-Frank, they have also been 

susceptible to jurisdictional disputes, which at times have prevented the agencies from working together effectively. Policymakers and other commenters periodically raise the question 

of whether there is a continued rationale for maintaining the SEC and the CFTC as separate 

market regulators. The issue remains relevant today in light of the Core Principles, including 

the need to rationalize the federal financial regulatory framework.

The SEC-CFTC merger debate

Principally, this debate centers on the question of whether the SEC and the CFTC should be 

merged into a single regulatory agency. In some cases, proposals to merge the two agencies have 

been prompted by specific market events, such as the October 1987 stock market crash432 and 

the 2011 failure of MF Global.433 Congress has also produced a number of proposals over the 

years to merge the SEC and CFTC, in whole or in part. Although Congress occasionally held 

hearings on some of these proposals — for example, H.R. 718 during the 104th Congress — 

none of the bills ever advanced in committee. Over the years, Treasury also has considered, and 

in certain cases published, proposals to merge the SEC and CFTC, most notably in its 2008 

“Blueprint for A Modernized Financial Regulatory Structure” white paper.434 Later, drafters 

of Dodd-Frank, rather than including a merger, decided to split jurisdiction over the OTC 

derivatives markets between the agencies, including a mandate for the agencies to write joint 

rules in certain areas and coordinate on others. The agencies successfully completed joint rulemakings further defining products and entities subject to the new OTC derivatives reforms, 

though there is more work to be done. 

Is there a policy rationale for merging the SEC and CFTC?

The fundamental proposition of combining two separate entities is that the whole is greater 

than the sum of its parts. This is established by identifying sufficient “efficiencies” and “synergies” arising from the merger, which in turn must outweigh the costs and other losses that 

could result from their combination. 

432. See Report of the Presidential Task Force on Market Mechanisms (Jan. 1988), at 59, 61-63.

433. See House Staff Report on MF Global at 79-81, 83.

434. Treasury Blueprint (2008). In the Blueprint, Treasury argued that combining the SEC and the CFTC into a 

single agency would “enhance investor protection, market integrity, market and product innovation, industry competitiveness, and international regulatory dialogue.” Following the financial crisis, however, Treasury 

stopped short of recommending a merger of the SEC and the CFTC and instead called on the two agencies to make recommendations to Congress for changes to statutes and regulations that would harmonize 

regulation of futures and securities. See Treasury Foundation (2009).
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What follows is the potential policy rationale for an SEC-CFTC merger from two viewpoints, 

operational and budget impacts as well as impact on markets: 

Operational and Budget Impacts. It is likely that efficiencies could be realized through 

reduced overhead costs resulting from running a single entity rather than two separate regulators. For example, expenses for operating budget items such as rent and utilities, printing 

and reproduction, supplies and materials, among other areas, could be reduced in aggregate. 

Similarly, certain program and administrative functions of the SEC and the CFTC could be 

streamlined through consolidation of one or more of the offices of the inspector general, general counsel, legislative affairs, or public affairs. In addition, synergies could likely be realized 

in the two agencies’ expenditures on information technology. 

Overall efficiencies will be limited, however, because most of the core mission functions currently carried out by the SEC and the CFTC would still need to be performed by a combined 

agency. The SEC, for instance, considers the adequacy of corporate disclosure, public accounting, and securities registration — regulatory activities that have no analogues in the derivatives 

markets. By contrast, many key regulatory functions of the CFTC are not performed by the 

SEC, including surveillance of underlying commodities markets and regulation of domestic 

futures and derivatives clearing organizations at home and abroad. While some synergies in 

mission functions could be found, merging the SEC and the CFTC is unlikely to materially 

enhance the efficiency in which their core activities are carried out. 

The SEC’s budget for fiscal year (FY) 2017 amounted to $1.66 billion and 4,637 budgeted 

full-time personnel equivalents (FTEs).435 The CFTC received appropriations for a FY 2017 

budget of $250 million, or about 15% of the SEC’s budget, which funds approximately 703 

FTEs.436 Based on public information on the CFTC’s budget, and making some highly simplified assumptions, a hypothetical outcome from merging the two agencies can be illustrated. 

For example, consolidation of physical space, certain information technology, and inspector 

general functions would yield hypothetical savings of roughly 5% of the combined SEC and 

CFTC budgets. Viewed in the context of the overall U.S. federal budget of roughly $4 trillion, 

the potential savings are not enough on their own to justify a merger. The table following this 

inset summarizes this discussion.437

Impact on Markets. Proponents of a merger argue that combining the agencies would improve 

regulatory effectiveness and efficiency, eliminate duplicative regulatory burdens on market participants, enhance policing of market manipulation, and improve U.S. engagement in international standard setting bodies. Examples of market overlap include swaps and security-based 

435. SEC 2018 Budget Request. Budget figures are FY 2017 annualized under continuing resolution.

436. U.S. Commodity Futures Trading Commission, Budget Request Fiscal Year 2018 (May 2017), available 

at: http://www.cftc.gov/idc/groups/public/@newsroom/documents/file/cftcbudget2018.pdf. Budget figures are FY 2017 

annualized under continuing resolution.

437. It should be noted that this example does not presume to be a thorough budget analysis but rather a highlevel summary. A formal examination of the agencies’ budgets could potentially show greater or lesser savings from operational efficiencies but even so would likely not be substantial enough to alter the analysis.
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swaps,438 security futures products,439 and the markets for stocks, stock options, and stock 

index futures. Market participants and key market intermediaries in securities and derivatives 

also have converged. Indeed, a merger might eliminate some regulatory gaps, redundancies 

and conflicts in these cases. A merger might enhance supervision of key market participants 

such as broker-dealers, futures commission merchants, and swap dealers, while reducing the 

regulatory burden on regulated entities, though by how much is hard to quantify. It might also 

improve access to data to enhance oversight and surveillance by regulators of linked markets 

and activities or help eliminate disparate treatment of economically similar products, while 

reducing opportunities for regulatory arbitrage. 

However, the extent to which these regulatory efficiencies and synergies can be realized may be 

limited. The securities and derivatives markets serve fundamentally different purposes: capital 

formation and investment versus hedging and risk transfer. While it may be appropriate to harmonize differences in approach to regulation of these markets in some areas, it is far from clear 

that reconciliation across all differences — for example, statutory and regulatory approaches to 

margin, protection and management of customer funds, customer suitability, insider trading, 

short sales, speculative trading, and product approval processes, among others — would be 

practical or advisable without risks to market health. 

Although the United States is unique in its separation of securities and derivatives markets 

regulation, it also has the largest, deepest, most liquid financial markets in the world. No other 

major market center has securities or derivatives markets of comparable size, diversity, and 

sophistication. Our markets are mature and well established, and while our regulatory system 

has perhaps evolved by accident, it is a system that by and large has worked and has served the 

American economy well. 

Treasury believes that merging the SEC and the CFTC would not appreciably improve on 

the current system. Instead, policymakers, regulators, and other stakeholders should focus on 

effecting changes that truly promote efficiency. Indeed, unnecessary supervisory duplication, 

jurisdictional conflicts that thwart innovation, and failures of regulatory accountability stand 

in contradiction to the Core Principles, as do developments that risk the competitiveness of 

U.S. companies in the financial markets or U.S. interests in international financial regulatory 

negotiations. Several of the issues discussed elsewhere in this report are aimed at prompting 

the SEC and the CFTC to take needed steps toward regulatory improvement to address these 

concerns. The agencies are encouraged, for instance, to harmonize their oversight and regulation of the swaps and security-based swaps markets with each other, as well as with non-U.S. 

jurisdictions to the extent feasible and appropriate. The SEC and the CFTC must be accountable for resolving regulatory differences and avoiding failures of regulatory coordination. 

438. See the “Derivatives” chapter in this report for more detail on regulation of swaps and security-based 

swaps.

439. Security futures products are regulated as both securities and futures and include futures on single securities (e.g., single-stock futures) and narrow-based security indexes.
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Possible Savings from Combined SEC and CFTC

FY 2017 Budget Savings from IT and Rent Assumed Personnel

Savings (OIG and other) Combined

SEC $1.66 billion -- -- $1.66 billion

CFTC $250 million $72.8 million $18.0 million $159.2 million

$1.91 billion Combined potential savings < 5% $1.82 billion

Source: SEC and CFTC FY 2018 budget requests.

Issues and Recommendations

Restoration of Exemptive Authority

Section 4(c) of the CEA provides the CFTC with general authority to grant exemptions “to promote responsible economic and financial innovation and fair competition.”440 Section 36(a) of the 

Exchange Act provides the SEC with authority to grant exemptions from the Exchange Act or any 

rule thereunder to the extent “necessary or appropriate in the public interest” and “consistent with 

the protection of investors.”441

The CFTC has used its authority judiciously over the years to accommodate developments and 

innovations in the markets it oversees, such as helping to facilitate the emergence of electronic 

trading of futures contracts. Similarly, the SEC has used its exemptive authority to promote development and innovation in the securities markets.

Dodd-Frank amended CEA Section 4(c)(1) and Exchange Act Section 36(c) to limit the agencies’ 

ability to exempt many of the activities covered under Title VII. Limitations on the exemptive 

authority with respect to the swaps requirements of Dodd-Frank was perhaps a measure to ensure 

that the agencies, while writing rules and implementing the new regulatory framework, did not 

unduly grant exemptions. 

However, market participants have suggested that restoring the exemptive provisions to their 

original forms could allow the agencies to evolve with the marketplace and properly tailor their 

oversight to those activities posing the highest risk, facilitate emerging and innovative technologies 

and products that face high regulatory barriers to entry, and help both the industry and regulators 

modernize the market infrastructure.

For example, restoring Section 4(c) to its original form could help facilitate the recently announced 

“LabCFTC” initiative, which is intended to help the CFTC cultivate a regulatory culture of 

forward thinking, become more accessible to emerging technology innovators, discover ways to 

440. 7 U.S.C. § 6(c).

441. 15 U.S.C. § 78mm.
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harness and benefit from financial technology innovation, and become more responsive to rapidly 

changing markets.442

Recommendations

Both agencies have had an opportunity to observe the swaps markets and examine the changes 

in that market that have occurred since the enactment of Dodd-Frank. The agencies are now in 

a position to make appropriate judgments about the advisability, feasibility and necessity of any 

exemptions for defined categories of regulated entities or activities, consistent with the public 

interest, from the CEA or Exchange Act, including the requirements added by Dodd-Frank. 

Treasury recommends that Congress restore the CFTC’s and SEC’s full exemptive authority and 

remove the restrictions imposed by Dodd-Frank.

Improving Regulatory Policy Decision Making

Treasury believes that there are a number of areas in which the agencies can improve their processes 

for making and implementing regulatory policy decisions. Treasury believes that such changes can 

be advanced administratively and could be enhanced through legislative reform as well. 

Economic Analysis in Rulemaking

Economic analysis is widely recognized as a useful rulemaking tool. An appropriate economic 

analysis includes at least three basic elements: (1) identifying the need for the proposed action; 

(2) an examination of alternative approaches; and (3) an evaluation of the benefits and costs, both 

quantitative and qualitative, of the proposed action and the main alternatives identified by the 

analysis.443

Executive Order 12866 was issued in 1993 with the aim of making the federal regulatory process 

more efficient and reducing the burden of regulation.444 Executive Order 12866 directs Executive 

Branch agencies to follow certain principles, including adopting a regulation only after a reasoned 

determination that the benefits of the intended regulation justify its costs. Subsequently, Executive 

Order 13563445 was issued in 2011 to reaffirm Executive Order 12866 and supplement it with 

additional principles, such as retrospective analysis of existing rules. 

As independent regulatory agencies, the CFTC and the SEC are not subject to Executive Orders 

12866 and 13563. However, in July 2011, President Obama signed Executive Order 13579, which 

encouraged the independent regulatory agencies to comply with the provisions in the previous 

executive orders to the extent permitted by law.446

The CFTC and the SEC are subject to statutory requirements to conduct some form of economic 

analysis. Section 15(a) of the CEA requires the CFTC to consider the costs and benefits before 

442. Acting Chairman J. Christopher Giancarlo, LabCFTC: Engaging Innovators in Digital Financial Markets, 

(May 17, 2017), available at: http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-23.

443. See, e.g., Office of Management and Budget, Circular A-4 – Regulatory Analysis (Sept. 17, 2003).

444. 58 Fed. Reg. 51735 (Oct. 4, 1993).

445. 76 Fed. Reg. 3821 (Jan. 21, 2011).

446. 76 Fed. Reg. 41587 (Jul. 14, 2011).
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promulgating a regulation. As part of this process, CFTC must consider the protection of market 

participants and the public, efficiency, competitiveness, and financial integrity of futures markets, 

price discovery, sound risk management practices, and other public interests.447 Under the provisions of various securities laws, the SEC is required to consider efficiency, competition, and capital 

formation when engaged in rulemaking.448 Both agencies have had rules challenged in court on the 

basis of inadequate cost-benefit analysis. 

The agencies have undertaken different approaches to implementing economic analysis. The 

SEC has published on its website its current staff guidance for conducting economic analysis in 

rulemakings.449 The CFTC, on the other hand, has not publicly released current guidance on its 

economic analysis efforts.450

Recommendations

Treasury reaffirms the recommendations for enhanced use of regulatory cost-benefit analysis discussed in the Banking Report for the SEC and the CFTC.451 Treasury supports efforts by the 

CFTC and SEC to improve their economic analysis processes.452 Economic analysis should not 

be viewed solely as a legal requirement to be satisfied nor should the specific provisions of the 

federal securities laws or the CEA be viewed as a limitation on the scope of economic analysis to 

be conducted. Economic analysis of proposed regulations, and their underlying statutes, not only 

promotes informed decision making by the agencies but also assists the President, the Congress, 

and the public in assessing the effectiveness of regulations.

Treasury recommends that the CFTC and SEC, when conducting rulemakings, be guided by the 

Core Principles for financial regulation laid out in Executive Order 13772 as well as the principles 

set forth in Executive Orders 12866 and 13563, and that they update any existing guidance as 

appropriate. Treasury further recommends that the agencies take steps, as part of their oversight 

responsibilities, so that SRO rulemakings take into account, where appropriate, economic analysis 

when proposed rules are developed at the SRO level.

447. 7 U.S.C. § 19(a).

448. See 15 U.S.C. §§ 77b(b), 78c(f), 80a-2(c), and 80b-2(c).

449. Staff of the U.S. Securities and Exchange Commission, Current Guidance on Economic Analysis in SEC 

Rulemakings (Mar. 16, 2012), available at: https://www.sec.gov/divisions/riskfin/rsfi_guidance_econ_analy_secrulemaking.pdf.

450. A 2011 report by the CFTC inspector general included a 2011 CFTC staff memo on cost-benefit analysis as an appendix. See Office of the Inspector General, U.S. Commodity Futures Trading Commission, 

A Review of Cost-Benefit Analyses Performed by the Commodity Futures Trading Commission in 

Connection with Rulemakings Undertaken Pursuant to the Dodd-Frank Act (June 13, 2011), available at: 

http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/oig_investigation_061311.pdf.

451. The Banking Report, at 62-63.

452. See Office of the Inspector General, U.S. Commodity Futures Trading Commission, A Review of the 

Cost-Benefit Consideration for the Margin Rule for Uncleared Swaps (Jun. 5, 2017), at 13, available at: 

http://www.cftc.gov/idc/groups/public/@aboutcftc/documents/file/oig_rcbcmrus060517.pdf; Jerry Ellig, Improvements 

in SEC Economic Analysis since Business Roundtable, Mercatus working paper (Dec. 2016), available 

at: https://www.mercatus.org/system/files/mercatus-ellig-sec-business-roundtable-v1.pdf.
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Finally, Treasury recommends that the CFTC and SROs issue public guidance explaining the 

factors they consider when conducting economic analysis in the rulemaking process. 

Using a Transparent, Common Sense, and Outcomes-Based Approach 

As stated in Executive Order 12866, which is still in effect today, “The American people deserve 

a regulatory system that works for them, not against them: a regulatory system that protects and 

improves their health, safety, environment, and well-being and improves the performance of the 

economy without imposing unacceptable or unreasonable costs on society; regulatory policies that 

recognize that the private sector and private markets are the best engine for economic growth; 

regulatory approaches that respect the role of State, local, and tribal governments; and regulations 

that are effective, consistent, sensible, and understandable.”

To maintain an efficient, effective, and appropriately tailored regulatory system, it is critical that 

agencies conduct periodic reviews of existing regulations. These retrospective reviews should identify rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and agencies 

should move to modify, streamline, expand, or repeal them in accordance with what has been 

learned. Importantly, the retrospective reviews should use data to the maximum extent possible.

Recommendations

To enhance rulemaking transparency, Treasury encourages the SEC and the CFTC to make fuller 

use of their ability to solicit comment and input from the public, including by increasing their use 

of advance notices of proposed rulemaking to better signal to the public what information may be 

relevant.

Treasury recommends that the CFTC and the SEC conduct regular, periodic reviews of agency 

rules for burden, relevance, and other factors. Treasury recognizes and supports the efforts undertaken by the CFTC with Project KISS (for “Keep it Simple, Stupid”) to conduct an internal review 

of rules, regulations, and practices to identify areas that can be made less burdensome and less 

costly.453

Treasury supports the goals of principles-based regulation and recommends that the SEC and the 

CFTC consider using this approach, to the extent appropriate and consistent with applicable law.

Finally, given the linkages between the derivatives markets and the capital markets, Treasury believes 

that the CFTC and the SEC should continue their joint outcomes-based effort to harmonize 

their respective rules and requirements, as well as the cross-border application of such rules and 

requirements. 

Regulatory Guidance Outside of Rulemaking

In administering their respective laws and regulations, the CFTC and the SEC may provide regulatory guidance outside of the notice and comment process conducted pursuant to the Administrative 

Procedure Act. For example, staff from the CFTC and the SEC might issue guidance through an 

453. Acting Chairman J. Christopher Giancarlo, CFTC: A New Direction Forward (Mar. 15, 2017), available at: 

http://www.cftc.gov/PressRoom/SpeechesTestimony/opagiancarlo-20.
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interpretive bulletin or a list of frequently asked questions after a rulemaking to clarify regulatory 

expectations or to ensure the smooth implementation of a rule. 

There are other mechanisms through which the CFTC or the SEC may publicly express new views 

that have the effect of de facto regulation, such as:

• The preamble of a final rule when such views were not disclosed at the proposal stage;

• Negotiated settlement of an enforcement action;

• Court filings in a litigated enforcement action or where the agency is participating as an 

amicus curiae;

• Commission opinion issued on appeal of an administrative enforcement action;

• No-action letters;

• Technical materials and guides;

• Comment letters to registrants or regulated entities;

• Deficiency letters in connection with examinations;

• Policy statements, risk alerts, and legal bulletins;

• Speeches and publications;

• Publications by international organizations, such as the Financial Stability Board, the 

International Organization of Securities Commissions, and the International Monetary 

Fund.

Guidance is a valid and useful tool, and there are appropriate circumstances in which guidance is 

helpful in assisting regulated parties in complying with underlying statutes or regulations. However, 

there is a serious risk of inappropriate use of guidance as a way to impose regulatory requirements 

and burdens outside of notice-and-comment rulemaking. 

Recommendations 

Treasury recommends that the CFTC and the SEC avoid imposing new requirements by no-action 

letter, interpretation, or other form of guidance and consider adopting Office of Management and 

Budget’s Final Bulletin for Agency Good Guidance Practices.454 Treasury also recommends that the 

CFTC and the SEC take steps to ensure that guidance is not being used excessively or unjustifiably 

to make substantive changes to rules without going through the notice and comment process. 

Treasury further recommends that the CFTC and the SEC review existing guidance and revisit any 

guidance that has caused market confusion or compliance challenges.

Update Definitions under the Regulatory Flexibility Act

When engaged in rulemaking, federal agencies are required to perform an analysis under the 

Regulatory Flexibility Act (RFA),455 which requires them to consider the impact on small entities. 

454. Final Bulletin for Agency Good Guidance Practices (Jan. 18, 2007) [72 Fed. Reg. 3432 (Jan. 25, 2007)].

455. 5 U.S.C. § 601 et seq.
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Since 1982, the CFTC has excluded any designated contract markets, FCMs, and CPOs registered 

with the CFTC from being considered a small entity under the RFA.456 The effect of the CFTC’s 

approach is that none of these registered entities can ever be a “small entity” for purposes of the 

RFA analysis. Commodity trading advisors, floor brokers, and unregistered FCMs are neither 

automatically included nor excluded from the definition of “small entities.” Instead, the CFTC has 

previously stated that, for purposes of RFA analysis, small entities would be addressed within the 

context of specific rule proposals, but without any specified definition.457

For the SEC, rules under the Securities Act and the Exchange Act458 generally define an issuer 

or a person with total assets of $5 million or less as a small business or small organization. This 

threshold was last adjusted in 1986. Other small business definitions under the Exchange Act use 

monetary thresholds that were set in 1982. There are other thresholds for small entity definitions 

under the Investment Company Act and the Investment Advisers Act that have not been changed 

in many years.459 The extremely limited scope of these definitions frequently excludes from the 

RFA analysis many entities that should arguably be viewed as a small entity.

Recommendation

Treasury recommends that the agencies undertake a review and update the definitions so that 

the RFA analysis appropriately considers the impact on persons who should be considered small 

entities.

Self-regulatory Organizations

Historically, regulation of the U.S. financial markets has entailed a combination of government 

regulation and industry self-regulation. In the derivatives and securities markets, SROs operate 

under the regulatory oversight of the CFTC or the SEC. Industry self-regulation can provide a 

mutually beneficial balance between the interests of the public and the regulated industry, particularly if the effects of the SRO are to strengthen investor protection and promote market integrity. 

SROs set standards, conduct examinations, and enforce rules against their members. SROs can 

establish conduct standards that may go beyond those otherwise required by law. For example, 

FINRA has a requirement that its members observe high standards of commercial honor and just 

and equitable principles of trade.460

Self-regulation by industry, however, can create a conflict between regulatory obligations and the 

interests of an SRO’s members, market operations, or listed issuers, which necessitates appropriate 

governmental supervision.461 SROs subject to oversight by the CFTC include the National Futures 

456. Policy Statement and Establishment of Definitions of “Small Entities” for Purposes of the Regulatory 

Flexibility Act [47 Fed. Reg. 18618 (Apr. 30, 1982)].

457. Id. Note that individuals are not considered in the RFA analysis.

458. 17 C.F.R. § 230.157; 17 C.F.R. § 240.0-10.

459. 17 C.F.R. § 270.0-10; 17 C.F.R. § 275.0-7.

460. FINRA Rule 2010.

461. The Governance of Self-Regulatory Organizations (June 2, 2004) [69 Fed. Reg. 32326 (Jun. 9, 2004)] 

(CFTC); Concept Release Concerning Self-Regulation (Nov. 18, 2004) [69 Fed. Reg. 71256, 71256-58 

(Dec. 8, 2004)] (“SEC SRO Concept Release”).
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Association, the commodity exchanges (designated contract markets), swap execution facilities, 

derivatives clearing organizations, and swap data repositories. SROs subject to oversight by the 

SEC include FINRA, the registered national securities exchanges, notice-registered securities 

future product exchanges (dual notice-registration with CFTC), registered clearing agencies, and 

the MSRB. 

One benefit of SRO regulation is that SROs are more familiar with, and able to take into account, 

the complexities of the day-to-day business operations of regulated entities and the markets.462 SROs 

engage in market surveillance, trade practice surveillance, and conduct audits and examinations of 

members for compliance with various rules, including financial integrity, financial reporting, sales 

practices, and recordkeeping.463 SROs can investigate potential violations and bring disciplinary 

proceedings against members for violations of SRO rules. SROs are funded by various fees and 

assessments, not out of federal agency resources.464 As an on-the-ground, front-line regulator, an 

SRO can be a more efficient and effective mechanism to protect the public against unlawful market 

activity.

On the other hand, the SRO model has been called into question by certain developments and 

trends. Some SROs, such as the national securities exchanges and designated contract markets, 

have transformed from member-owned, mutual organizations to for-profit, publicly traded companies. As such, concerns have been raised as to whether their obligations to their shareholders may 

conflict with their duties and powers to regulate public markets and their members. In addition, as 

a result of consolidation within the financial services industry, the economic importance of certain 

SRO members may create particularly acute conflicts.465

In outreach meetings with Treasury, some member firms stated that the SROs have gradually 

become less transparent and more opaque, arbitrary, and prescriptive in fulfilling their selfregulatory function, weakening the traditional connection with markets and their members. The 

increase in non-member involvement in governance of the SRO has led to a diminished influence 

of members, both at the board and committee levels, in determining SRO regulatory policy.466 In 

this respect, SROs have become less like an industry-led self-regulator and more like a government 

regulator but without due process protections.

462. See, e.g., CFA Institute, Self-Regulation in the Securities Markets (Aug. 2013), at 2, available at: http://

www.cfapubs.org/doi/pdf/10.2469/ccb.v2013.n11.1 (observing that, although not perfect, the self-regulatory system is needed “in today’s highly complex and technologically changing and evolving markets”).

463. Self-Regulation and Self-Regulatory Organizations in the Futures Industry (Nov. 18, 2005) [70 Fed. Reg. 

71090 (Nov. 25, 2005)].

464. The costs of funding SROs, however, may be borne indirectly by investors and end users in the form of 

higher costs.

465. SEC SRO Concept Release at 71259-60.

466. But see U.S. Securities and Exchange Commission, Report Pursuant to Section 21(a) of the Securities 

Exchange Act of 1934 Regarding the NASD and the NASDAQ Market (Aug. 8, 1996), available at: 

https://www.sec.gov/litigation/investreport/nd21a-report.txt (“the consequences for the Nasdaq market of this failure were exacerbated by the undue influence exercised by Nasdaq market makers over various aspects of 

the NASD's operations and regulatory affairs”).
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In addition, the increasing number of SRO rules and the potential for regulatory duplication and 

overlap with the CFTC or the SEC or with other SROs, increases operational complexity and costs 

for market participants and potentially creates inefficiencies in regulation. These regulatory costs 

are ultimately borne by investors and end users. 

Recommendations

Treasury recommends that the CFTC and the SEC conduct comprehensive reviews of the roles, 

responsibilities, and capabilities of SROs under their respective jurisdictions and make recommendations for operational, structural, and governance improvements of the SRO framework. 

Such reviews should consider:

• Within specific categories of SROs, how to ensure comparable compliance by SROs with 

their self-regulatory obligations to avoid outlier SROs that do not fully comply with 

these obligations;

• Appropriate controls on SRO conflicts of interest;

• Appropriate composition, roles, and empowerment of SRO committees;

• Appropriate transparency regarding SRO fee structures to ensure alignment of fees with 

actual costs of regulation;

• Appropriate application and limitations on regulatory immunity and private liability 

to SRO regulatory operations as opposed to general operations, including commercial 

operations, of the SRO;

• Appropriate limitations on regulatory, surveillance and enforcement responsibilities 

entrusted to SROs, including limitations of regulatory activities to SROs’ own markets 

and centralization of cross-market regulation within a single SRO and avoiding duplicative investigations, audits, and enforcement actions; 

• Changes to the process for agency review and approval of SRO rulemakings to manage 

the volume and priority of such rulemakings in a manner consistent with applicable 

laws.467

As part of their reviews, Treasury recommends that the agencies identify any changes to underlying 

laws or rules needed to enhance oversight of SROs. Treasury also recommends that each SRO 

adopt and publicly release an action plan to review and update its rules, guidance, and procedures 

on a periodic basis. In this context, Treasury supports the current effort by FINRA to conduct a 

comprehensive, organization-wide self-assessment and improvement initiative.468 Treasury encourages the NFA and other SROs to undertake similar projects. 

467. See also Susquehanna Int’l Group v. SEC, No. 16-1061 (D.C. Cir. Aug. 8, 2017) (finding that SEC 

approval of a rule change from the Options Clearing Corporation did “not represent the kind of reasoned 

decisionmaking required by either the Exchange Act or the Administrative Procedure Act”).

468. See https://www.finra.org/about/finra360.
International Aspects of Capital Markets Regulation

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Overview

Cross-border financial integration enhances capital markets efficiency through better allocation of 

savings while stability is enhanced through better risk sharing. Because of these economic benefits, 

capital markets are increasingly global in nature, becoming highly integrated and interdependent. 

However, integration of capital markets also increases the potential for the cross-border transmission of shocks. This underscores the need to accompany the increasing role of nonbank financial 

intermediation and market-based financing with adequate regulatory and supervisory frameworks 

to safeguard financial stability.

Generally, given the size and global stature of U.S. capital markets, the U.S. regulatory approach 

is to provide investors and firms with a U.S. presence equal access to our markets on national 

treatment terms. Cross-border access is allowed to foreign registrants and financial institutions 

in a manner consistent with prudential and other public policy objectives. This provides a level 

playing field for market participants wanting to access and be active in our markets, the largest and 

most vibrant nonbank financial sector in the world. Regulatory frameworks that encourage diverse 

approaches with respect to products, investment strategies, and investment horizons help create 

vibrant markets, and variation across jurisdictions is not only acceptable but desirable. At the same 

time, conflicting frameworks, whether it be within a jurisdiction or between them, can fragment 

markets, lead to unnecessary costs, distort price discovery, and reduce consumers’ options. In some 

cases, regulation can have far reaching and often unintended consequences for market participants 

in other jurisdictions that may have little connection to the jurisdiction promulgating the regulation or the issue being regulated. Internationally active financial institutions may be subject to 

overlapping, duplicative, and sometimes incompatible national regulatory regimes. Appropriate 

regulatory cooperation in bilateral and multilateral forums can advance U.S. interests by promoting financial stability, leveling the playing field for U.S. financial institutions, and reducing market 

fragmentation. 

Since the financial crisis, regulators have worked to address these shortcomings by agreeing on 

common standards, where appropriate, and depending on a jurisdiction’s preference, through findings of substituted compliance and regulatory equivalence. Findings of substituted compliance and 

regulatory equivalence are recognitions (generally unilateral) that foreign regulatory regimes achieve 

similar goals and that national regulatory approaches, while differing in certain respects, were of a 

high quality. For example, after consultation with the SEC in 2012 the European Securities and 

Markets Authority eventually reported to the European Commission (EC) its conclusion that the 

U.S. regulatory regime for credit rating agencies was equivalent to the EU’s own system. Several 

months later, the EC formally rendered its equivalency determination for the U.S. credit rating 

agency regulatory regime. 
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Markets in Financial Instruments Directive II 

The EU’s Markets in Financial Instruments Directive (2004/39/EC, MiFID) has been applicable across the European Union since November 2007. It is a cornerstone of the EU's regulation of financial markets seeking to improve the competitiveness of EU financial markets by 

improving the single European market for investment services and activities and to ensure 

a similarly high degree of protection for investors in financial instruments. The MiFID II 

Framework was formally adopted on June 12, 2014, and many of its key elements will apply 

across Europe as of Jan. 3, 2018.469

One currently contentious cross-border aspect of MiFID II is the unbundling of financial 

research services and payments. Currently, fund managers receive the research at no cost 

because investment banks and brokers bundle the costs into the trading fees that are passed 

onto investors.470 Under MiFID II, European fund managers will be required to pay investment banks and brokers directly for analyst research via two options: (1) paying for the research 

directly from their own accounts, or (2) creating separate research payment accounts funded 

by specific charges billed to clients. Asset managers will likely significantly reduce the amount 

of research they pay for, and brokers are expecting significant decreases in revenue for research 

services. MiFID II’s research unbundling creates implementation challenges due to conflicts 

with U.S. policy on research provision, where U.S. brokers cannot directly sell research unless 

they are formally registered as investment advisers. Under MiFID II, U.S. brokers that are not 

registered investment advisers cannot provide research to European clients since MiFID II 

would require such clients to make direct payments for research services. Because many firms 

operate internationally, there is uncertainty in the market over how to comply with MiFID 

II. There is also confusion on whether U.S. asset managers can share analyst research freely 

within their firms if they have European footprints. The SEC and the European Commission 

are currently in discussions to develop solutions to this apparent conflict.

Issues and Recommendations

Advancing American Interests 

To avoid fragmenting and harming these complex and diverse markets, U.S. agencies must 

continue to engage and cooperate bilaterally and multilaterally with other jurisdictions to work 

toward coherent regulation and supervision that protects consumers, manages systemic risk, and 

enhances financial stability. U.S. engagement in international forums should also continue to 

advance U.S. interests by enabling U.S. companies to be competitive in domestic and foreign 

markets. Additionally, a key objective and consideration of regulation and regulatory policy both 

domestically and in the international context is to maintain the competitiveness of U.S. capital 

markets. This means domestic regulation that promotes market efficiency and cost-effectiveness 

469. See https://www.esma.europa.eu/policy-rules/mifid-ii-and-mifir.

470. See 15 U.S.C. § 78bb(e).
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and international engagement to ensure that U.S. markets remain attractive to foreign investors 

and institutions.

Bilateral Regulatory Cooperation

Treasury coordinates a series of productive bilateral policy dialogues. These include dialogues with 

the European Union, Mexico, and Canada within the context of the North American Free Trade 

Agreement Financial Services Committee, and India. These discussions have helped to facilitate 

cooperation and coherent implementation of financial regulation. 

Recommendations

Treasury recommends that U.S. regulators and Treasury sustain and develop technical level dialogues with key partners, informed by prior outreach to industry, to address conflicting or duplicative regulation. Treasury also recommends that U.S. regulators seek to reach outcomes-based, 

non-discriminatory substituted compliance arrangements with other regulators or supervisors with 

the goal of mitigating the effects of regulatory redundancy and conflict when it is justified by the 

quality of foreign regulation, supervision, and enforcement regimes, paying due respect to the 

U.S. regulatory regime. Treasury also assists the regulators, when appropriate, in navigating the 

challenges of reaching substituted compliance arrangements. Responsible comparisons of regulatory regimes require sufficient attention to the details and actual application of rules, and relying 

on compliance with minimum international standards is not itself necessarily sufficient. It is the 

responsibility of U.S. regulators to determine whether firms operating in the United States achieve 

the necessary outcomes for safety, soundness, and investor protection, as set out in domestic statute 

and regulations.

Multilateral Regulatory Cooperation

As noted in the Banking Report, U.S. engagement in international financial regulatory standardsetting bodies (SSBs) remains important to promote vibrant financial markets and level playing 

fields for U.S. financial institutions, prevent unnecessary regulatory standard-setting that could 

stifle financial innovation, and assure the competitiveness of U.S. companies and markets. Treasury 

recommends that the U.S. members of international standard setting organizations should enhance 

the efficiency of international standards by reducing conflicting cross-sectoral standards. To improve 

transparency and accountability, the SSBs should appropriately consider and account for the views 

and concerns of external stakeholders, including market participants, self-regulatory organizations, 

and other interested parties. The current processes for developing significant standards could be 

improved, and Treasury recommends increasing the number and timeliness of external stakeholder 

consultation and publicizing the schedule of major international meetings.

Recommendations

Treasury recommends that the U.S. members of SSBs continue to advocate for and shape international regulatory standards that are aligned with domestic financial regulatory objectives. 

The American marketplace is like no other, and benefits from a diversity of providers and consumers of financial intermediation. Inappropriately applying approaches to regulation in U.S. capital 

markets that are ill suited to our jurisdiction or bank-centric would stifle otherwise vibrant markets 
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while not efficiently enhancing financial stability or consumer protection. Treasury recommends 

that U.S. agencies remain alert to developments abroad and engaged in international organizations. To promote the effectiveness and efficiency of regulations, U.S. agencies should continue to 

regularly coordinate policy before and after international engagements. Direct coordination, at all 

relevant levels of an organization and across all U.S. agencies, will enhance the substantive basis of 

advocacy for U.S. market participants’ interests when engaging abroad but also increase the force 

of our outreach. We are more effective when we speak with one voice and the full support of the 

U.S. regulatory system. 

Good policy development should consider the interactions of regulation and also the proper alignment of incentives. Regulatory approaches that have worked in one context, such as a country or 

sector, should not be inappropriately applied elsewhere. Robust regulatory impact assessment and 

stakeholder consultation and input are key steps in understanding the likely effects of regulation. 

As a result, Treasury values the U.S. process of notice and comment under the Administrative 

Procedure Act, recommends that other jurisdictions adopt similarly robust comment procedures, 

and will work in international organizations to elevate the quality of stakeholder consultation 

globally.
Appendix A

Participants in the Executive Order 

Engagement Process

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Academics 

Adi Sunderam, Harvard Business 

School

Anat Admati, Stanford 

Graduate School of Business

Arnold Kling, Independent Scholar 

Arthur Wilmarth, Jr., George 

Washington University Law School

Darrell Duffie, Stanford Graduate 

School of Business

David Skeel, University of 

Pennsylvania Law School 

Jay Rosengard, Harvard Kennedy 

School 

Jim Angel, Georgetown University 

McDonough School of Business

John Cochrane, Stanford University 

Hoover Institution

John Taylor, Stanford University 

Hoover Institution 

Joseph Grundfest, 

Stanford Law School

Lawrence White, New York 

University Stern School of Business

Mark Willis, New York University 

Furman Center

Monika Piazzesi, 

Stanford University

Richard Herring, University of 

Pennsylvania, The Wharton School

Roberta Romano, Yale Law School

Robin Greenwood, Harvard 

Business School 

Sanjai Bhagat, University of 

Colorado Leeds School of Business

Consumer Advocates

American Association of Retired 

Persons

Americans for Financial Reform

Center for Responsible Lending

Consumer Action

Consumer Federation of America

Consumers Union

Leadership Conference on Civil and 

Human Rights

National Association for the 

Advancement of Colored People

National Community Reinvestment 

Coalition

Participants in the Executive Order

Engagement Process
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National Consumer Law Center

National Council of La Raza

National Disability Institute

National Urban League

U.S. Public Interest Research 

Group

Regulators and Government Related Entities

California Public Employees’ 

Retirement System

Conference of State Bank 

Supervisors 

Consumer Financial Protection 

Bureau 

Delegation of the European Union 

to the United States of America

Federal Deposit Insurance 

Corporation 

Federal Housing Finance Agency 

Federal Reserve Bank of New York

Federal Reserve Board 

Federal Reserve Bank of Chicago

Financial Services Agency, Japan

Financial Industry Regulatory 

Authority

Independent Member with 

Insurance Expertise, FSOC

Municipal Securities Rulemaking 

Board

National Futures Association

New York State Common Fund

North American Securities 

Administrators Association

Office of Financial Research 

Office of the Comptroller of the 

Currency

Teachers Retirement System of 

Texas

U.S. Commodity Futures Trading 

Commission 

U.S. Securities and Exchange 

Commission 

Industry and Trade Groups

ABN AMRO Clearing

Aegon N.V. (Transamerica)

AFEX / GPS Capital

Aflac Inc.

AllianceBernstein L.P.

Allstate Corporation

American Bankers Association

American Council of Life Insurers
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American Express

American Institute of Certified 

Public Accountants 

American International Group, Inc. 

American Investment Council

American Principles Project

Amerifirst Financial, Inc. 

Andreessen Horowitz 

Angel Capital Association

Angel Oak Home Loans

AQR Capital Management

Association for Financial 

Professionals

Association for Enterprise 

Opportunity

Association of Institutional 

Investors

Association of Mortgage Investors

Autonomous Research

AXA

Bank of America

Bank of New York Mellon

Barclays

Bayview Asset Management

Bernstein

BGC Partners

Biotechnology Innovation 

Organization

BlackRock

Blackstone

Bloomberg

BNP Paribas

BOK Financial Corporation

Bond Dealers of America

Boston Consulting Group

Bridgewater Associates

Business Roundtable

Cadwalader, Wickersham & Taft, 

LLP

Caliber Home Loans

Carlyle Group

Carnegie Cyber Policy Initiative

Center for Capital Markets 

Competitiveness, U.S. Chamber of 

Commerce

Center for Financial Services 

Innovation

Chatham Financial

Chicago Board Options Exchange

Chicago Mercantile Exchange

Chicago Trading Company
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CHIPS

Chubb

Citadel

Citi

Class V Group

Clayton Holdings, LLC

Cleary Gottlieb Steen & Hamilton 

LLP

CLS

CMG Financial Inc.

CNH Industrial

Coalition for Derivatives End-Users

Coalition for Small Business 

Growth

Columbia Investment Management

Commercial Real Estate Finance 

Council

Community Bankers Association

Community Development Bankers 

Association

Council of Institutional Investors

Cowen & Co.

Credit Suisse

Crowdfund Capital Advisors

Crowdfund Intermediary Regulatory 

Advocates

Cullen/Frost Bankers, Inc.

Cypress Group

D.E. Shaw

Davidson Kempner

Davis Polk & Wardwell LLP

DoubleLine Capital

Depository Trust and Clearing 

Corporation (DTCC)

Eby-Brown

EKap Strategies LLC

Ellington Management Group, LLC

Elliott Management Corporation

Emergent Biosolutions

Equipment Leasing and Finance 

Association

Equity Dealers of America

Equity Markets Association

Equity Prime Mortgage, LLC

Fidelity Investments

Financial Executives International

Financial Information Forum

Financial Services Roundtable

Fitch Ratings Inc.

Flagstar Bank
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Ford Foundation

Francisco Partners

Franklin Templeton Investments

Futures Industry Association

GEICO Corporation

General Electric

Geneva Trading

Gibson, Dunn & Crutcher LLP

Global Financial Markets 

Association

Global Trading Systems

Glycomimetrics

Goldman Sachs

Goldstein Policy

Guaranteed Rate, Inc.

Hancock Whitney Bank

HBK Capital Management

Healthy Markets

Hehmeyer Trading

HomeBridge Financial Services Inc.

HSBC

Hudson River Trading

Hunt Consolidated, Inc.

ICF International, Inc. 

Independent Community Bankers of 

America

Institute of International Bankers

Institute of International Finance

Intercontinental Exchange (ICE)

International Council of Shopping 

Centers

International Franchise Association

International Swaps and Derivatives 

Association

Invesco

Investment Company Institute

The Investors Exchange (IEX)

Janney Montgomery Scott LLC

Jones Walker LLP

Jordan & Jordan

JP Morgan

Katten Muchin Rosenman LLP

Keefe, Bruyette & Woods

KKR

KPMG LLP

Kroll Bond Rating Agency 

Latham & Watkins LLP

Law Office of William J. Donovan

LCH
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200

LCH Clearnet Group Ltd

Levy Group

Liberty Mutual Group, Inc.

Lincoln Financial Bancorp, Inc.

LivWell

Loan Syndication and Trading 

Association

Loomis, Sayles & Co

LSEG

M&T Bank

Managed Funds Association

Manulife Financial Corporation

Marvin F. Poer and Company

Massachusetts Mutual Life 

Insurance Company

Mayer Brown, LLP

MB Financial, Inc.

McGuireWoods LLP

McKinsey & Company

MetLife Investors

Mid-Size Bank Coalition of America

Modern Markets Initiative

Moody’s Corporation

Moody’s Investor Services

Morgan Stanley

Mortgage Bankers Association

NASDAQ

National Association of Corporate 

Treasurers

National Association of Home 

Builders

National Bankers Association

National Conference of Insurance 

Guaranty Funds

National Federation of Independent 

Business

National Organization of Life and 

Health Guaranty Associations

National Restaurant Association 

National Retail Federation 

National Venture Capital 

Association

Nationstar Mortgage Holdings Inc.

Nationwide Mutual Insurance 

Company

Natixis

Navient

NEX Markets 

New York Life Investors, LLC

Nomura 

Northwestern Mutual Life Insurance 

Company

NYSE
A Financial System That Creates Economic Opportunities • Capital Markets

Appendix A • Participants in the Executive Order Engagement Process

201

Och-Ziff

Old National Bancorp

Oliver Wyman

Options Clearing Corporation

Orbital ATK

PentAlpha Capital, LLC

PHH Mortgage Corporation

PIMCO

Primary Residential Mortgage, Inc.

Progressive Corporation

Property Casualty Insurers 

Association of America

Prudential Financial, Inc.

Pulte Mortgage LLC

Quantlab Financial, LLC

Quicken Loans Inc.

Redwood Trust Inc.

Risk Management Association

Rock Financial Corporation

Roosevelt Management Company

Royal Bank of Canada

Runbeck Election Services

Sallie Mae

Sandler O’Neill and Partners LP

Sanovas

Santander

Scale Venture Partners

Securities Industry and Financial 

Markets Association

Security Traders Association

Small Business & Entrepreneurship 

Council

Small Business Majority

Société Générale

Standard & Poor’s Financial 

Services LLC

Starwood Mortgage Capital

State Farm Mutual Automobile 

Insurance Company

State Street

Stearns Lending, LLC

Steptoe & Johnson LLP

Structured Finance Industry Group

Sullivan & Cromwell LLP

SVB Financial Group

SWBC Mortgage Corporation

Swiss Re Ltd.

TCF Financial Corporation

TD Group US Holdings
A Financial System That Creates Economic Opportunities • Capital Markets

Appendix A • Participants in the Executive Order Engagement Process

202

Teachers Insurance and Annuity 

Association of America

The Clearing House

The Cypress Group

Thomson-Reuters

TIAA Global Asset Management

Tradeweb

Tradition

Travelers Companies, Inc.

Tullet Prebon

Two Sigma Investments

U.S. Chamber of Commerce

UBS

UMB Financial Corporation

Union Home Mortgage Corporation

United States Automobile 

Association

Vanguard

VantageScore Solutions, LLC

Venable LLP

Virtu Financial Inc.

Waddell & Reed

WeFunder

Wellington Management

Wells Fargo

Wholesale Markets Brokers’ 

Association

Wilson Sonsini Goodrich & Rosati

Wintrust Financial Corporation

Think Tanks

American Enterprise Institute

Aspen Institute

Better Markets

Bipartisan Policy Center

Brookings Institution

CATO Institute

Committee on Capital Markets 

Regulation 

Competitive Enterprise Institute

Heritage Foundation

Hoover Institution

Mercatus Center at George Mason 

University

New America

Pew Charitable Trust

R Street Institute

Urban Institute
Appendix B

Table of Recommendations

A Financial System That Creates Economic Opportunities • Capital Markets

Appendix B • Table of Recommendations

205

Access to Capital

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Public Companies and IPOs

Treasury recommends that Section 1502 (conflict minerals), Section 1503 

(mine safety), Section 1504 (resource extraction), and Section 953(b) (pay 

ratio) of Dodd-Frank be repealed and any rules issued pursuant to such 

provisions be withdrawn, as proposed by H.R. 10, the Financial CHOICE Act 

of 2017. In the absence of legislative action, Treasury recommends that the 

SEC consider exempting smaller reporting companies (SRCs) and emerging 

growth companies (EGCs) from these requirements.

Congress SEC D, F

As required by the Fixing America’s Surface Transportation Act, Treasury 

recommends that the SEC proceed with a proposal to amend Regulation S-K 

in a manner consistent with its staff’s recent recommendations.

SEC F

Treasury recommends that the SEC move forward with finalizing its current 

proposal to remove SEC disclosure requirements that duplicate financial 

statement disclosures required under generally accepted accounting 

principles by the Financial Accounting Standards Board.

SEC F

Treasury recommends that companies other than EGCs be allowed to “test 

the waters” with potential investors who are qualified institutional buyers 

(QIBs) or institutional accredited investors.

SEC A, D, F

Treasury recommends further study and evaluation of proxy advisory 

firms, including regulatory responses to promote free market principles if 

appropriate.

SEC A, C, F

Treasury recommends that the $2,000 holding requirement for shareholder 

proposals be substantially revised.

SEC D, F, G

Treasury recommends that the resubmission thresholds for repeat proposals 

be substantially revised from the current thresholds of 3%, 6%, and 10% 

to promote accountability, better manage costs, and reduce unnecessary 

burdens.

SEC D, F, G

Treasury recommends that the states and the SEC continue to investigate 

the various means to reduce costs of securities litigation for issuers in a way 

that protects investors’ rights and interests, including allowing companies and 

shareholders to settle disputes through arbitration.

SEC, 

States

F

Treasury recommends that the SEC continue its efforts, when reviewing 

company offering documents, to comment on whether the documents provide 

adequate disclosure of dual class stock and its effects on shareholder voting.

SEC A, D, F, G

Treasury recommends that the SEC revise the securities offering reform 

rules to permit business development companies (BDCs) to use the same 

provisions available to other issuers that file Forms 10-K, 10-Q, and 8-K.

SEC A, D, F, G

Table of Recommendations
Access to Capital

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Disproportionate Challenges for Smaller Public Companies

Treasury supports modifying rules that would broaden eligibility for status as 

an SRC and as a non-accelerated filer to include entities with up to $250 

million in public float as compared to the current $75 million.

SEC A, F, G

Treasury recommends extending the length of time a company may be 

considered an EGC to up to 10 years, subject to a revenue and/or public float 

threshold.

Congress SEC A, F, G 

Treasury recommends that the SEC review its interval fund rules to determine 

whether more flexible provisions might encourage creation of registered 

closed-end funds that invest in offerings of smaller public companies and 

private companies whose shares have limited or no liquidity.

SEC A, F, G

Treasury recommends a holistic review of the Global Settlement and the 

research analyst rules to determine which provisions should be retained, 

amended, or removed, with the objective of harmonizing a single set of rules 

for financial institutions.

SEC, 

FINRA

A, C, F, G

Expanding Access to Capital Through Innovative Tools

Treasury recommends expanding Regulation A eligibility to include Exchange 

Act reporting companies.

SEC A, F, G

Treasury recommends steps to increase liquidity for the secondary market for 

Tier 2 securities. Treasury recommends state securities regulators promptly 

update their regulations to exempt secondary trading of Tier 2 securities 

or, alternatively, the SEC use its authority to preempt state registration 

requirements for such transactions.

SEC, States A, F, G

Treasury recommends that the Tier 2 offering limit be increased to $75 million. SEC A, F, G

Treasury recommends allowing single-purpose crowdfunding vehicles advised 

by a registered investment adviser. Treasury recommends that any rulemaking 

in this area prioritize alignment of interests between the lead investor and the 

other investors participating in the vehicle, regular dissemination of information 

from the issuer, and minority voting protections with respect to significant 

corporate actions.

SEC A, F, G

Treasury recommends that the limitations on purchases in crowdfunding 

offerings should be waived for accredited investors as defined by Regulation 

D.

SEC A, F, G

Treasury recommends that the crowdfunding rules be amended to have 

investment limits based on the greater of annual income or net worth for the 

5% and 10% tests, rather than the lesser.

SEC A, F, G

Treasury recommends that the conditional exemption from Section 12(g) be 

modified, raising the maximum revenue requirement from $25 million to $100 

million.

SEC F, G

Treasury recommends increasing the limit on how much can be raised in a 

crowdfunding offering over a 12-month period from $1 million to $5 million.

SEC A, F, G

A Financial System That Creates Economic Opportunities • Capital Markets

Appendix B • Table of Recommendations

206
Markets Structure and Liquidity

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Equities

Treasury recommends that the SEC allow issuers of less liquid stocks, 

in consultation with their underwriter and listing exchange, to partially or 

fully suspend unlisted trading privileges for their securities and select the 

exchanges and venues on which their securities will trade.

SEC C, F

Treasury recommends that the SEC evaluate whether to allow issuers to 

determine the tick size for trading of their stock across all exchanges and 

whether to additionally limit potential tick sizes to a small number of standard 

options to manage complexity.

SEC C, F

Regarding Treasury’s concern that maker-taker markets and payment for order 

flow may create misaligned incentives for broker-dealers:

• Treasury recommends the SEC adopt rules to mitigate potential conflicts 

of interest due to maker-taker rebates and payment for order flow 

compensation arrangements.

• Treasury supports a pilot program to study the impact reduced access 

fees would have on investors’ execution costs or available liquidity.

• Treasury recommends that the SEC exempt less liquid stocks from the 

restrictions on maker-taker rebates and payment for order flow if such 

exemptions promote greater market making.

SEC C, F

Access to Capital

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Maintaining the Efficacy of the Private Markets

Treasury recommends that the SEC, FINRA, and the states propose a new 

regulatory structure for finders and other intermediaries in capital-forming 

transactions.

SEC, 

FINRA, 

States

A, F, G 

Treasury recommends that amendments to the accredited investor 

definition be undertaken with the objective of expanding the eligible pool of 

sophisticated investors.

SEC A, F, G

Treasury recommends a review of provisions under the Securities Act and the 

Investment Company Act that restrict unaccredited investors from investing in 

a private fund containing Rule 506 offerings.

SEC A, F, G

Treasury recommends that federal and state financial regulators, along with 

their counterparts in self-regulatory organizations, work to centralize reporting 

of individuals and firms that have been subject to adjudicated disciplinary 

proceedings or criminal convictions, which can be searched easily and 

efficiently by the investing public free of charge. 

SEC, CFTC, 

FINRA, 

States

A, G

A Financial System That Creates Economic Opportunities • Capital Markets

Appendix B • Table of Recommendations

207
Markets Structure and Liquidity

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Equities

Regarding market data rules: 

• Treasury recommends that the SEC and FINRA issue guidance clarifying 

that broker-dealers may satisfy their best execution obligations by relying 

on securities information processor (SIP) data rather than proprietary 

data feeds if the broker-dealer does not otherwise subscribe to or use 

those proprietary data feeds.

• Treasury suggests that the SEC consider whether proposed selfregulatory organization (SRO) rules establishing data fees are “fair 

and reasonable,” “not unreasonably discriminatory,” and an “equitable 

allocation” of reasonable fees among persons who use the data.

• Treasury recommends that the SEC consider amending Regulation NMS 

as necessary to enable competing consolidators to provide an alternative 

to the SIPs.

SEC, 

FINRA

C, F

Treasury recommends that the SEC consider amending the Order Protection 

Rule to give protected quote status only to registered national securities 

exchanges that offer meaningful liquidity and opportunities for price 

improvement. Treasury recommends that the SEC consider amending the 

Order Protection Rule to withdraw protected quote status for orders on 

any exchange that do not meet a minimum liquidity threshold. Treasury 

recommends that the SEC should consider proposing that any newly 

registered national securities exchange receive the benefit of protected order 

status for some period of time.

SEC C, F

In order to reduce complexity in equity markets, Treasury recommends that the 

SEC review whether exchanges and alternative trading systems (ATSs) should 

harmonize their order types and make recommendations as appropriate.

SEC C, F

Treasury recommends that the SEC adopt amendments to Regulation ATS 

substantially as proposed but revise aspects of the proposal to: (1) eliminate 

unnecessary public disclosure of confidential information, (2) require 

disclosure of confidential information only to the SEC and only if it would 

improve the SEC’s ability to oversee the industry, (3) ensure that disclosures 

related to conflicts of interest are tailored to provide useful information to 

market participants, and (4) simplify the disclosures to reduce the compliance 

burden and to increase their readability and comparability across competing 

ATSs. 

SEC C, F

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Appendix B • Table of Recommendations

208
Markets Structure and Liquidity

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Treasuries

Treasury recommends closing the PTF data granularity gap by requiring 

trading platforms operated by FINRA member broker-dealers that facilitate 

transactions in Treasury securities to identify the customers in reports to 

TRACE of Treasury security transactions. 

SEC, 

FINRA

C, G

Treasury supports the Federal Reserve Board’s efforts to collect Treasury 

transaction data from its bank members.

FRB C, G

To further the study and monitoring of the Treasury cash market, Treasury 

recommends that the CFTC share daily its Treasury futures security transaction 

data with Treasury. 

CFTC C, G

To better understand clearing and settlement arrangements in the Treasury 

interdealer broker (IDB) market and the consequences of reform options 

available in the clearing of Treasury securities, Treasury recommends further 

study of potential solutions by regulators and market participants.

SEC B, C

Treasury reiterates its recommendation from the Banking Report to amend 

regulation to improve the availability of secured repurchase agreement (repo) 

financing.

Congress FRB, FDIC, 

OCC

D, F

Corporates

Treasury reiterates its recommendations from the Banking Report to improve 

secondary market liquidity.

Congress FRB, FDIC, 

OCC, SEC, 

CFTC

C, F, G

A Financial System That Creates Economic Opportunities • Capital Markets

Appendix B • Table of Recommendations

209
Securitization

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Capital

Treasury recommends that banking regulators rationalize the capital 

required for securitized products with the capital required to hold the same 

disaggregated underlying assets. 

FRB, FDIC, 

OCC

C, F

Treasury recommends that U.S. banking regulators adjust the parameters of 

both the simplified supervisory formula approach (SSFA) and the supervisory 

formula approach (SFA). 

• The p factor, already set at a punitive level that assesses a 50% 

surcharge on securitization exposures, should, at minimum, not be 

increased. 

• SSFA should recognize the added credit enhancement when a bank 

purchases a securitization at a discount to par value. 

• Regulators should align the risk weight floor for securitization exposures 

with the Basel recommendation.

FRB, FDIC, 

OCC

C, D, F

Treasury recommends that bank capital requirements for securitization 

exposures sufficiently account for the magnitude of the credit risk sold or 

transferred in determining required capital instead of tying capital to the 

amount of the trust consolidated for accounting purposes.

FRB, FDIC, 

OCC

C, F

Treasury recommends that regulators consider the impact that trading book 

capital standards, such as fundamental review of the trading book (FRTB), 

would have on secondary market activity. Capital requirements should be 

recalibrated to prevent the required amount of capital from exceeding the 

maximum economic exposure of the underlying bond.

FRB, FDIC, 

OCC

C, F

Treasury recommends that the Federal Reserve Board consider adjusting 

the global market shock scenario for stress testing to more fully consider the 

credit quality of the underlying collateral and reforms implemented since the 

financial crisis.

FRB C, F

Liquidity

Treasury recommends that high-quality securitized obligations with a proven 

track record receive consideration as level 2B high-quality liquid assets 

(HQLA) for purposes of the liquidity coverage ratio (LCR) and the net 

stable funding ratio (NSFR). Regulators should consider applying to these 

senior securitized bonds a prescribed framework, similar to that used to 

determine the eligibility of corporate debt, to establish criteria under which a 

securitization may receive HQLA treatment.

FRB, FDIC, 

OCC

C, F

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Appendix B • Table of Recommendations

210
Securitization

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Risk Retention

Treasury recommends that banking regulators expand qualifying underwriting 

exemptions across eligible asset-classes through notice-and-comment 

rulemaking.

FRB, FDIC, 

OCC

C, F

Treasury recommends that collateralized loan obligation (CLO) managers who 

select loans that meet prespecified “qualified” standards, as established by 

the appropriate rulemaking agencies, should be exempt from the risk retention 

requirement.

FRB, FDIC, 

OCC

C, F

Treasury recommends that regulators review the mandatory five-year holding 

period for third-party purchasers and sponsors subject to this requirement. To 

the extent regulators determine that the emergence period for underwritingrelated losses is shorter than five years, the associated restrictions on sale or 

transfer should be reduced accordingly.

SEC, FRB, 

OCC, 

FDIC, 

FHFA, HUD

C, F

Treasury reiterates its recommendation that Congress designate one lead 

agency from among the six that promulgated the Credit Risk Retention 

Rulemaking to be responsible for future actions related to the rulemaking.

Congress C, F

Disclosures

Treasury recommends that the number of required reporting fields for 

registered securitizations be reduced. Additionally, Treasury recommends that 

the SEC continue to refine its definitions to better standardize the reporting 

requirements on the remaining required fields.

SEC C, F

Treasury recommends that the SEC explore adding flexibility to the current 

asset-level disclosure requirements by instituting a “provide or explain regime” 

for prespecified data fields.

SEC C, F

Treasury recommends that the SEC review the three-day waiting period for 

registered deals and consider reducing, dependent on securitized asset class.

SEC C, F

Treasury recommends that the SEC signal that Reg AB II asset-level 

disclosure requirements will not be extended to unregistered 144A offerings 

or to additional securitized asset classes.

SEC C, F

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Appendix B • Table of Recommendations

211
Derivatives

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Harmonization Between CFTC and SEC

Treasury recommends that the CFTC and the SEC undertake and give high 

priority to a joint effort to review their respective rulemakings in each key Title 

VII reform area. The goals of this exercise should be to harmonize rules and 

eliminate redundancies to the fullest extent possible and to minimize imposing 

distortive effects on the markets and duplicative and inconsistent compliance 

burdens on market participants. 

• As part of this review, the SEC should finalize its Title VII rules with the 

goal of facilitating a well-harmonized swaps and security-based swaps 

regime. 

• This effort should also include consideration of the prospects for 

alternative compliance regimes — for example, a framework of interagency 

substituted compliance or mutual recognition — for any areas in which 

effective harmonization is not feasible. 

• Public comment should be part of this process. 

Treasury recommends that Congress consider further action to achieve 

maximum harmonization in the regulation of swaps and security-based swaps.

Congress CFTC, SEC D, F, G

Margin Requirements for Uncleared Swaps

Treasury recommends that U.S. regulators take steps to harmonize their 

margin requirements for uncleared swaps domestically and cooperate with 

non-U.S. jurisdictions that have implemented the Basel Committee on Banking 

Supervision-International Organization of Securities Commissions (BCBSIOSCO) framework to promote a level playing field for U.S. firms. 

• The U.S. banking agencies should consider providing an exemption from 

the initial margin requirements for uncleared swaps for transactions 

between affiliates of a bank or bank holding company in a manner 

consistent with the margin requirements of the CFTC and the 

corresponding non-U.S. requirements, subject to appropriate conditions.

• The CFTC and U.S. banking regulators should work with their 

international counterparts to amend the uncleared margin framework so it 

is more appropriately tailored to the relevant risks.

• Where warranted based on logistical and operational considerations, the 

CFTC and the U.S. banking agencies should consider amendments to 

their rules to allow for more realistic time frames for collecting and posting 

margin. 

• The CFTC and the U.S. banking regulators should reconsider the onesize-fits-all treatment of financial end users for purposes of margin on 

uncleared swaps and tailor their requirements to focus on the most 

significant source of risk.

• Consistent with these objectives, the SEC should repropose and finalize 

its proposed margin rule for uncleared security-based swaps in a manner 

that is aligned with the margin rules of the CFTC and the U.S. banking 

regulators.

CFTC, SEC, 

Banking 

Agencies

D, F

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Appendix B • Table of Recommendations

212
Derivatives

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

CFTC Use of No-Action Letters

Treasury recommends that the CFTC take steps to simplify and formalize all 

outstanding staff guidance and no-action relief that has been used to smooth 

the implementation of the Dodd-Frank swaps regulatory framework. This 

should include, where necessary and appropriate, amendments to any final 

rules that have proven to be infeasible or unworkable, necessitating broadly 

applicable or multiyear no-action relief.

CFTC F, G

Cross-Border Issues

Cross-border Application and Scope: Treasury recommends that the CFTC 

and the SEC provide clarity around the cross-border scope of their regulations 

and make their rules compatible with non-U.S. jurisdictions where possible to 

avoid market fragmentation, redundancies, undue complexity, and conflicts of 

law. Examples of areas that merit reconsideration include: 

• whether swap counterparties, trading platforms, and CCPs in jurisdictions 

compliant with international standards should be required to register with 

the CFTC or the SEC as a result of doing business with a U.S. firm’s 

foreign branch or affiliate;

• whether swap dealer registration should apply to a U.S. firm’s non-U.S. 

affiliate on the basis of trading with non-U.S. counterparties if the U.S. 

firm’s non-U.S. affiliate is effectively regulated as part of an appropriately 

robust regulatory regime or otherwise subject to Basel-compliant capital 

standards, regardless of whether the affiliate is guaranteed by its U.S. 

parent;

• whether U.S. firms’ foreign branches and affiliates, guaranteed or not, 

should be subject to Title VII’s mandatory clearing, mandatory trading, 

margin, or reporting rules when they trade with non-U.S. firms in 

jurisdictions compliant with international standards; and

• providing alternative ways for regulated entities to comply with 

requirements that may conflict with local privacy, blocking, and secrecy 

laws.

CFTC, SEC D, F

A Financial System That Creates Economic Opportunities • Capital Markets

Appendix B • Table of Recommendations

213
Derivatives

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Cross-Border Issues

Substituted Compliance: Treasury recommends that effective cross-border 

cooperation include meaningful substituted compliance programs to minimize 

redundancies and conflicts. 

• The CFTC and SEC should be judicious when applying their swaps 

rules to activities outside the United States and should permit entities, 

to the maximum extent practicable, to comply with comparable non-U.S. 

derivatives regulations, in lieu of complying with U.S. regulations.

• The CFTC and the SEC should adopt substituted compliance regimes 

that consider the rules of other jurisdictions, in an outcomes-based 

approach, in their entirety, rather than relying on rule-by-rule analysis. They 

should work toward achieving timely recognition of their regimes by nonU.S. regulatory authorities. 

• The CFTC should undertake truly outcomes-based comparability 

determinations, using either a category-by-category comparison or a 

comparison of the CFTC regime to the foreign regime as a whole.

• Meaningful substituted compliance could also include consideration of 

recognition regimes for non-U.S. CCPs clearing derivatives for certain 

U.S. persons and for non-U.S. platforms for swaps trading.

CFTC, 

SEC

D, F

ANE Transactions: Treasury recommends that the CFTC and the SEC 

reconsider any U.S. personnel test for applying the transaction-level 

requirements of their swaps rules.

• The CFTC should provide certainty to market participants regarding the 

guidance in the CFTC arrange, negotiate, execute (ANE) staff advisory 

(CFTC Letter No. 13-69), which has been subject to extended no-action 

relief, either by retracting the advisory or proceeding with a rulemaking. 

• In particular, the CFTC and the SEC should reconsider the implications 

of applying their Title VII rules to transactions between non-U.S. firms 

or between a non-U.S. firm and a foreign branch or affiliate of a U.S. 

firm merely on the basis that U.S.-located personnel arrange, negotiate, 

or execute the swap, especially for entities in comparably regulated 

jurisdictions.

CFTC, 

SEC

D, F

A Financial System That Creates Economic Opportunities • Capital Markets

Appendix B • Table of Recommendations

214
Derivatives

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Capital Treatment in Support of Central Clearing

Treasury recommends that regulators properly balance the post-crisis goal 

of moving more derivatives into central clearing with appropriately tailored 

and targeted capital requirements.

• As a near-term measure, Treasury reiterates the recommendation 

of the Banking Report and calls for the deduction of initial margin 

for centrally cleared derivatives from the SLR denominator; and 

recommends a risk-adjusted approach for valuing options for 

purposes of the capital rules to better reflect the exposure, such as 

potentially weighting options by their delta.

• Beyond the near term, Treasury recommends that regulatory capital 

requirements transition from CEM to an adjusted SA-CCR calculation 

that provides an offset for initial margin and recognition of appropriate 

netting sets and hedged positions. 

• In addition, Treasury recommends that U.S. banking regulators and 

market regulators conduct regular comprehensive assessments of 

how the capital and liquidity rules impact the incentives to centrally 

clear derivatives and whether such rules are properly calibrated.

Banking 

Agencies, 

CFTC, SEC

D, F

Swap Dealer De Minimis Threshold

Treasury recommends that the CFTC maintain the swap dealer de 

minimis registration threshold at $8 billion, and establish that any future 

changes to the threshold will be subject to a formal rulemaking and public 

comment process.

CFTC F

Definition of Financial Entity

To provide regulatory certainty and better facilitate appropriate exceptions 

from the swaps clearing requirement for commercial end users engaged 

in bona fide hedging or mitigation of commercial risks, Treasury would 

support a legislative amendment to CEA Section 2(h)(7) providing the 

CFTC with rulemaking authority to modify and clarify the scope of the 

financial entity definition and the treatment of affiliates.

• Such authority should include consideration of non-prudentially 

regulated entities that currently fall under subclause VIII of CEA 

Section 2(h)(7)(c)(i) — i.e., entities that are “predominantly engaged... 

in activities that are financial in nature” — but which might warrant 

exception from the clearing requirement if they engage in swaps primarily 

to hedge or mitigate the business risks of a commercial affiliate. 

• Such authority should also be flexible enough to permit, for example, 

the CFTC to formalize its no-action relief for central treasury units 

(CTUs) in a rulemaking.

• Further, any exceptions provided by the CFTC under such authority 

should be subject to appropriate conditions and allow the CFTC to 

appropriately monitor exempted activity. The conditions could include, 

for example, making the exception dependent on the size and nature 

of swaps activities, demonstration of risk-management requirements 

in lieu of clearing, and reporting requirements.

Any legislative amendment should provide the SEC analogous rulemaking 

authority under Exchange Act Section 3C(g) with respect to exceptions 

from the clearing requirement for security-based swaps.

Congress CFTC, SEC D, F

A Financial System That Creates Economic Opportunities • Capital Markets

Appendix B • Table of Recommendations

215
Derivatives

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Position Limits

Treasury recommends that the CFTC complete its position limits rules, 

as contemplated by its statutory mandate, with a focus on detecting and 

deterring market manipulation and other fraudulent behavior. Among the 

issues to consider in completing a final position limits rule, the CFTC 

should:

• ensure the appropriate availability of bona fide hedging exemptions 

for end users and explore whether to provide a risk management 

exemption; 

• consider calibrating limits based on the risk of manipulation, for 

example, by imposing limits only for spot months of physical delivery 

contracts where the risk of potential market manipulation is greatest; 

and

• consider the deliverable supply holistically when setting the limits 

(e.g., for gold, consider the global physical market, not just U.S. 

futures).

CFTC D, F

SEF Execution Methods and MAT Process

Treasury recommends that the CFTC:

• consider rule changes to permit swap execution facilities (SEFs) to 

use any means of interstate commerce to execute swaps subject 

to a trade execution requirement that are consistent with the 

“multiple-to-multiple” element of the SEF definition (CEA Section 

1a(50)). Such rule changes should be undertaken in recognition of 

the statutory goals of impartial access for market participants and 

promoting pre-trade price transparency in the swaps market; 

• reevaluate the MAT determination process to ensure sufficient 

liquidity for swaps to support a mandatory trading requirement; and

• consider clarifying or eliminating footnote 88 in its final SEF rules to 

address associated market fragmentation. 

CFTC D, F

Swap Data Reporting

Treasury supports the CFTC’s newly launched “Roadmap” effort, as 

announced in July 2017, to standardize reporting fields across products 

and SDRs, harmonize data elements and technical specifications with 

other regulators, and improve validation and quality control processes.

• Treasury recommends that the CFTC secure and commit adequate 

resources to complete the Roadmap review, undertake notice and 

comment rulemaking, and implement revised rules and harmonized 

standards within the timeframe outlined in the Roadmap.

• Treasury recommends that the CFTC leverage third-party and market 

participant expertise to the extent necessary to develop a coherent, 

efficient, and effective reporting regime.

CFTC, SEC F

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Appendix B • Table of Recommendations

216
Financial Market Utilities

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Treasury recommends that U.S. regulators that supervise systemically 

important financial market utilities (SIFMUs) bolster resources for their 

supervision and regulation, and that the CFTC be allocated greater 

resources for its review of CCPs. Treasury also recommends that the 

agencies study how they can streamline the existing advance notice 

review process to be more efficient and appropriately tailored to the risk 

that a particular change presented by a SIFMU may pose. 

Congress FRB, CFTC, 

SEC

D, F

Treasury recommends that the Federal Reserve review: (1) what risks 

are posed to U.S. financial stability by the lack of Federal Reserve 

Bank deposit account access for financial market utilities (FMUs) with 

significant shares of U.S. clearing business and an appropriate way to 

address such risks; and (2) whether the rate of interest paid on SIFMUs’ 

deposits at the Federal Reserve Banks should be adjusted based on 

market-based evaluation of comparable private sector opportunities. 

FRB B

Treasury recommends that future central counterparty (CCP) stress 

testing exercises by the CFTC incorporate additional products, different 

stress scenarios, liquidity risk, and operational and cyber risks, which can 

also pose potential risks to U.S. financial stability.

CFTC B

Treasury recommends that U.S. regulators continue to take part in 

crisis management groups (CMGs) to share relevant data and consider 

the coordination challenges that domestic and foreign regulators and 

resolution authorities may encounter during cross-border resolution of 

CCPs. 

CFTC, FDIC, 

SEC

B, E

Treasury recommends that U.S. regulators continue to advance American 

interests abroad when engaging with international standard setting 

bodies such as The Committee on Payments and Market Infrastructures 

of the International Organization of Securities Commissions (CPMIIOSCO) and Financial Stability Board’s (FSB’s) work streams. 

CFTC, SEC, 

FRB, FDIC

E

A Financial System That Creates Economic Opportunities • Capital Markets

Appendix B • Table of Recommendations

217
Regulatory Structure and Processes

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Restoration of Exemptive Authority

Treasury recommends that Congress restore the CFTC’s and SEC’s full 

exemptive authority and remove the restrictions imposed by Dodd-Frank.

Congress F, G

Improving Regulatory Policy Decision Making

Treasury reaffirms the recommendations for enhanced use of regulatory 

cost-benefit analysis discussed in the Banking Report for the SEC and 

the CFTC.

CFTC, 

SEC

C, F, G

Treasury recommends that the CFTC and the SEC, when conducting 

rulemakings, be guided by the Core Principles for financial regulation 

laid out in Executive Order 13772, as well as the principles set forth in 

Executive Orders 12866 and 13563, and that they update any existing 

guidance as appropriate.

CFTC, 

SEC

C, F, G

Treasury recommends that the agencies take steps, as part of their 

oversight responsibilities, so that self-regulatory organization (SRO) 

rulemaking take into account, where appropriate, economic analysis 

when proposed rules are developed at the SRO level.

CFTC, 

SEC

C, F, G

Treasury recommends that the CFTC and the SROs issue public 

guidance explaining the factors they consider when conducting 

economic analysis in the rulemaking process.

CFTC, 

SROs

C, F, G

Treasury encourages the CFTC and the SEC to make fuller use of 

their ability to solicit comment and input from the public, including by 

increasing their use of advance notices of proposed rulemaking to better 

signal to the public what information may be relevant.

CFTC, 

SEC

C, F, G

Treasury recommends that the CFTC and the SEC conduct regular, 

periodic reviews of agency rules for burden, relevance, and other factors.

CFTC, 

SEC

C, F, G

Treasury supports the goals of principles-based regulation and 

recommends that the SEC and the CFTC consider using this approach, 

to the extent appropriate and consistent with applicable law.

CFTC, 

SEC

F, G

Treasury believes that the CFTC and the SEC should continue their 

joint outcomes-based effort to harmonize their respective rules and 

requirements, as well as cross-border application of such rules and 

requirements.

CFTC, 

SEC

D, E, F, G

Treasury recommends that the CFTC and the SEC avoid imposing new 

requirements by no-action letter, interpretation, or other form of guidance 

and consider adopting Office of Management and Budget’s Final Bulletin 

for Agency Good Guidance Practices.

CFTC, 

SEC

C, F, G

A Financial System That Creates Economic Opportunities • Capital Markets

Appendix B • Table of Recommendations

218
Regulatory Structure and Processes

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Improving Regulatory Policy Decision Making

Treasury recommends that the CFTC and the SEC take steps to ensure 

that guidance is not being used excessively or unjustifiably to make 

substantive changes to rules without going through the notice and 

comment process. 

CFTC, 

SEC

C, F, G

Treasury recommends that the CFTC and the SEC review existing 

guidance and revisit any guidance that has caused market confusion and 

compliance challenges.

CFTC, 

SEC

C, F, G 

Treasury recommends that the agencies undertake a review and update 

the definitions so that the Regulatory Flexibility Act analysis appropriately 

considers the impact on persons who should be considered small 

entities.

CFTC, 

SEC

C, F, G 

Self-Regulatory Organizations

Treasury recommends that the CFTC and the SEC conduct 

comprehensive reviews of the roles, responsibilities, and capabilities 

of the SROs under their respective jurisdictions and make 

recommendations for operational, structural, and governance 

improvements of the SRO framework.

CFTC, 

SEC

C, F, G

Treasury recommends that the agencies identify any changes to 

underlying laws or rules that are needed to enhance oversight of SROs.

CFTC, 

SEC

C, F, G

Treasury recommends that each SRO adopt and publicly release an 

action plan to review and update its rules, guidance, and procedures on 

a periodic basis.

SROs C, F, G

A Financial System That Creates Economic Opportunities • Capital Markets

Appendix B • Table of Recommendations

219
International Aspects of Capital Market Regulation

Recommendation

Policy Responsibility Core 

Principle Congress Regulator

Treasury recommends that U.S. regulators and Treasury sustain and 

develop technical level dialogues with key partners, informed by previous 

outreach to industry, to address conflicting or duplicative regulation.

CFTC, 

FDIC, FRB, 

OCC, SEC, 

Treasury

D, E

Treasury recommends that U.S. regulators seek to reach outcomesbased, non-discriminatory substituted compliance arrangements with 

other regulators or supervisors with the goal of mitigating the effects of 

regulatory redundancy and conflict when it is justified by the quality of 

foreign regulation, supervision, and enforcement regimes, paying due 

respect to the U.S. regulatory regime.

CFTC, SEC D

Treasury recommends that U.S. members of standard-setting bodies 

(SSBs) continue to advocate for and shape international regulatory 

standards aligned with domestic financial regulatory objectives.

CFTC, 

FDIC, FRB, 

OCC, SEC, 

Treasury

E

Treasury recommends that U.S. agencies should continue to regularly 

coordinate policy before as well as after international engagements.

CFTC, 

FDIC, FRB, 

OCC, SEC, 

Treasury

E

Treasury recommends that U.S. agencies to work in international 

organizations to elevate the quality of stakeholder consultation globally.

CFTC, 

FDIC, FRB, 

OCC, SEC, 

Treasury

D, E

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Appendix B • Table of Recommendations

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2017-04856 (Rev. 1) • Department of the Treasury • Departmental Offices • www.treasury.gov