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A REVIEW OF FIXED INCOME 

MARKET STRUCTURE 

HEARING 

BEFORE THE

SUBCOMMITTEE ON CAPITAL MARKETS, 

SECURITIES, AND INVESTMENT 

OF THE

COMMITTEE ON FINANCIAL SERVICES 

U.S. HOUSE OF REPRESENTATIVES 

ONE HUNDRED FIFTEENTH CONGRESS 

FIRST SESSION 

JULY 14, 2017 

Printed for the use of the Committee on Financial Services 

Serial No. 115–30 

( 

(II) 

HOUSE COMMITTEE ON FINANCIAL SERVICES 

JEB HENSARLING, Texas, Chairman 

PATRICK T. MCHENRY, North Carolina, 

Vice Chairman 

PETER T. KING, New York 

EDWARD R. ROYCE, California 

FRANK D. LUCAS, Oklahoma 

STEVAN PEARCE, New Mexico 

BILL POSEY, Florida 

BLAINE LUETKEMEYER, Missouri 

BILL HUIZENGA, Michigan 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

RANDY HULTGREN, Illinois 

DENNIS A. ROSS, Florida 

ROBERT PITTENGER, North Carolina 

ANN WAGNER, Missouri 

ANDY BARR, Kentucky 

KEITH J. ROTHFUS, Pennsylvania 

LUKE MESSER, Indiana 

SCOTT TIPTON, Colorado 

ROGER WILLIAMS, Texas 

BRUCE POLIQUIN, Maine 

MIA LOVE, Utah 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

LEE M. ZELDIN, New York 

DAVID A. TROTT, Michigan 

BARRY LOUDERMILK, Georgia 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MacARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

DAVID KUSTOFF, Tennessee 

CLAUDIA TENNEY, New York 

TREY HOLLINGSWORTH, Indiana 

MAXINE WATERS, California, Ranking 

Member 

CAROLYN B. MALONEY, New York 

NYDIA M. VELA ́ ZQUEZ, New York 

BRAD SHERMAN, California 

GREGORY W. MEEKS, New York 

MICHAEL E. CAPUANO, Massachusetts 

WM. LACY CLAY, Missouri 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

AL GREEN, Texas 

EMANUEL CLEAVER, Missouri 

GWEN MOORE, Wisconsin 

KEITH ELLISON, Minnesota 

ED PERLMUTTER, Colorado 

JAMES A. HIMES, Connecticut 

BILL FOSTER, Illinois 

DANIEL T. KILDEE, Michigan 

JOHN K. DELANEY, Maryland 

KYRSTEN SINEMA, Arizona 

JOYCE BEATTY, Ohio 

DENNY HECK, Washington 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

CHARLIE CRIST, Florida 

RUBEN KIHUEN, Nevada 

KIRSTEN SUTTON MORK, Staff Director 

(III) 

SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES, AND INVESTMENT

BILL HUIZENGA, Michigan, Chairman 

RANDY HULTGREN, Illinois, Vice Chairman 

PETER T. KING, New York 

PATRICK T. MCHENRY, North Carolina 

SEAN P. DUFFY, Wisconsin 

STEVE STIVERS, Ohio 

ANN WAGNER, Missouri 

LUKE MESSER, Indiana 

BRUCE POLIQUIN, Maine 

FRENCH HILL, Arkansas 

TOM EMMER, Minnesota 

ALEXANDER X. MOONEY, West Virginia 

THOMAS MacARTHUR, New Jersey 

WARREN DAVIDSON, Ohio 

TED BUDD, North Carolina 

TREY HOLLINGSWORTH, Indiana 

CAROLYN B. MALONEY, New York, 

Ranking Member 

BRAD SHERMAN, California 

STEPHEN F. LYNCH, Massachusetts 

DAVID SCOTT, Georgia 

JAMES A. HIMES, Connecticut 

KEITH ELLISON, Minnesota 

BILL FOSTER, Illinois 

GREGORY W. MEEKS, New York 

KYRSTEN SINEMA, Arizona 

JUAN VARGAS, California 

JOSH GOTTHEIMER, New Jersey 

VICENTE GONZALEZ, Texas 

(V) 

C O N T E N T S 

Page 

Hearing held on: 

July 14, 2017 ..................................................................................................... 1 

Appendix: 

July 14, 2017 ..................................................................................................... 31 

WITNESSES 

FRIDAY, JULY 14, 2017 

Andresen, Matthew F., Founder and CEO, Headlands Technologies, LLC ........ 5 

Crane, Jonah, former Deputy Assistant Secretary for the Financial Stability 

Oversight Council (FSOC), U.S. Department of the Treasury ......................... 10 

Sedgwick, Alexander, Vice President and Head of Fixed Income Market Structure and Electronic Trading, T. Rowe Price ...................................................... 8 

Shay, John, Senior Vice President and Global Head of Fixed Income and 

Commodities, Nasdaq .......................................................................................... 6 

Snook, Randolph, Executive Vice President, Securities Industry and Financial 

Markets Association (SIFMA) ............................................................................. 11 

APPENDIX 

Prepared statements: 

Andresen, Matthew F. ...................................................................................... 32 

Crane, Jonah ..................................................................................................... 43 

Sedgwick, Alexander ........................................................................................ 52 

Shay, John ......................................................................................................... 65 

Snook, Randolph ............................................................................................... 82 

ADDITIONAL MATERIAL SUBMITTED FOR THE RECORD

Huizenga, Hon. Bill: 

SIFMA chart entitled, ‘‘Figure 1. Issuance in the U.S. Bond Markets, 

May 2017 (in $ billions)’’ .............................................................................. 112 

Letter from the Depository Trust & Clearing Corporation, dated July 

18, 2017 .......................................................................................................... 113 

(1) 

A REVIEW OF FIXED INCOME 

MARKET STRUCTURE 

Friday, July 14, 2017 

U.S. HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES, AND INVESTMENT, COMMITTEE ON FINANCIAL SERVICES, Washington, D.C. 

The subcommittee met, pursuant to notice, at 9:20 a.m., in room 

2128, Rayburn House Office Building, Hon. Bill Huizenga [chairman of the subcommittee] presiding. 

Members present: Representatives Huizenga, Hultgren, Messer, 

Poliquin, Hill, Emmer, Mooney, Davidson, Budd, Hollingsworth; 

Maloney, Lynch, Himes, Foster, Sinema, and Vargas. 

Ex officio present: Representative Hensarling. 

Chairman HUIZENGA. The Subcommittee on Capital Markets, Securities, and Investment will come to order. And we are very, very 

pleased that we have this great panel ahead of us here. 

Without objection, the Chair is authorized to declare a recess of 

the subcommittee at any time. 

Today’s hearing is entitled, ‘‘A Review of Fixed Income Market 

Structure.’’ And as I had said to the witnesses, there is Floor activity that is happening right now, so you may see a few Members 

ducking in and out as they have to go down to the Floor, addressing issues there, or to another meeting, and we will just have to 

see how we are playing out here with our timing for votes and 

those kinds of things. 

But I deeply appreciate your time here, gentlemen. 

At this point, I will now recognize myself for 3 minutes to give 

an opening statement. 

The United States has the deepest, strongest, most liquid capital 

markets in the world, and the fixed income market is one of the 

largest sources of capital for issuers and investment opportunities 

for a broad array of savers and investors. While lesser known to 

some investors, the fixed income market is nearly twice as large as 

the equity markets, and it differs significantly. Fixed income serves 

as a vital source of funding for companies and provides capital for 

them to grow and create jobs as well as funding for local infrastructure projects such as roads and bridges. Additionally, the fixed income markets help provide opportunities for savers and investors 

ranging from first-time home buyers to seniors seeking opportunities for a more stable stream of income. 

According to the Securities Industry and Financial Markets Association, the total outstanding fixed income debt is nearly $40 trilVerDate Nov 24 2008 13:54 May 01, 2018 Jkt 028749 PO 00000 Frm 00007 Fmt 6633 Sfmt 6633 K:\DOCS\28749.TXT TERI
2 

lion, with a ‘‘T,’’ with new issuances between $6 trillion and $7 trillion per year over the last 5 years. On average, $775 billion of securities are traded each and every day. 

Today’s hearing will focus on the current market structure and 

potential ways to improve the transparency, liquidity, efficiency, 

and other aspects of fixed income markets. Since fixed income markets are different than equity markets, they should have a regulatory structure that appropriately reflects the market’s unique 

characteristics. 

We will review both the current domestic and international regulatory regime for fixed income markets, liquidity, data transparency for fixed income asset classes, and increased deployment of 

technology and electronic trading platforms in fixed income products. 

Our witnesses will also review components that are working well 

in the fixed income market, components that need improvement, 

and components that may negatively impact the market’s optimal 

functionality. The objective of this hearing is to provide this subcommittee with the background and foundation to examine the optimal design of the fixed income market based on today’s market 

conditions. 

In a July 12th speech, I was pleased to hear Securities and Exchange Commission Chairman Jay Clayton say, ‘‘The time is right 

for the SEC to broaden its review of market structure to include 

specifically the efficiency, transparency, and effectiveness of our 

fixed income markets. As waves of Baby Boomers retire every 

month and need investment options, fixed income products, which 

are viewed as a stable place to store hard-earned money, will attract more and more Main Street investors. The Commission must 

explore whether these are as efficient and resilient as we expect 

them to be, scrutinize our regulatory approach, and identify opportunities for improvement. To that end, I have asked the staff to develop a plan for creating a fixed income market structure advisory 

committee, like the EMSEC. This committee would be made up of 

a diverse group of outside experts who will be asked to give advice 

to the Commission on regulatory issues impacting fixed income 

markets.’’ 

I can just say this: Bravo. 

This is an area where we can put partisan politics aside, and I 

believe that the SEC and Congress can work together to make sure 

that the fixed income market is performing optimally for all investors and the economy. 

I look forward to hearing from our witnesses today. 

At this time, the Chair now recognizes the ranking member of 

the subcommittee, the gentlelady from New York, Mrs. Maloney, 

for 5 minutes for an opening statement. 

Mrs. MALONEY. I thank the gentleman for calling this important 

oversight committee. And we have an outstanding group of panelists today. 

This hearing will address the market structure of the corporate 

bond market, the Treasury market, and the municipal bond market. Bond markets are incredibly important to our economy. The 

corporate bond market allows companies of all sizes to raise capital 

to expand their businesses, hire more employees, or invest in new 

3 

equipment. And the Treasury and municipal bond markets allow 

governments to finance their day-to-day activities at a very loss 

cost to taxpayers. 

U.S. companies raised over $1.5 trillion in the bond markets in 

2016, the fifth consecutive year of record issuance, and the Federal 

Government raised about $2.2 trillion in the Treasury market in 

2016. With so much money at stake, it is important to ensure that 

the secondary market for these bonds is robust and efficient. 

A couple of weeks ago, this subcommittee examined the market 

structure of the U.S. stock market, so it is only logical that we also 

examine the structure of the bond markets as well. And what we 

find is that the market structure of these markets, the stock market and the bond markets, are as different as night and day. The 

stock market is a highly electronic, mostly exchange-traded market, made up of mom-and-pop retail investors, institutional investors like mutual funds and pension funds, banks, and brokers, and 

high-frequency trading firms. Trades in the stock market happen 

so fast that they are measured in microseconds, which is one onemillionth of a second. This is largely because stocks are highly 

standardized. One share of Apple is interchangeable with another 

share of Apple, and there are so many shares outstanding. 

In contrast, the corporate bonds are not standardized at all. A 

big U.S. company, like GE, has around 900 different bonds outstanding, each with different terms, maturity dates, so trading is 

much more fragmented in corporate bonds. 

As a result, corporate bonds don’t trade on centralized exchanges 

like stocks. Instead, they trade through banks acting as dealers. 

Dealers hold large inventories of bonds so that when an investor 

like a mutual bond wants to buy a particular corporate bond, the 

dealer can sell them and that bond out of its own inventory. So, 

in corporate bonds, it is the dealers who are responsible for maintaining an orderly liquid market. 

The structure of the Treasury market is somewhere in between 

the stock market and the corporate bond market. Treasuries are 

much more standardized than corporate bonds. All Treasury bonds 

are issued by the same issuer. The Treasury Department and the 

terms are not customized. The Treasury Department mostly issues 

the same 2-year, 5-year, 10-year, and 30-year bonds over and over 

again. Because of this standardization, the Treasury market has 

become significantly more electronic and significantly faster in the 

past decade. 

It is still a dealer-based market like the corporate bond market, 

but those dealers now include a lot of high-frequency trading firms. 

And when dealers trade with each other, it is done almost entirely 

electronically now. But when dealers trade with their customers, 

the mutual funds and pension funds that buy and hold Treasury 

securities, they still trade over the phone like in corporate bonds. 

This trend toward more electronic, high-speed trading in trading 

and Treasuries has likely made the Treasury market more efficient 

but also more fragile, which is worrying. 

But I want to make two points before we hear from our witnesses. First, for all its flaws, the Treasury market is still the largest, deepest, and most liquid bond market in the world. This allows 

4 

the Federal Government to borrow at extremely low interest rates, 

which ultimately saves money for taxpayers. 

So we need to be very careful before we make changes to the 

Treasury market, because if we get it wrong, then taxpayers will 

end up footing the bill. 

Second, the corporate bond market has never been and likely 

never will be a very liquid market. So while it is important to monitor the health of this market, we shouldn’t fool ourselves into believing that corporate bonds will ever be anywhere near as liquid 

as stocks or even Treasury bonds. 

With that, Mr. Chairman, I look forward to hearing from our witnesses, and I thank you for holding so many substantive and important oversight hearings. 

Chairman HUIZENGA. The gentlelady yields back. 

The Chair now recognizes the vice chairman of the subcommittee, the gentleman from Illinois, Mr. Hultgren, for 2 minutes. 

Mr. HULTGREN. I would also like to thank Chairman Huizenga 

for holding so many important hearings. It has been a busy couple 

of days, but it’s really important for us to tackle the challenges facing our markets, especially reassessing some of the policy responses made by Washington during the financial crisis. We have 

spent a lot of time debating the modernization of our equity markets but our fixed income markets should not get overlooked. And 

while we can draw lessons from the modernization of our equity 

market structure, we must also be cognizant of the inherent differences between these financial products and markets. 

I was very encouraged to see Chairman Clayton state in his 

speech before the Economic Club of New York earlier this week 

that he would like the Securities and Exchange Commission to be 

more focused on fostering the development of the our fixed income 

markets and ensuring investors have access to products with reliable returns. 

I also applaud his proposal to create a fixed income structure advisory committee similar to the Equity Market Structure Advisory 

Committee formed by his predecessor. For this to be an effective 

committee it will, of course, need to include the right perspective 

of market participants, such as small- and middle-market dealers. 

It will also need a strong mechanism for making recommendations 

to the Commission so that its work won’t go overlooked. 

Finally, I would be remiss not to mention that, in addition to 

serving as vice chairman of this subcommittee, I serve as co-Chair 

of the Municipal Finance Caucus in Congress. 

Our work is generally focused on preserving the tax-exempt status of municipal bonds, which I believe is foundational for States 

and local governments, especially smaller issuers, for accessing of 

the capital markets. Through this work, I have had the opportunity 

to hear the perspective of dozens of market participants, and I look 

forward to weighing this against the recommendations that will be 

made before this subcommittee today. 

Thank you, again, to all of our witnesses. And I yield back. 

Chairman HUIZENGA. The gentleman yields back. 

And today, we have a great panel in front of us. The challenge 

with us doing this on a fly-out day is when everybody is trying to 

5 

escape Oz. We are trying to get back home, but that means votes 

are getting moved around a little bit. We have just gotten a notice 

that votes will be somewhere between 10:25 and 10:40, and we are 

going to be on the Floor for about 1 hour and 15 minutes. And so 

if any of the witnesses would care to shorten up their opening 

statement, that would be appreciated so that we can get to questions. 

I will note that your written testimony is submitted for the 

record as well, and you will each be recognized for 5 minutes. But 

if you have the ability to shorten it up, that will be appreciated. 

We have Mr. Matt Andresen, who is the founder and CEO of 

Headlands Technologies, LLC; Mr. John Shay, who is the senior 

vice president and global head of fixed income and commodities at 

Nasdaq; Mr. Alexander Sedgwick, who is the vice president and 

head of fixed income market structure in electronic trading with T. 

Rowe Price, on behalf of the Investment Company Institute; Mr. 

Jonah Crane, former Deputy Assistant Secretary for the Financial 

Stability Oversight Council (FSOC), U.S. Treasury Department; 

and Mr. Randy Snook, executive vice president, Securities Industry 

and Financial Markets Association. 

So, gentlemen, we appreciate you being here. 

And, with that, Mr. Andresen, you are recognized now. 

STATEMENT OF MATTHEW F. ANDRESEN, FOUNDER AND CEO, 

HEADLANDS TECHNOLOGIES, LLC 

Mr. ANDRESEN. Thank you, Chairman Huizenga, Ranking Member Maloney, and members of the subcommittee. I am Matt 

Andresen, the CEO of Headlands Global Markets (HGM). We welcome this opportunity to present our views on fixed income market 

structure and, in particular, the secondary market for municipal 

bonds. HGM is an SEC-registered FINRA member broker-dealer. It 

launched its municipal bond trading in 2014 and uses proprietary 

models to trade bonds electronically. 

HGM is a widely recognized muni market participant, executing 

close to 1,000 trades a day with over 400 counterparties, ranking 

as a top participant on all major market platforms. 

In addition to HGM, I am also CEO of its affiliate, Headlands 

Technologies, one of the largest global trading firms in more liquid 

securities. 

Before founding HGM, I was co-CEO of Citadel Securities. Prior 

to that, I was CEO of Island, the largest electronic equities market 

in the U.S. at that time. Currently, I serve on the SEC’s aforementioned Equity Market Structure Advisory Committee. 

Last year, $458 billion in municipal bonds were issued by local 

governments. Most carry tax advantages, making them an attractive vehicle for retail investors. In fact, retail holds an estimated 

75 percent of municipal bonds. Retail investors also trade in the 

secondary market. Last year, 47 percent of secondary market 

trades were for 25 bonds or less, indicating active retail participation. 

The secondary market is a dealer market. Investors interested in 

buying or selling a bond need to contact a dealer for pricing information. Public post-trade pricing data is of limited use to investors 

if the bond of interest has not traded recently, which is usually the 

6 

case. And due to the abundance in diversity of municipal bonds— 

there are approximately a million unique municipal bonds today 

compared to only 3,800 listed equities—investors often struggle to 

identify comparable bonds, making investors dependent on dealers 

for pricing information. 

The market has seen several recent areas of improvement, however, such as the increased use of bid-wanted auctions, implementation of best execution rules, and the forthcoming markup/markdown disclosure requirements. Notwithstanding these positive developments, there are still areas in need of improvement. We share 

the committee’s excitement about SEC Chairman Clayton’s call this 

week for a broad review of fixed income markets. 

We are going to highlight three areas ripe for improvement. 

First, there is the problematic practice of filtering. Filtering occurs 

when a broker-dealer, handling its own retail customer’s order, requests a quote and starts an ATS auction but filters out responses 

from specified dealers. Filters are used in ways that restrict market participation, resulting in investors not receiving the best available price. 

Second, there is the anticompetitive practice of a trade-through, 

which occurs when a retail broker-dealer initiates an auction for a 

customer but then ignores the results, purchasing the bonds from 

its customer for its own account at a lower price than the winning 

bid in the auction. This practice is harmful because it results in 

bonds sold at inferior prices than those that were available at the 

time of the execution. 

Finally, there is Last Look, where the submitting broker-dealer 

observes the prices in their completed auction and then purchases 

the bond from the customer at a price equal to or slightly better 

than the winning bid, even though MSRB rule G–43 appears to 

prohibit such practice. This practice harms competitiveness by deterring aggressive pricing by other dealers who know the submitting dealer may step in front of their winning price. 

We are hopeful that the competitiveness and transparency of 

these markets will continue to improve as more attention is paid 

to these problematic areas and as recently enacted rules, such as 

best execution and markup/markdown disclosure, are implemented 

and appropriately enforced. 

We appreciate the subcommittee’s attention to these important 

issues. Thank you. 

[The prepared statement of Mr. Andresen can be found on page 

32 of the appendix.] 

Chairman HUIZENGA. Thank you very much. 

Mr. Shay, you now are recognized. 

STATEMENT OF JOHN SHAY, SENIOR VICE PRESIDENT AND 

GLOBAL HEAD OF FIXED INCOME AND COMMODITIES, 

NASDAQ 

Mr. SHAY. Thank you, Chairman Huizenga, Ranking Member 

Maloney, and members of the subcommittee for the opportunity to 

testify today on fixed income market structure. The market for U.S. 

Treasury securities is widely recognized to be the most liquid and 

consequential market in the U.S., and the U.S. Treasury bond reflects the stability of the United States and our Nation’s strength. 

7 

However, the market could benefit from greater transparency, organization, and efficiency. 

Nasdaq applauds SEC Chairman Clayton’s call this week to form 

a market structure advisory committee to help the SEC study and 

understand the evolution of these important markets. 

Nasdaq has extensive experience operating markets, and with 

Nasdaq fixed income, our lineage as the first electronic trading 

platform, we operate one of the largest and most liquid fixed income cash markets in the world. 

Currently, our client profile features 112 institutional clients, including 23 primary dealers. We offer trading through our SEC-registered ATS and FINRA-regulated broker-dealer entity, utilizing an 

anonymous, fully electronic central limit order book using pricetime priority. 

Nasdaq’s analysis of market structure reforms is driven by the 

application of core principles derived from this experience. Nasdaq 

believes that the market for U.S. Treasuries can be significantly 

improved on each of the following measures: one, the transparency 

benefits all market participants; two, regulation must be clear, consistent, and technologically driven; three, competition must be on 

a level playing field; four, equal access to trading promotes efficiency; and five, all investors are entitled to a fair deal. 

These markets are evolving, and they are becoming more fragmented and segregated and subject to uneven and uncertain regulation and enforcement. Therefore, Nasdaq recommends the following basic improvements to better serve market participants and 

to protect investors: Transparency. TRACE reporting to FINRA 

was a positive step, just begun this past Monday. The further evolution toward a comprehensive centralized reporting mechanism is 

absolutely critical. Nasdaq does not support radical change in this 

area. We prefer a cautious and incremental track toward regulatory reform. 

On October 15, 2014, the current market structure as we know 

it today experienced an unusually high level of volatility and significant price movements. It is important to state that such events 

are not common in the U.S. Treasury markets. 

As an operator of one of the primary U.S. Treasury venues, 

Nasdaq could not evaluate the liquidity and/or efficacy of the entire 

market either in real time or on a delayed basis then or today. 

October 15th prompted 5 Federal agencies to review the day’s 

events along with trading data. The resulting findings report, published on July 13, 2015, noted that while banks and nonbanks continued to execute transactions, it was the nonbank firms that represented more than half of the traded volume that day. 

Recommendation number two is to impose minimum regulatory 

requirements in all venues to ensure fair and orderly markets. 

Well-functioning markets must be transparent, fair, and orderly. 

This requires uniform minimum regulatory standards across all 

trading venues. 

For example, rules similar to Regulation SCI would ensure that 

participants in the U.S. Treasury markets develop systems with 

sufficient capacity, resiliency, availability, and security to minimize 

the occurrence of disruptive systems issues. It is critical that trading venues do their part to keep bad actors out of the Treasury 

8 

market. NFI is operated by a FINRA-regulated broker-dealer and 

NSCC-registered ATS, and upholds its duties through a vetting 

process that includes robust know-your-customer and anti-money 

laundering monitoring standards under the USA PATRIOT Act. 

NFI uses a third-party vendor to investigate each customer by 

comparing their information against 120-plus government-managed 

lists and websites for any negative information. NFI does not allow 

any access to the ATS prior to confirmation or clearance. NFI engages the same vendor to conduct continuous monitoring of customers and receives alerts when negative news is obtained. 

In summary, we strongly advocate for the standardization of regulatory standards and surveillance practices across all U.S. Treasury venues. Each U.S. Treasury venue should perform similar monitoring surveillance for the activity related to that venue. 

Recommendation number three is to reduce systemic risk by requiring cost-effective clearing of all transactions, be it centralized 

or through an interoperable model. The clearing market structure, 

in our view, has fallen behind the realities of automated trading. 

The lack of a centralized clearing solution poses material 

counterparty risks to the market and leads to the following: less 

transparency as to the size of exposure; concentration risks; clients 

having to post collateral at multiple venues; and a decentralized 

default management process that is cumbersome and prone to 

delays and errors. 

We appreciate the opportunity to testify on these important 

issues. I am happy to answer your questions. 

[The prepared statement of Mr. Shay can be found on page 65 

of the appendix.] 

Chairman HUIZENGA. Thank you very much. 

Mr. Sedgwick, you are now recognized. 

STATEMENT OF ALEXANDER SEDGWICK, VICE PRESIDENT 

AND HEAD OF FIXED INCOME MARKET STRUCTURE AND 

ELECTRONIC TRADING, T. ROWE PRICE 

Mr. SEDGWICK. Thank you, Chairman Huizenga, Ranking Member Maloney, and members of the subcommittee, for inviting me to 

testify today. My name is Alexander Sedgwick, and I am the head 

of fixed income market structure and electronic trading at T. Rowe 

Price, a global investment management firm with about $860 billion in assets under management. I am also appearing at this hearing as a member of the Investment Company Institute, a leading 

global organization of regulated funds. 

We greatly appreciate the subcommittee’s continuing interest in 

ensuring the quality and integrity of the fixed income markets. 

These markets provide a critical source of capital for companies 

and governments, facilitating job creation in corporate America, financing municipal infrastructure projects, and providing a vital 

funding mechanism for the Federal Government. 

The funds offered by T. Rowe Price and other ICI members play 

a significant role in this capital formation process by investing on 

behalf of millions of retail investors saving for their long-term financial goals, such as purchasing a home, paying for college, or 

funding their retirement. 

9 

Enhancing the transparency, liquidity, and overall functioning of 

these markets is particularly important because fixed income market dynamics affect our ability to deliver on investment mandates. 

And so we applaud the subcommittee for holding this hearing. 

In my written statement, I outline the evolution of the U.S. Government bond market, not because I think members of this subcommittee need that history lesson, but because it illustrates how 

fixed income market structure evolves, and it speaks to two important points. 

Fixed income securities can and indeed historically have traded 

in a variety of ways. Further, the development of fixed income market structure has not been linear, but it has been influenced by the 

changing needs of market participants, including issuers, buyers 

and sellers, and liquidity providers. 

The result is that the fixed income market is a collection of diverse sectors, each with its own unique structure, the largest and 

most liquid of which is the U.S. Treasury market. 

One thing I would like to note is that many of the studies focused on the Treasury market being constrained by a lack of market data. A 2015 study done by the staff of the New York Fed concluded that the liquidity is in line with historical standards. While 

we generally agree with this conclusion, along with the joint staff 

report in 2014 on the flash event, both of these reports relied on 

data provided by interdealer trading platforms, which highlights 

the need for a more comprehensive source of information in this 

market. 

As a result, both T. Rowe Price and ICI are supportive of the regulatory reporting of Treasury trades, which began earlier this 

week. 

Before discussing the corporate bond market, I would like to consider transparency more broadly. Buy-sized firms have a range of 

strong views on transparency and public dissemination of trade 

data. T. Rowe Price has been and continues to be broadly supportive of greater transparency in fixed income markets, although 

we recognize risks in this regard. 

We encourage regulators to thoughtfully consider requirements 

to foster transparency and implement those requirements in phases 

with regular periods of review to minimize any unintended consequences for market participants as well as any market dislocations. 

This kind of careful approach can produce a transparency regime 

that appropriately balances the benefits and risks of additionally 

transparency. 

Turning now to the credit markets, there’s been no shortage of 

commentary regarding the current state of liquidity. At T. Rowe 

Price, we have an optimistic long-term view. We believe that a 

modest increase in both yields and volatility may result in several 

constructive developments, including increased interests from longterm investors, similar to what we saw during the 2013 taper tantrum; buyers and sellers developing differing views of value, which 

is critical to creating two-way and more vibrant markets; and widening bid offer spreads, which would entice market makers to allocate capital to liquidity provision. 

10 

We are also excited about the continued development of greater 

electronification. While less ubiquitous than other markets, e-trading continues to grow steadily in corporate credit markets. T. Rowe 

Price believes that removing obstacles to further electronification 

will improve price discovery and facilitate best execution. 

Moreover, given the recent proliferation of e-trading platforms, 

regulators may consider standardized reporting for Treasury—for 

trading volumes, which would help market participants evaluate 

which platform meets their trading needs. 

As I said at the outset, the fixed income markets play an important role in helping millions of Americans save and invest, and enhancing the structure of these markets is critical to their success. 

We greatly appreciate the subcommittee’s time and their continuing interest in these issues. Thank you. 

[The prepared statement of Mr. Sedgwick can be found on page 

52 of the appendix.] 

Chairman HUIZENGA. Thank you very much. 

Mr. Crane, you are recognized for 5 minutes. 

STATEMENT OF JONAH CRANE, FORMER DEPUTY ASSISTANT 

SECRETARY FOR THE FINANCIAL STABILITY OVERSIGHT 

COUNCIL (FSOC), U.S. DEPARTMENT OF THE TREASURY 

Mr. CRANE. Thank you, Chairman Huizenga, Ranking Member 

Maloney, and members of the subcommittee for inviting me to participate in today’s hearing. 

I was sitting in the Treasury Department on October 15, 2014, 

when somewhere around 9:30 in the morning, all of our phones 

started to blow up with several alerts. And we looked down and 

saw price alerts about the Treasury market. And after shouting 

several expletives, we gathered around a Bloomberg terminal and 

tried to figure out what was going on. And the reality is, we 

couldn’t figure out what was going on. We couldn’t figure out what 

was going on that morning, and it took five agencies several 

months to figure out what had happened that day. 

So, following October 15th, an interagency group of five agencies 

got together and conducted what was the most comprehensive review of Treasury market structure in about 20 years and made several recommendations. Those recommendations will be reflected in 

my written testimony, and I will get to them very shortly. 

Broadly speaking, I think what you are hearing consistently 

across the panel is that fixed income markets are undergoing a period of transition. It is not necessarily a recent transition. It is not 

necessarily limited to fixed income. And it certainly is not proceeding all at one speed. 

Nonetheless, there is clearly a big transition on the way. The big 

theme is electronification of financial markets. This occurred in 

other markets, beginning with equities and futures in the 1990s, 

moving into foreign exchange, and at this point, it is moving into, 

really, all areas, even the fixed income markets. 

I would just echo the chairman and the ranking member, who 

noted that it is important to think about the unique characteristics 

of the underlying market when thinking about the ways that a policy framework should shape the evolution of this trend in the different markets. 

11 

With respect to even just the Treasury market, the Treasury 

market itself remains pretty bifurcated between, really, a dealer 

market on the one hand and a client market on the other hand. 

When end users, like mutual funds and insurance companies, want 

to trade Treasuries, they still generally do so exclusively through 

dealers and bilateral transactions. And the interdealer market, 

which has opened up in the past decade to nonbank dealers like 

principal trading firms, you have really seen a full evolution into 

markets with predominant high-frequency trading now accounting 

for the majority of trading in the interdealer market. 

So the evolution of electronification, even within the Treasury 

markets, is really running at two speeds. And I think the recommendations that the interagency working group made and that 

I will echo today really will achieve a couple of things. One, they 

will bring new competition into the Treasury market or facilitate 

the continued entry of new competitors into the Treasury market. 

And you could see a broader, more diverse spectrum of liquidity 

provision across the Treasury market, which I think would create 

a healthy echo system over time. 

Two, it will improve resilience in the market. I think some of the 

recommendations that you heard Mr. Shay discuss and some of the 

recommendations that the interagency working group discussed 

would bring important stability and confidence to the market. The 

recommendations specifically here were registration of market participants, registration of minimum standards for trading venues. 

And I think those are important improvements that will help to 

modernize the oversight of the Treasury market. 

I will end there and leave the rest of my testimony to be submitted for the record, and I look forward to answering your questions. Thank you. 

[The prepared statement of Mr. Crane can be found on page 43 

of the appendix.] 

Chairman HUIZENGA. Thank you very much. 

And Mr. Snook, you are recognized for 5 mines. 

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

Mr. SNOOK. Chairman Huizenga, Ranking Member Maloney, and 

distinguished members of the subcommittee, thank you for providing me the opportunity to testify today on behalf of SIFMA and 

to share our views on the structure and the health of the U.S. fixed 

income securities markets. 

The U.S. fixed income markets are truly without parallel, with 

nearly $40 trillion in debt outstanding, and on average, over $775 

billion of securities traded each and every day. 

As the trade association representing a broad range of financial 

services firms active in all aspects of the fixed income markets, 

SIFMA is dedicated to promoting investor opportunity, access to 

capital, and an efficient market system that stimulates economic 

growth and job creation. 

Traditional bank lending is often pointed to by policymakers as 

the driver of economic growth, but we are here to highlight the 

12 

more significant source of financing that drives our economy: the 

capital markets. 

Bonds finance everything from home mortgages and car loans, to 

highways and schools, to factories and equipment, as well as the 

Federal Government itself. The bond market sets the interest rates 

for commercial and consumer lending and provides a safe and predictable investment for millions of Americans. 

The cumulative impact of post-crisis reforms must be studied and 

reconsidered to ensure our capital markets are providing funding 

in the most efficient way possible. 

This is particularly important since product credit extended to 

households and nonfinancial businesses has grown at a slower pace 

than in all recoveries in the past 60 years. SIFMA supports many 

of the post-crisis capital reform efforts and believes they have enhanced the overall resiliency of our capital market system. However, now is the time to review how those rules work together with 

a particular emphasis in determining where they may be impeding 

liquidity by targeting the same risk in multiple ways. 

A review should include the new liquidity and leverage requirements but also look at the effect of the interactions with the CCAR 

rules, Basel III capital rules, and single counterparty credit limits. 

We firmly believe that this sort of clear review of the potential 

costs of the current and additional requirements, which could limit 

the capital available for lending, should be undertaken. We are 

pleased to see that policymakers have begun to move in that direction. 

While trying to understand the state of liquidity, it is certainly 

helpful to understand the end users and investor points of view. In 

a 2014 and 2015 survey of corporate bond investors, Greenwich Associates asked about the ease of trading corporate bonds by size. 

In each year of the survey, 75 percent of the investors found it difficult or extremely difficult to execute or trade in block sizes of corporate bonds measured as $15 million and larger in size. 

Regulation does, indeed, impact liquidity. For example, the 

Volcker Rule’s limits on trading by banks in some cases constrain 

dealers’ ability to take on trading for dispositions and build inventory necessary for market making. Capital and leverage rules also 

limit dealers’ ability to finance positions held in inventory and can 

clearly limit their ability to commit to customer trades. 

Although just one of the markets discussed here this morning, 

the importance of the Treasury market or system to our economy 

cannot be overstated. This unique, resilient, and robust market 

serves multiple roles, including as the transmission mechanism for 

monetary policy, and as a safe haven investment, particularly during times of financial stress, and, most importantly, as a source of 

stable and efficient funding for the Federal Government. 

Given its importance, continued study of any potential changes 

is required to ensure the U.S. Treasury securities market remains 

the preeminent benchmark in the world. Any changes to regulation 

should be carefully calibrated to support both the resiliency and 

the role of the Treasury market and recognize the unique auction 

process that has allowed the Treasury to finance the government 

at extremely low cost to taxpayers. 

13 

We support the government’s program to collect secondary market transaction data, which began last week. Additional changes, 

however, including the public dissemination of that data, need further careful study, including a clear articulation of any potential 

benefits to the market to ensure no harm. 

In conclusion, SIFMA believes that policymakers have the ability 

to enhance economic activity through tailored recalibration of rules 

and regulations affecting our capital markets. This recalibration 

could help jump-start the economy without sacrificing financial stability. We very much appreciate the opportunity to present our 

views here today. We look forward to working with policymakers 

to help ensure that our capital markets continue to perform their 

vital functions and operate safely and efficiently to move America 

forward. 

I look forward to answering your questions. Thank you. 

[The prepared statement of Mr. Snook can be found on page 82 

of the appendix.] 

Chairman HUIZENGA. Thank you. 

And I thank each of you for your testimony. 

At this time, I will recognize myself for 5 minutes. And I am 

going to try to move rapidly through this and make sure we have 

time for the other Members here. 

Given the testimony today, I have heard a lot about transparency 

and fixed income markets. Mr. Shay, and Mr. Sedgwick, especially, 

you note in your testimony there is room for improvement in transparency and reporting in fixed income transactions, such as 

FINRA’s TRACE, Trade Reporting and Compliance Engine, reporting regime. Can you please explain how this is helpful to both regulators and the market participants? 

Mr. SHAY. Sure. I am happy to start. 

Without market data, and as we saw back in October of 2014 and 

as I think you have heard from testimony from members today, it 

took over a year for the regulators and the five different government agencies to come together with a proper understanding of 

what happened. And in my oral testimony today, I just mentioned 

as well that if there were to be another similar flash rally or ‘‘12 

minutes of fury,’’ as we called it, it would be very difficult for us 

as a venue to be able to diagnose what actually happened. It would 

be nearly impossible for the regulators. It would have to be another 

multi-month process. 

But during the crisis, I was working at a professional trading 

firm named Virtu Financial. And we were in the enviable position 

of having market data inputs from the various futures venues, 

from the cash venues, from the various direct venues that we were 

using to trade this product. And it was very easy for us to recreate 

what had happened. In fact, we had spent some time with both the 

Federal Reserve and Mr. Crane at Treasury reviewing our market 

data, but, of course, it had to be confirmed independently. And that 

took an enormous amount of time. 

And, certainly, in that period of time, Mr. Chairman, I think it 

would have been very helpful if the regulators—Treasury and the 

Fed—all had that data at their fingertips to be able to diagnose the 

problem. 

14 

Chairman HUIZENGA. Mr. Sedgwick, would you care to jump in 

on that? 

Mr. SEDGWICK. Thank you for the question, Mr. Chairman. 

I would say there are three main areas where transparency is 

important to us. The first is, as we are trying to deliver on our investment mandates, it allows us to identify relative value opportunities within the market. So the ability to look at where individual 

bonds have traded and the relative value from an investment perspective. 

I think, additionally, liquidity has been a topic that we have all 

talked about in our opening statements. I am sure it is something 

we will talk about further today, but it is really helpful in helping 

us identify where there are pockets of liquidity in this market. 

Of the 20,000 or so investment grade bonds, there may only be 

6,000 traded on a given day. It is important for us to understand 

which ones those are so we can frame up the market from that perspective. 

I think the final piece that I would point to in many respects is 

probably the most important, and that is we leverage TRACE data 

for trade cost analysis. That allows us to give transparency back 

to not only our portfolio managers internally but also our retail and 

institutional clients. 

Chairman HUIZENGA. So, again, I am hearing a lot about the 

transparency, and I know, Mr. Andresen, you talked a little bit 

about filters and Last Look and some other things. And, Mr. Shay, 

you had talked about—I think points number three and four were 

equal access and fair trades. 

Some have called for an electronic trading platform for fixed income lead in order to increase this transparency. Is that the right 

direction to go? 

Mr. ANDRESEN. I think, without question, it is. Americans insist 

on transparency in almost all of their economic transactions. If you 

own a house, and you are able to find out if anyone else in your 

neighborhood sold their house, what the price was. It is a matter 

of public record. Imagine trying to put your house up for sale and 

having no price discovery, no idea what prices may have been in 

the last 2 years, the last 3 years. 

Chairman HUIZENGA. So is that a vital piece, getting this electronic— 

Mr. ANDRESEN. I think, without question. In municipal bonds, we 

have the EMMA system, with which we can see every trade that 

happens as reported. It is reported in near real-time and is visible 

for all investors. This is a critical tool for investors to understand 

where the market is pricing risk. 

But the challenge for municipal bonds—and I know I scared you. 

You thought this was my testimony. 

Chairman HUIZENGA. Yes. I noticed you had a little notebook. 

Mr. ANDRESEN. This is five columns, printed on both sides, a list 

of individual municipal bonds. It lists 700,000 individual securities. 

Most of them do not trade in a given day, a given week, or a given 

month. So just having that bit of pricing— 

Chairman HUIZENGA. You did mention that is only ‘‘A’’ through 

‘‘N.’’ 

15 

Mr. ANDRESEN. Yes, that is ‘‘A’’ through ‘‘N.’’ My colleague is not 

fit enough to carry the whole thing. 

Chairman HUIZENGA. I think what we are going to need to find 

here, though, is consensus. And is there industry consensus on this 

that this is a direction to go? That is certainly something I am 

looking for in this. 

My time is up, but I suspect that we will have some fairly extensive written follow-up questions as well for everybody, and I look 

forward to that. 

So, with that, I recognize the ranking member, Mrs. Maloney, for 

5 minutes. 

Mrs. MALONEY. Thank you, Mr. Chairman. 

Mr. Crane, you mentioned in your testimony that you were there 

for the very famous Treasury flash crash in 2014. And one of the 

recommendations coming out of the staff report was that firms 

should be required to report their transactions in Treasuries to regulators on a daily basis. And as I understand it, it is being implemented even this Monday by the SEC and FINRA to have that 

take place. 

One of the other debates following that action was whether 

Treasury transactions should be reported publicly as well. And 

some have said that this would be unfair; high-speed traders would 

take advantage of it. But others have thought that it would increase market quality and stability and bring more investors in. 

So what are your thoughts on this? Should transactions in Treasuries be reported publicly or just to regulators? 

Mr. CRANE. Thank you for the question. I don’t want to—I don’t 

think it should be underestimated how important the launch of official sector reporting on TRACE was this week. That is an important step, and I commend FINRA and the SEC for following 

through on that initiative. 

As Mr. Shay pointed out, it will be really helpful in future episodes of volatility to try and diagnose what had happened. 

You asked about making that information more broadly available 

to the public, and I do think that is an important next step. Public 

transparency can improve liquidity markets. It can improve participation, create a more level playing field. And I think history shows 

that when you brought transparency to new markets, especially 

when it has been done in a thoughtful way, that it can improve the 

overall health of the market. 

I do think it is important for it to be done in a thoughtful way. 

It is important to think through the unique characteristics of 

Treasuries and the role that they play in the global economy, to 

have large reserve managers around the world and large institutional investors like insurance companies, who hold large amounts 

of Treasury securities. And if they need to trade in large blocks, 

putting that trade out there for the world to see may be a risky 

proposition. 

So I think it is important to think through how to accommodate 

the important unique aspects of Treasuries, but I think that can 

be done with thoughtful design. When FINRA originally launched 

TRACE for corporate bonds and then for agency—mortgage-backed 

securities, they took a similar thoughtful approach. They implemented delays in reporting. They implemented size thresholds so 

16 

that block trades were masked, for example. I think it is important 

to be thoughtful about it, but the concerns that have been raised 

about public transparency in Treasury markets can be addressed 

through thoughtful design. 

Mrs. MALONEY. Okay. 

What are your thoughts on it, Mr. Sedgwick and Mr. Shay? 

Mr. SEDGWICK. As I mentioned in my opening statement, T. 

Rowe Price has been broadly supportive of transparency across the 

markets. 

While we are aware of some of the risks that I think Jonah outlined, I think, in general, we look at the way TRACE has been administered as they expand to new asset classes and the extent to 

which disclosures have been adjusted accordingly, and so I think, 

in this particular case, presuming the same approach is taken, we 

would find value in that. 

I think one thing to point out is, in some respects, when you are 

looking at the credit markets, you are dealing with investment 

views being articulated through a trade. In Treasuries, in some respects, you are also dealing with collateral trades; you are dealing 

with a variety of other reasons you would trade those securities. 

So, in some respects, that information may be less sensitive. 

Mrs. MALONEY. Mr. Shay? 

Mr. SHAY. I always find it interesting when I hear public data 

being made available to the professional trading groups as being a 

negative. As we have seen, those particular firms enhance other 

markets that we at Nasdaq are very active in, most notably the equity market, the equity option market, the listed futures market. 

But it does strike at the heart of real clearing. 

The large banks in the last 8 years have become extremely good 

at managing their technology as well as world class at managing 

risk. They are enormously or, you could almost argue, overcapitalized at this moment. And they are wonderful in that they have 

large balance sheets. They have a huge list of clients, and they 

manage the risks for them. 

So the idea would be making data public to everyone in a way 

doesn’t level the playing field. It is just a normal response. As Mr. 

Andresen noted, you are not going to sell your house without market data. You are not going to buy your car from the dealer that 

you always go to when you could buy it from a dealer across town 

for $1,000 or $2,000 less. 

Mrs. MALONEY. Thank you. 

And I would like—Mr. Crane, there has been a lot of talk on this 

committee about how the liquidity in the corporate bond market 

has declined in recent years. And do you think it has declined 

enough that major regulatory changes are necessary? 

Mr. CRANE. It is a good question. I think, first, it is important 

to remember that it has declined from a pre-crisis period that is 

probably not the best benchmark to use. I think the pre-crisis period was an anomaly in terms of extremely high liquidity, and it 

was probably driven by a lot of leverage and turned out to not be 

all that resilient, as we discovered. So I think I would hesitate to 

draw any firm conclusions about how—just how far— 

Mrs. MALONEY. Thank you. 

My time has expired. Thank you. 

17 

Chairman HUIZENGA. The gentlelady’s time has expired. 

Unfortunately, they have announced they are moving up votes. 

We don’t know when that will be, but my intent is to try to get 

through as many people as we can, and then we will evaluate if 

our panel is available to then take that break, vote, and come back; 

if you are able to stay. 

So, with that, I recognize the vice chairman of the subcommittee, 

Mr. Hultgren, for 5 minutes. 

Mr. HULTGREN. Thank you so much, Mr. Chairman. 

And thank you all for being here. We appreciate your testimony. 

Mr. Andresen, it is great to see you. Thank you for coming up 

from Illinois to testify today. 

We have seen our equity markets evolve more quickly than our 

fixed income markets, at least in terms of the number of trades 

being executed electronically. 

As someone who played an integral role in the development of 

our modern equity markets, and who now serves on the SEC’s Equity Market Structure Advisory Committee, what takeaways do 

you think we can apply from this evolution in our equity markets 

to our fixed income markets, if any? And do you believe our fixed 

income markets will continue to develop due to market forces, or 

what other role should government have, if any? 

Mr. ANDRESEN. I think government can play an important role 

here. Fixed income, as you see from my list of securities here, will 

never look like the market for Google or Amazon or Facebook. 

There is a very small number of equity securities. A lot of interest, 

as Ranking Member Maloney pointed out, is concentrated on one 

product, whereas in fixed income, even if you have a multitude of 

issuers, all sometimes with hundreds of different securities, you are 

never going to have streaming bids and offers driven by natural 

flow. Most times, things will only trade by appointment. But that 

doesn’t mean that electronic trading can’t play an important role, 

and the government can’t play an important role, in facilitating 

this. 

Already today, in the muni markets, there are about 40,000 

trades a day, and about 8,000 of those actually take place on alternative trading systems. Now, the primary method of trading on 

this doesn’t look like the New York Stock Exchange or like Nasdaq. 

It looks like an auction. It takes about 4 hours. An auction is initiated. Participants who come in can bid on this, and it is a competitive auction that yields a very good price. 

In fact, today, there is an average of over seven bidders per auction. If you had seven bidders on your house, you would probably 

get a good price. So this is a very robust process that is working. 

The challenge we have, and where I think government is taking 

the lead, is to try to bring in new rules to encourage the use of this 

facility and to encourage the proper adherence with best practices 

for how the rules work within those auctions. 

Routinely, we see 15 to 20 bidders in these auctions. And I think, 

with the new rules coming into effect, if you had the majority of 

orders in these auctions, you would have a very efficient result, but 

we are not there yet. 

Mr. HULTGREN. It sounds like from your answer, you would say 

that these auctions are competitive for municipal bonds? 

18 

Mr. ANDRESEN. The auctions are—we were very surprised when 

we got in this business. It took us years to build the modeling to 

be able to make these prices. And we anticipated that, because of 

our breadth, we would sometimes go into these auctions and be virtually alone. And we were very surprised to find that they are actually quite competitive. 

Mr. HULTGREN. It is helpful. 

Mr. Snook, do you have any response to that? Do you agree? Do 

you disagree? 

Mr. SNOOK. I think the main point we would want to emphasize 

around electronic trading—and electronic trading has been growing 

and developing for close to 20 years now—is that there have been 

a large number of new entrants coming into the market. So we are 

in favor of pro-competitive forces, encouraging the innovation and 

experimentation that is happening. 

In each of the markets, we see different degrees of adoption and 

use of electronic trading. That is a good thing. But we think it is 

important that it can and should develop as organically as possible 

in a pro-competitive way without really deciding externally what 

the correct market structure should be. Let’s let entrants come in, 

innovate, compete, find the best ways to use and leverage the technology and leverage the data, and I think that is what we see. We 

see 20 percent of corporate bonds traded electronically now. There 

are estimates that agency MBS close to three-quarters. Parts of the 

government market, particularly in the on-the-run sector, are nearly at 100 percent. So we are in favor of encouraging more electronic 

trading but not imposing that externally. 

Mr. HULTGREN. Let me ask one last question here to Mr. Shay. 

You mentioned in your testimony that Nasdaq is not advocating 

for something similar to Reg NMS being applied to U.S. Treasuries. 

What steps can policymakers take to acknowledge the imperfection 

of Reg NMS and to make sure any potential new rules are appropriately tailored for Treasuries? We just have a few seconds. 

Mr. SHAY. I think it comes down to clearing. And right now, you 

have a market that some securities, with FICC clearing members 

clears at FICC, part of the DTTC. Some clear at Fedwire. You have 

this global risk-free rate that exists as the benchmark of the world, 

and, yet, it doesn’t perfectly clear. When you do clear it at FICC, 

it is very expensive. They are cumbersome, anachronistic, idiosyncratic rules that no longer make real-day modern market sense. 

Mr. HULTGREN. Thank you all. 

I yield back. 

Chairman HUIZENGA. The gentleman’s time has expired. 

The Chair recognizes the gentleman from Connecticut, Mr. 

Himes, for 5 minutes. 

Mr. HIMES. Thank you, Chairman Huizenga. I would like to echo 

the ranking member’s gratitude for the substantive and generally 

nonpartisan approach of these hearings. I very much appreciate 

that. And I thank the witnesses as well. 

Gentlemen, I want to ask you a question about the Volcker Rule 

and its effect on liquidity. We went through a big exercise in the 

passage of something called the CHOICE Act, which is really kind 

of a rollback of many Dodd-Frank regulations. The premise was 

that Dodd-Frank regulations were harming capital markets. And if 

19 

you look at capital markets, actually, there is not much data to 

support that, whether it is venture capital, private equity, corporate bond issuance, secondary markets, IPOs, you name it. Those 

markets are pretty robust and growing. 

That is not necessarily true in smaller business lending. 

And, Mr. Chairman, I would love to see us take a look at the 

issues affecting smaller business lending. It also would appear that 

there is some data and studies supporting the notion that the 

Volcker Rule, which I strongly support—I just don’t believe that 

FDIC-supported institutions should be making proprietary bets. 

There is a Federal Reserve study and other suggestions out there 

that in moments of stress, we may have a liquidity issue in the corporate bond market. 

So I guess I am going to point this question first to Mr. Crane, 

as a non-private-sector participant, but then somebody else from 

the private sector: Are you concerned that the Volcker Rule is, in 

fact, constraining liquidity in a way we need to be conscious of? 

And then, if you agree with me that we probably shouldn’t do away 

with the Volcker Rule, meaning we don’t want FDIC-insured institutions taking proprietary bets, is there a modification or change 

to the Volcker Rule that might allow for, if, in fact, there is a decline in liquidity and stress corporate bond markets, that would 

sort of fix that problem if it exists? 

Mr. CRANE. Thanks for the question. 

As discussed in a little more detail in my written testimony, I 

don’t think there is a lot of evidence—and you hinted at this as 

well—that there has been a broad-based deterioration in liquidity. 

So it is a little bit—I am not sure I fully agree with sort of the 

premise of that assertion. 

But there was one study you alluded to done by the Federal Reserve staff. I think it is notable in that respect that the periods of 

stress that study looked at were downgrades of the individual securities. So, ordinarily, when I think about liquidity in a period of 

stress, I think about market stress and marketwide stress, not an 

individual security experiencing a downgrade in an otherwise normal market. 

So I think it is a bit of apples and oranges. That study alone, I 

think, read in conjunction with the rest of the evidence on liquidity, 

makes it difficult to conclude that there has been a broad effect on 

liquidity. 

That said, I heard Chair Yellen’s testimony, I think it was yesterday, on the Senate side, where she suggested trying to look at 

some of the complexity involved in Volcker Rule implementation, 

and I think that it is appropriate for the regulators to do so. 

Mr. HIMES. I don’t know. Is there maybe, T. Rowe, a private sector, take on that question? 

Mr. SNOOK. I would just add our perspective, which is we do 

think the Volcker Rule, among other rules, is impacting liquidity. 

I think it is important to acknowledge— 

Mr. HIMES. Let me stop you, Mr. Snook. We talked about the 

Federal Reserve study. Can you point us to other studies that back 

that assertion? 

Mr. SNOOK. I think the Federal Reserve study is a good way to 

isolate what we would consider a stress environment. There are 

20 

different ways to do it, but I think that was a really thoughtful way 

of doing it. 

When we look at the volume of secondary market trading in the 

marketplace versus the total outstanding, it hasn’t kept pace with 

the growth of the market. So we acknowledge that the primary 

markets are very strong, but there is a virtuous circle that exists 

between primary and secondary markets, and people will pay the 

better prices. They will pay a liquidity premium when they have 

confidence in that very strong and liquid secondary market. They 

will pay a better price in the primary market. So that is why liquidity is important. 

We are in a relatively benign environment where we have low 

rates. We have low volatility. We have a lot of stability. We are 

concerned that, if we had more volatility in a rising rate environment, that would put pressure on market making. 

And to your point earlier on the small cap companies, there is 

evidence that, despite the growth in the markets, it has been principally larger companies issuing larger bonds, and there is evidence 

that the number of smaller companies issuing, measured by size of 

balance sheet assets, there has actually been a decline, despite the 

growth of the marketplace. 

Mr. HIMES. No, I take that point. Again, I looked pretty hard at 

all of the capital markets. 

Again, I will direct this to the chairman. I think there would be 

bipartisan support for a hard look at capital availability for smaller 

businesses, but I am out of time. 

So I appreciate the perspective, and I yield back. 

Mr. SNOOK. Thank you. 

Chairman HUIZENGA. The gentleman’s time has expired. 

The Chair recognizes the gentleman from Arkansas, Mr. Hill, for 

5 minutes. 

Mr. HILL. I thank the chairman. 

I appreciate the opportunity to talk about fixed income structure. 

Listening to this is always inspirational to me to see this much talent in a panel. We are all benefited by that. 

I have to tell you, though, that when I started in my financial 

career, the top technological innovation, Mr. Andresen, was muni 

fax coming across the thermal paper in our offices in the 1970s. So 

it has been neat to see the evolution of the market from that moment where we did official circular files and kept copious notes to 

Bloomberg’s advances and now your trading platform you talked 

about today. 

You would agree, though, that there are houses that there are 

no bids for. Have you ever seen a—you are a fencer. So is there 

an electronic scoring in fencing? 

Mr. ANDRESEN. Yes, sir, there is. 

Mr. HILL. And how does that compare to human scoring? Pretty 

good? 

Mr. ANDRESEN. As an American, when I used to compete in Europe, we always felt like we got some inventive interpretations 

from the European referees about how to interpret an electronic 

score box. 

Mr. HILL. Yes. So, there is no more over-the-counter, more complex market than the muni market, and you illustrated that. 

21 

Mr. ANDRESEN. I would agree with that. 

Mr. HILL. And I listened to your opening comments, and I took 

them sort of as I want to lead us to the future technologically, but 

I took your comments as a bit of a pejorative maybe towards dealers across the country that are in the muni market. You probably 

didn’t intend that. Maybe you did. It came across pretty negatively. 

And I think there are a lot of people out there trying to fill demand in the municipal market, which is very challenging, whether 

you are at T. Rowe trying to fill out a laddered portfolio or individual market-making, which doesn’t make me not interested in 

EMMA’s success or your trading platform. I am for it. 

I just want to recognize that, with over a million issues, some a 

million bucks, some that had one buyer, and the difficulty and the 

fact that most of them are nonrated, and even Bloomberg’s database is feeble, that it is not fair to say, in my view, that this is 

just going to be imminently electronic, made electronic, and easily 

auctioned across the country. 

So I just want to, after 40 years of experience in the market, get 

that off my chest. I feel better now, Mr. Chairman. Thank you so 

much. 

Chairman HUIZENGA. We are here for your therapy. 

Mr. HILL. Thank you. And in Congress, we need it. We only have 

one psychiatrist in Congress, Tim Murphy from Pennsylvania. We 

need dozens more. So thank you for that. 

Mr. Crane, I want to talk for a minute about the Treasury market. In your view of—you talked about the electronics there. Tell 

me a little bit about the changes in the market you saw at Treasury. We had 40 dealers when I worked at Treasury. We have 20 

or so now. That is maybe not even relevant anymore vis-a-vis how 

the market has changed. 

Talk to me about access to the market, price discovery in the 

market. And just give me some more of your views on that. 

Mr. CRANE. Sure. Thank you for the question. 

As you note, the number of primary dealers has declined over the 

last several decades. I think we are 23. 

At this point, I think in terms of secondary market trading, it is 

somewhat less relevant. The inter-dealer market was opened up to 

nonbank dealers beginning in the early or mid-2000s. Firms like 

Citadel, eventually Virtu, are competing actively in that market. 

And it has really become—there are sort of two primary platforms, one operated by Nasdaq and the other is BrokerTec, and 

they operate a lot like our stock markets do. There are central limit 

order books, anonymous trading, high-speed electronic trading. 

And then there is a very different market in the customer market, for a lot of good reasons. Customers whom, as I indicated before, may not want to expose their trade to everybody, may want 

to transact in a different market. But the dealer-to-client market 

is very different. Parts of it are electronified, but in many ways it 

is just sort of doing electronically what used to be done by the 

phone. 

The latest data I saw indicated that a majority of trading in the 

dealer-to-client space was still actually done over the phone. If you 

think about the underlying nature of Treasury securities, very liqVerDate Nov 24 2008 13:54 May 01, 2018 Jkt 028749 PO 00000 Frm 00027 Fmt 6633 Sfmt 6633 K:\DOCS\28749.TXT TERI
22 

uid, very standardized, et cetera. So it is a little surprising to see 

that much trading by phone. 

But it is important to recognize that not all Treasuries come in 

the same form. Even on-the-runs, the most recently issued Treasuries, trade a lot more. 

And then there tends to be a process—and I think this is true 

across fixed income, although the other panelists should validate 

this—that in fixed income securities get issued, and they trade for 

a little, and then they tend to sort of find a home with a buyer. 

And then they trade less often. 

So you do tend to have these very different liquidity characteristics in more recently issued securities than more aged securities. 

Mr. HILL. Thank you, Mr. Crane. 

Thank you, Mr. Chairman. 

Chairman HUIZENGA. The gentlemen’s time has expired. 

In the absence of Members on the other side, we will continue 

on our side of the aisle. 

With that, the gentleman from West Virginia, Mr. Mooney, has 

5 minutes. 

Mr. MOONEY. Thank you, Mr. Chairman. 

I am very intrigued with the transparency comments that were 

made. There is a famous statement by Louis Brandeis in 1913, that 

sunlight is said to be the best of disinfectants. 

So, Mr. Sedgwick, you talked a lot about transparency in your 

comments. Are you suggesting that transparency can do a better 

job than more regulations would? 

Mr. SEDGWICK. I think in many respects, when you look at transparency, what that really does is help remove some of the obstacles 

to things, for example, like greater electronification. We tend to see 

more electronic markets in more transparent markets. So when I 

think about transparency, that is an opportunity to facilitate greater electronification. 

In addition, I think that transparency also, as I mentioned earlier, helps us manage our trading costs and be able to provide additional transparency back to retail investors. So I think that is also 

helpful. 

I think ultimately, when we look at transparency, it is really 

about giving the market an opportunity to find equilibrium around 

things like the optimal state of liquidity. 

Mr. MOONEY. This question is probably more directed to Mr. 

Shay as a follow up. And we have here an Ethics Committee where 

there are three Republicans, and three Democrats, and we peer review ourselves to keep ourselves straightforward and review it that 

way. My wife is a doctor. They have other doctors who peer review 

what doctors do to decide if they have done something they 

shouldn’t have done rather than a bunch of bureaucrats. 

So, Mr. Shay, you mentioned a lot about surveillance and bad actors, keeping the bad actors out. I was wondering, can you do that 

internally with some peer reviews of people in the industry rather 

than a government program of some kind? 

Mr. SHAY. We actually do do that. So if you are going to take on 

a new client, whether it be a PTG or a firm that meets our standards for joining our platform, you are going to subject them to a 

clearing sort of pathway. So they cannot gain access to our platVerDate Nov 24 2008 13:54 May 01, 2018 Jkt 028749 PO 00000 Frm 00028 Fmt 6633 Sfmt 6633 K:\DOCS\28749.TXT TERI
23 

form unless they have enough capital to satisfy the minimum clearing requirements, because we, as an ATS in the U.S. Treasury 

space, are requiring firms to eventually get their trades cleared 

through the FICC, which is part of the DTCC. 

So is this whole shining of the light on one’s balance sheet, availability of capital, actual firm capital, is all measured and predetermined before trade one is even remotely put on. 

Mr. MOONEY. Thank you. 

Mr. Chairman, I know time is tight, and there are a lot of people 

in the queue, so I will go ahead and yield back the balance of my 

time. 

Chairman HUIZENGA. The gentleman is deeply appreciated by 

that, I am sure, especially by the next gentleman. 

With that, we have Mr. Budd, who is up for 5 minutes or less. 

Mr. BUDD. Thank you, Mr. Chairman. 

And I thank each of you for being here today. 

So to Mr. Sedgwick, post-Dodd-Frank and Basel III, we have 

heard from market participants that regulations that micromanage 

trading behavior are impacting liquidity, specifically a decrease in 

the lack of sustainable liquidity in the U.S. swaps market, corporate bond markets, and the U.S. Treasury market. Do you agree 

with that statement? 

Mr. SEDGWICK. I would say that the Volcker Rule, Basel III, and 

the Dodd-Frank Act were all factors in effectively disincentivizing 

dealers to commit capital to secondary trading. So what we have 

seen when we actually transact in the market is that whereas we 

used to transact with a principal commitment to do large trades, 

now much of the trading is taking place in a more agency fashion. 

What that means is that we are largely dependent on there being 

the opposite side of the trade or counter interest in the market for 

the trades we would like to do. 

The impact to us has been, in a lot of respects, to take large orders, split them into smaller sizes, potentially fragment our work 

flow, and source liquidity from different areas. 

So I think in some respects—I am sure you have heard a lot of 

conversation in the industry about low liquidity—the real conversation is actually about the changing way in which liquidity is being 

accessed and how it is being delivered to us. That has been the 

most fundamental change since the crisis. 

Mr. BUDD. So in the simple yes/no, it would be a ‘‘yes?’’ 

Mr. SEDGWICK. Yes. 

Mr. BUDD. We know that the U.S. fixed income market is massive at roughly $40 trillion and that the largest subcategory of that 

is U.S. Treasury debt. So with the national debt approaching $20 

trillion, do you think that U.S. debt is not subject to market forces? 

Mr. SEDGWICK. I would say it is, yes. 

Mr. BUDD. Okay. 

In the interest of time, I am going to let some of my colleagues 

go, as well. I have many more questions. If we come back after 

votes, perhaps I will ask some more, Mr. Chairman. 

Chairman HUIZENGA. I appreciate that. And we have a number 

of gentlemen and scholars, apparently, on the committee. 

So with that, I recognize the gentleman from Indiana, Mr. Hollingsworth, for up to 5 minutes. 

24 

Mr. HOLLINGSWORTH. Good morning. Thanks to everybody for 

being here. 

I wanted to touch on, frankly, what Mr. Budd had started, which 

is, again, talking about liquidity. And I think, as the gentleman 

across the aisle had said, perhaps some of the indicators show that 

there is ample liquidity in certain markets today, but I find that 

it is not in good times that you find out you have enough liquidity. 

It is really in moments of acute stress when you determine whether 

or not you have enough liquidity in the market. 

And I was struck by the recent Treasury report that came out 

and some of its simplification and repurposing of the Volcker Rule, 

if not eliminating it, and I was curious if you all had a view on 

whether that went far enough. Some of the proposals that are out 

there in the Treasury report include eliminating the 60-day rebuttal presumption, changing some of the purpose tests around prop 

trading, and then, in addition to that, giving some more flexibility 

in determining what reasonable market-making is for banks. 

And I am just curious if you all had a view of whether that went 

far enough in reforming the Volcker Rule or whether we needed to 

go even further, in fact eliminating the Volcker Rule, in order to 

enhance liquidity. 

I would point out to my gentlemen across the aisle that inventory 

is down 92 percent, according to Bank of America and SIFMA, but 

it is down a further 55 percent from 2013. So this is not just from 

a peak that is anomalous, but instead from even normal periods. 

Going back to 2001, we see that inventory is down dramatically, 

and I worry about liquidity. 

Mr. SHAY. And our large banks are very well-capitalized, as I 

have already mentioned. They have huge client distribution networks. They were viewed in the world as these wonderful risk 

transfer agents. 

So in that new ecosystem that the banks have created for themselves post-crisis, I think it would be very beneficial to have the 

chains taken off and to allow the banks to again perform their duties as risk transfer agents, certainly in the yield or coupon security businesses that we are trading in. 

Mr. HOLLINGSWORTH. Any comments from any others? Fair 

enough. 

The other report that I wanted to talk about was that in the Federal Reserve’s July 7th Monetary Policy Report—we recently had 

Chair Yellen in—they describe, and I am just going to read this 

statement, and I am kind of interested in your views on it, ‘‘A series of changes, including regulatory reform, since the global financial crisis have likely altered financial institutions’ incentives to 

provide liquidity, raising concerns about decreased liquidity in 

these markets, especially during periods of market stress,’’ something I also believe in. 

But I am curious if that is something that everybody here believes in. And then are there other regulations, outside of Volcker, 

that have contributed significantly to the decline in liquidity? 

Mr. SNOOK. Sure. So maybe just to round up the point on 

Volcker, I think, and our members believe, that the Treasury report provided a lot of good suggestions. We believe that it may be 

best to repeal it. If that is not the approach, a more clear and foVerDate Nov 24 2008 13:54 May 01, 2018 Jkt 028749 PO 00000 Frm 00030 Fmt 6633 Sfmt 6633 K:\DOCS\28749.TXT TERI
25 

cused definition of what is proprietary trading as opposed to the 

negative presumption, the 60-day test, and the activities-based exemptions could be a better way to go. So we do think that is a rule 

that is impacting liquidity but that the implementing regulations 

would be improved. 

Our members who have market-making functions are doing so in 

a very cautious and deliberate way to make sure they are within 

the guardrails of what the rule and what the compliance regimes 

dictate. And things like reasonably expected near-term demand 

(RENTD), are very difficult to use dynamically because they are 

backward-looking processes. 

It often can be the case that, as you look forward, the customer 

demand and the customer needs are quite varied. It could be a 

large portfolio rebalancing, or that an asset manager wants to shift 

from fixed income to equities. It might be something where a large 

corporation wants to enter into an interest rate hedging program 

to finance long-term debt and thus it may be foreseen that down 

the road and need to use interest rate swaps to do so. 

Mr. HOLLINGSWORTH. I think that is right. And I think one of the 

things I hear from businesses all the way across the district, not 

just in the financial space but all of them, is the gray area around 

regulators’ ability to interpret rules is causing them to move further and further away from what they think the actual rule says, 

because they just don’t know how they are going to be interpreted, 

and there is so much gray around that. So we get further and further back, thus hampering their ability to make markets or, in 

other businesses’ case, produce the goods that they once thought 

that they could. And so I appreciate that. 

Mr. SNOOK. Thank you. 

Mr. HOLLINGSWORTH. With that, I yield back, Mr. Chairman. 

Chairman HUIZENGA. We have been on a roll. And I appreciate 

the gentleman yielding back. 

I recognize Mr. Messer for up to 5 minutes. 

I will make a quick note. They are debating the final amendment. And at this point, we have three Members in the queue. 

Hopefully, we will be able to get through that before we need to 

break for our vote. 

So with that, Mr. Messer. 

Mr. MESSER. Mr. Chairman, I will work to not use my entire 5 

minutes. I heard your message and I will work to do that. 

Chairman HUIZENGA. Ten points to Gryffindor. 

Mr. MESSER. It’s great to follow my colleague from Indiana. 

Mr. Snook, I would like to ask you what I think is a fairly narrow, but at least to me important, question. 

As you know, current regulations do not permit banks to hold investment-grade municipal bonds, American investment-grade municipal bonds, as high quality liquid assets for the purposes of their 

liquidity coverage ratio (LCR). It creates this sort of odd circumstance under Basel where certain German municipal bonds can 

be counted as highly qualified liquid assets where American municipal bonds, some of the best investments in the world, safest places 

to put dollars, are not. 

In a final rule released by the Fed in April of 2016, I was encouraged to see that the Fed conceded that investment-grade municipal 

26 

bonds are appropriate for banks to hold under the LCR. And the 

Treasury Department issued a report last month that recommended these bonds be reclassified as 2B HQLAs. However, 

until the FDIC and the OCC act, banks will not be able to count 

these bonds as part of the LCR. 

So what impact do you think reclassifying investment-grade municipal bonds would have for cities and towns that issue bonds 

across the country? 

Mr. SNOOK. First, thank you for that question. I think, obviously, 

the municipal bond market is an incredibly important part of our 

fixed income markets. $400 billion in each year, year in and out, 

plus or minus, is issued in that marketplace, and it is obviously a 

critical part of financing our infrastructure. 

We talked earlier about the municipal market being less liquid 

and anything that further constrains or curtails the buyer base is 

potentially harmful. And so it is important that munis are traded 

as high quality liquid assets for purposes of the liquidity coverage 

ratio, because depository institutions, banks, hold over $500 billion 

in municipal securities. 

So for that to be constrained or curtailed, I think would be a negative. We want to encourage the use of munis. And if they are investment grade, high quality, readily marketable, that makes sense 

to us. 

Thank you. 

Mr. MESSER. So on the margins, them not being counted drives 

up the cost on the margins? 

Mr. SNOOK. On the margin, it will drive up the cost and put an 

additional burden on municipalities and taxpayers there. 

Mr. MESSER. And so the reverse, if they are counted, right? Lowers the cost, less burden. 

So do you think this type of action would ultimately save taxpayer money while ensuring the integrity? You just said that, of 

course you do believe that. So I guess my next question would be, 

do you think legislation is necessary to ensure that investment 

grade munis are reclassified as HQLA? 

Mr. SNOOK. It may be the case. We are hopeful that the banking 

regulators collectively work together to get there, but it may be the 

case that we, in fact, need legislation. 

Mr. MESSER. Yes. In respect to the chairman’s time, I guess I 

will yield back my time. We are working on legislation in a bipartisan way to do that, trying to create a floor at that 2B level that 

would then allow them to be, maybe, lifted even beyond that. 

These are safe assets. They are rarely traded because, frankly, 

people take their money and keep it there. But in times of financial 

crisis, they are a place where dollars with flock. And so in that way 

I think I think they are very liquid. 

Mr. SNOOK. And we are very much appreciative of the leadership 

and the work you are doing there. 

Thank you. 

Mr. MESSER. Thanks. 

Chairman HUIZENGA. I appreciate the gentleman taking a hint 

from the jumbotron behind there. 

And we have two. Hopefully, if we can get through that, that 

would be a great cap to this. 

27 

I now recognize Mr. Emmer from Minnesota. 

Mr. EMMER. Thank you, Mr. Chairman. 

And thanks to the panel. 

I don’t have the background of some of these people, like my colleague from Arkansas, the 40 years that he has. I just watch what 

happens and look at this market. 

And whether it is the equity markets or the fixed income market, 

available and accessible capital is what drives our economy. In 

many ways, in my opinion, these markets are the true definition 

of American freedom, the ability of people from all walks of life to 

access capital to start a new business, to make an important purchase, to pursue their American dream. That is what these markets are all about. And it is interesting, because we are talking 

about transparency and liquidity, the evolution of the fixed income 

market, the marketplace itself. 

And one of my colleagues was talking earlier to you about his 

concern with small-cap companies, and I would add mid-size or 

mid-cap companies. Because it seems what I have watched in the 

last 8, 10 years, maybe longer, but certainly as I have seen it, more 

focused in the recent past, we have built policies or we have instituted policies in this country that have allowed the larger to get 

even larger. They have been one-sided. I heard Mr. Shay talk about 

the large banks and we should take the chains off and return them 

to their risk-transfer function. 

And it seems to me, and my colleague from Indiana, Mr. Hollingsworth, actually cited the July 7, 2017, Monetary Policy Report 

from the Fed, and he read you a quote, I hope you remember it, 

but I would like to know if you agree with that, and specifically the 

Fed’s assessment of the state of the liquidity in the corporate bond 

market. 

And then I would like you to talk, and it can be anybody on the 

panel, I want to know what regulations have contributed to the decline in liquidity and what are the potential solutions? And, again, 

with a focus towards how do we get the lower end, the small-cap 

companies, the mid-size companies, so everybody has access to capital. 

Why don’t you go ahead, Mr. Andresen, and start? 

Mr. ANDRESEN. Thank you. 

So I serve on the Equity Market Structure Advisory Committee, 

and this was a focus from the beginning of that committee’s work, 

was we all agree that the structure did a fantastic job for helping 

transactions be effectuated in SPDRs, in Google and Apple and 

these huge companies. 

But clearly, in the smaller cap names, that is a dealer-driven 

market. We are a dealer. Our purpose in the muni markets is to 

transfer that risk. We hold each position, on average, about a 

month. 

And that is the same type of structure you see in small cap companies. You need some intermediary to step up and warehouse that 

risk between the investor that wants to buy and an investor that 

wants to sell, because they are unlikely to have those desires contemporaneously. 

So there are a bunch of pilot programs that are being enacted 

now on the equity side to try to help with that. I think on the fixed 

28 

income side you see an enormous profusion of new networks, new 

market platforms attempting to facilitate trading between buyers 

and sellers to try to fill this gap. But without a very diverse set 

of dealers to be able to do that, you are not going to be successful. 

Mr. EMMER. And I guess I will go to Mr. Shay, with whatever 

time you want to use. Go to your example, we should take the 

chains off. I am interested to know what regulation, what policy 

has been instituted on the government side that we could perhaps 

roll back or modify that has encouraged this getting bigger and bigger and squeezing out. 

I appreciate your trying to find a way under the current environment to restimulate the smaller companies and access to capital. 

But what have we done that has caused this problem in the first 

place, and can we reverse it? 

Mr. SHAY. Just from the sheer size of the major players, and I 

am talking about in the highly liquid, highly transparent visible 

markets that we were all impacted by during the financial crisis, 

you had mergers of these large institutions. You had emergency 

weddings. You had banks then being sued for everything from foreign exchange issues, ISDA fixing issues, LIBOR. There was one, 

it was one compliance issue after another. 

So the banks—if you are sitting on a trading desk—and to my 

point about banks have traditionally acted as these risk-transfer 

agents with large pools of clients, which as a regulator looking at 

these institutions you want, because you are going to have clients 

that are naturally offsetting risk within the bank’s portfolio. 

What caused the market to go the wrong way was a result of risk 

and leveraged risk— 

Mr. EMMER. I think you and I are going to have to continue, and 

the whole panel. I will be in touch to continue this discussion in 

light of our time. 

Chairman HUIZENGA. The gentleman’s time has expired. 

With that, last but not least, the gentleman from Maine, Mr. 

Poliquin. 

Mr. POLIQUIN. Mr. Chairman, you always save Maine for last. 

But that is okay. We don’t take it the wrong way. It is still the 

greatest State in America. 

I appreciate everyone being here. I really do. Government should 

be in the business of helping our families. So if you are poor or disadvantaged or you are disabled or you are a veteran or you are a 

senior who is trying to save for your retirement years or you are 

a taxpayer, government should help you. And the decisions that we 

make here today set policies that make it easier for people like you 

to help our families in the private sector or not. 

Now, I was a State treasurer up in Maine for a period of time, 

and part of the fixed income market I dealt with was the municipal 

bond market. And I will tell you, yes, our companies, as Mr. 

Emmer said and Mr. French said, it’s very important they can access capital to expand their businesses and grow, pay their workers 

more, and hire more workers, because a good job solves a lot of 

problems. 

Also, in the municipal bond market we need to make sure we 

continue to give our States and cities and towns across America a 

very low-cost way to borrow money. So it is critically important 

29 

that you folks continue to make sure we have liquidity in that market so we can drive down the price if you are a buyer or increase 

it if you are a seller and make sure interest rates are as low as 

humanly possible, because of the taxpayers who are paying the interest every 6 months and repayment of principal at the end of the 

period. 

Now, there are some folks in this town, not me, who are floating 

an idea of taxing municipal bonds. So all of a sudden we have this 

additional burden, additional cost on the taxpayer to build a new 

sewage treatment plant in Ellsworth, Maine, or to build a new 

water treatment facility in Lewiston, Maine. 

And I would like to ask you, Mr. Sedgwick, you work for one of 

the biggest mutual fund houses in the country and you have, I am 

sure, a significant municipal bond portfolio, tell me what taxation 

of municipal bonds would do to the infrastructure needs of this 

country and what it would do to the folks who are saving for their 

retirement that you service? 

Mr. SEDGWICK. I think it is actually a very complex issue. As we 

look at the tax treatment, for example, with munis, but also with 

corporate credit, it is actually a very difficult sort of— 

Mr. POLIQUIN. I have 2 minutes, and 4 minutes and 13 seconds, 

before I have to vote. So you have to make your very complex— 

make it very simple quickly. 

Mr. SEDGWICK. I’m sorry. I am not a muni trader, but I can certainly circle back with you and get you a written response. 

Mr. POLIQUIN. Great. 

Mr. Snook, do you have a comment on this? 

Mr. SNOOK. Yes. I think we have tremendous infrastructure 

needs in this country. The municipal tax-exempt market is an extremely well-functioning market. We talked about the fact that 

there are almost a million separate securities outstanding. That reflects our ability and the market’s ability to serve all those issuers 

well, those small towns, those municipalities, all those different 

local entities. 

And if we take that tax exemption away, we will undermine that 

market greatly, because when we talk about liquidity and the ability to sell small size, it will be devastating. Right now we have a 

very strong amount of demand from the individual investor directly 

through mutual funds. If we were to take that away, we would 

throw a tremendous cost burden back on those local cities, States, 

and municipalities. 

Mr. POLIQUIN. Thank you. 

Mr. Shay, you have last say. I have 1 minute. 

Mr. SHAY. Again, I am not a municipal bond trader either, but 

I think adding friction to any market is not going to be good for 

the individuals or the municipalities trying to raise— 

Mr. POLIQUIN. Thank you all very much for being here. I really 

appreciate it. 

Mr. Chairman, I yield back my time. 

Chairman HUIZENGA. The gentleman yields back. 

And with that, I want to say thank you to our panel. Already, 

we have gotten comments from Members that this was extremely 

illuminating, very helpful. And as I was starting to say in my questioning, we are really looking for some industry consensus. I don’t 

30 

know what exactly that means and what we are going to be able 

to get to. But I deeply appreciate this input and your time and effort being here. 

I look forward to working with Chairman Clayton as well at the 

SEC to see where we can go and work hand-in-hand with them 

where we are able to. 

The Chair notes that some Members may have additional questions for this panel, which they may wish to submit in writing. 

Without objection, the hearing record will remain open for 5 legislative days for Members to submit written questions to these witnesses and to place their responses in the record. Also, without objection, Members will have 5 legislative days to submit extraneous 

materials to the Chair for inclusion in the record. 

And again, thank you for your time. And this hearing is adjourned. 

[Whereupon, at 10:47 a.m., the hearing was adjourned.] 

(31) 

A P P E N D I X 

July 14, 2017 

32 


28749.001

STATEMENT OF MATTHEW F. ANDRESEN 

ON BEHALF OF 

HEADLANDS GLOBAL MARKETS, LLC 

BEFORE THE 

SUBCOMMITTEE ON CAPITAL MARKETS, SECURITIES, AND INVESTMENT 

FINANCIAL SERVICES COMMITTEE 

UNITED STATES HOUSE OF REPRESENTATIVES 

July 14, 2017 

Chainnan Huizenga, Ranking Member Maloney, and Members of the Subcommittee, I 

am Matthew Andresen, CEO of Headlands Global Markets, LLC, ("HGM"). as well as CEO of 

Headlands Technologies LLC ("Headlands Technologies"), an affiliate of HGM. On behalf of 

HGM and Headlands Technologies, I welcome this opportunity to present our views on market 

structure in the secondary market for municipal bonds. 

Recent regulatory efforts have brought about necessary and important improvements in 

the transparency and competitiveness of these markets. In this testimony, [will review some of 

those key achievements, as well as some areas that may be ripe for further improvementincluding work that remains to be done to ensure that recently enacted rules are fully enforced 

for the benefit of all market participants. I will begin first with some background about myself, 

HGM, and Headlands Technologies, as well as the existing market structure in municipal bonds. 

Before founding HGM and Headlands Technologies, Twas co-CEO of Citadel Securities 

LLC ("Citadel''), an affiliate of Citadel Investment Group, LLC in Chicago, a large electronic 

equities market maker. Prior to Citadel, I was President and CEO ofTsland ECN ("Island''), the 

largest electronic stock market in the United States. Island grew from a start-up into the largest 
33 


28749.002

market for the trading ofNasdaq-listed stocks, ETF securities, and many NYSE-Iisted names. In 

2002, we sold Island to its largest competitor, Instinct. The electronic market was then sold to 

NASDAQ. Currently, I serve on the Securities and Exchange Commission's ("SEC's") Equity 

Market Structure Advisory Committee, advising the SEC on trading issues. 

Our firm is a global quantitative trading company based in Chicago, London, and San 

Francisco. Founded in July 2009, Headlands Technologies develops and implements 

quantitative trading strategies in various financial products. It is one of the world's largest 

trading firms, accounting for significant volumes across global markets. HGM is a SEC 

registered, Financial Industry Regulatory Authority ("FINRA") member broker-dealer. It 

launched its municipal bond trading business in March 2014 and uses proprietary models to price 

bonds electronically. HGM is a widely-recognized participant in the municipal bond market, 

executing close to 700 trades per day, trading with over 400 counterparties, and ranking as a top 

participant on all major municipal bond altemative trading system ("ATS") platforms. This 

volume makes HGM a significant liquidity provider and one of the country's largest dealers in 

the secondary market for municipal bonds. HGM also engages in transactions directly with 

institutional counterparties and provides direct prices to certain municipal securities dealers. 

Background on the Municipal Bond Market 

Local government entities issue bonds in the municipal markets. According to Municipal 

Securities Rulemaking Board (''MSRB") statistics, approximately $458 billion in municipal 

bonds were issued in 2016. 1 Municipal bonds vary considerably in their terms and reflect 

obligations of a variety of local government entities across the country. Many carry tax 

advantages making them an attractive investment vehicle for retail investors. As such, retail 

1 See https: emmaJ1l$rb.ora.:\farketA.ctivitv/YiewStatistics.a~ (last viewed July 3, 2017). 

2 
34 


28749.003

investors hold an estimated 75% of municipal bonds either directly or indirectly (through mutual 

funds), making them significant purchasers of municipal bonds. Retail investors also trade in the 

secondary market. According to MSRB statistics, in 2016 approximately 47% of secondary 

market trades in municipal securities had a value of $25,000 or less, and 80% had a value of 

$100.000 or less- indicating active retail participation in the secondary market trading of 

municipal bonds.2 

The secondary market for municipal bonds has historically been a dealer market. Thus, 

investors interested in either buying or selling a municipal bond would need to contact a dealer, 

who would provide pricing information. Although the MSRB has made great strides in 

providing detailed post-trade pricing data to the public, such information is of limited use to 

investors if the bond of interest has not traded recently, which is often the case. Moreover, due 

to the abundance and diversity of municipal bonds, investors may struggle to identify 

comparable bonds for pricing purposes. Accordingly, retail investors are often dependent on 

dealers for pricing information. 

When dealers trade directly with their own customers, they do so either as a principal, 

meaning they arc trading against their own inventory, or as a riskless principal, meaning they are 

engaging in offsetting principal buys and sells. lnterdcaler brokers have also historically been 

active in the municipal bond market matching buyers and sellers of bonds. They do not directly 

provide liquidity. Traditionally, interdealer brokers largely had dealers as their clients, but may 

also have institutional customers. lnterdealer brokers may operate in voice or electronic markets. 

A dealer may also trade as riskless principal by trading bonds between its customers, with 

one customer buying and another customer selling. When trading with their customers as either 

a principal or riskless principal, dealers may include a markup or markdown within the price the 

2 Municipal Securities Rulemaking Board 2016 Fact Book at37. 

3 
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customer receives. This means the customer only sees one net price, and may not have visibility 

into the amount the dealer is charging to facilitate the transaction. 

Recent Improvements in Municipal Bond Market Structure 

I have spent a good part of my career trading in the equity securities markets, which are 

liquid and deep markets driven by both real-time customer orders and firm dealer quotes. 

Although similar pre-trade transparency consisting of firm, streaming quotes would be ideal for 

municipal bonds, we do not believe that is a practical solution given the vast number of 

municipal bonds (approximately 1,000,000 unique bonds compared to roughly 4,000 listed 

equity securities) and the infrequency with which most bonds trade. Rather, due to these unique 

characteristics. dealer intermediation and liquidity provision will continue to be essential 

elements of the secondary market for municipal bonds. The market has seen several recent areas 

of improvement in the transparency and competitiveness of these practices. 

-

Secondary market trades in municipal bonds often occur through auctions administered 

by an ATS. A TSs, which have become prevalent in recent years, primarily bring together buyers 

4 
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and sellers of municipal securities by administering auctions and posting dealer offers, but do not 

themselves take principal risk or directly add liquidity to the market. When selling a bond, 

investors and intermediaries initiate auctions to request quotes for a ·'bid price'' (the price at 

which a dealer is willing to buy bonds that the investor is looking to sell). These auctions are 

known as "request for quotes" or "RFQs", and they create competition among liquidityproviding dealers. In theory, investors should look to sell at the highest bid received in a '·bid 

wanted" auction. Of course, investors may choose not to sell if the best quote does not meet 

their desired price. Conversely, when buying a municipal bond in the secondary market, 

investors and intermediaries review dealer offers posted on the A TS platforms. In theory, 

investors should look to buy bonds that meet their criteria at the lowest possible offer price. 

HGM is a significant participant on the A TSs. It provides approximately I 0,000 bid 

wanted quotes per day. HGM's quotes end up representing the best price in approximately 25% 

of the municipal bond auctions in which it bids. On several of the largest A TS platforms, HGM 

is one of the top 3 bidding participants. Similarly, HGM provides meaningful sell side liquidity 

by posting offers in well over 3,000 unique bonds each day. 

The A TSs have brought positive changes to the municipal bond markets through these 

auctions by increasing price transparency and liquidity and by helping buyers and sellers find 

each other. There are consistently more than 6 bidders per auction, and consistently half of bidwanted requests are duplicated across various A TS platforms, meaning that dealers are seeking 

best prices and liquidity across multiple A TSs. 

Other improvements came about as a result of the SEC's July 31,2012 Report on the 

Municipal Securities Market.3 That report provided an overview of the municipal securities 

1 Report on the Municipal Securities Market, U.S. Securities and Exchange Commission (July 31, 2012). 

5 
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28749.006

market structure and made several recommendations for improving the structure of the secondary 

market for municipal securities, including: 

• providing more detailed interpretive guidance to assist dealers in establishing the 

"prevailing market price" for a municipal security, for purposes of determining whether 

the price offered to a customer (including any markup or markdown) is fair and 

reasonable. 

• requiring municipal bond dealers to disclose to customers the amount of any markup or 

markdown on confirmations for riskless principal transactions. 

• requiring municipal bond dealers to seek "best execution" of customer orders for 

municipal securities. 

These recommendations have been or arc in the process of being implemented. For 

example, since March 21, 2016, municipal securities dealers have been required to provide retail 

customers with ·'best exccution.''4 The best execution rule requires broker-dealers to use 

reasonable diligence to ascertain the best market for a security and trade in that market so the 

resulting price to the customer is as favorable as possible under prevailing market conditions. 

Although the concept of best execution has been around in the equities market for decades, it 

was not until March of last year that best execution was required for the municipal bond market. 

Accordingly. the MSRB issued detailed guidance to dealers explaining how to implement that 

best-execution requirement in the municipal bond market.5 

Further, the MSRB has amended its rules to require municipal securities dealers, starting 

on May 14, 2018, to disclose markups and markdowns when engaging in offsetting principal 

transactions with retail customers. Specifically, the disclosed markup or markdown must be 

4 MSRB Rule G-!8. 5 lmplementation Guidance on MSRB Rule G-18. on Best Execution (Nov. 20, 2015). 

6 
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calculated from the prevailing market price. The MSRB also has issued guidance to municipal 

securities dealers about how to determine the prevailing market price. 

The combination of the best execution rule and retail markup disclosure rule are positive 

developments for which we applaud the SEC and MSRB. We expect these developments will 

have a beneficial impact on municipal bond pricing as dealers and investors adapt to these new 

rules and as they are appropriately enforced. 

Areas of Possible Improvement 

The current combination of'·request for quote" auctions and electronically posted offers 

is efficient and works well in lower liquidity markets. like the municipal bond market. We 

believe, however, that there is continued room for improvement in the structure and operation of 

that market. For one thing, many trades are still internalized or conducted "blind" without being 

o!Iered through any auction at all, and thus do not capture the benefits the auction process has 

brought to the market. In addition, several anti competitive practices have developed that we 

believe limit the advantages of the existing market structure and exert detrimental effects on 

retail investors. 

First we want to address the practice of filtering. Filtering occurs when a broker-dealer 

handling its own retail customer's order (a "retail broker-dealer") requests a quote or starts an 

auction on an A TS, but uses automated tools on the A TS to filter out responses from specified 

dealers. Current MSRB guidance pennits filtering only "for a legitimate purpose consistent with 

obtaining the most favorable executions for [retail] customcrs ... .''6 But filters are still used in 

the market today in ways that are difficult to reconcile with the guideline. Dealers commonly 

engage in both auction filtering, where they restrict the set of liquidity providers permitted to 

participate in retail bid wanted auctions, and offerfiltering, where dealers limit the selection of 

" Implementation Guidance on MSRB Rule G-18. on Best Execution (Nov. 20, 20 !5) at 7. 

7 
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28749.008

offers made available to investors looking to purchase bonds. In both cases, these filtering 

restrictions on market participation have the same result-retail investors may not receive the 

best available price. 

Moreover, the behavior of retail broker-dealers who utilize these filtering practices often 

belies any claim that they might have a "legitimate purpose" for employing them. For example, 

retail broker-dealers may often lilter offers from certain counterparties, but allow those same 

counterparties to bid in bid wanted auctions. Similarly, retail broker-dealers will filter 

participants from retail bid wanted auctions, but opportunistically trade with those same 

participants in the voice market. As these filtering practices may prevent investors from 

receiving the best price, it is difficult to asce1tain what "legitimate purpose" might motivate such 

behavior. Instead, such practices ret1ect a conflict of interest between broker-dealers and their 

customers. Though these restrictions may harm investors' execution quality, the practices 

clearly benefit the retail broker-dealers whom these investors depend on for pricing information. 

Auction filtering facilitates dealer internalization of customer sell orders by reducing the 

competitiveness of the auctions. Similarly, offer filtering facilities dealer internalization of 

customer buy orders by increasing the likelihood that these orders execute against the dealers' 

own inventory. Accordingly. a focus on whether the continued usc of filters is '·for a legitimate 

purpose" may be in order. 

Second, we want to address the topic of auction competitiveness. As previously 

discussed, retail broker-dealers often sell bonds on behalf of customers via bid wanted auctions, 

during which market participants submit bid prices at which they would be willing to purchase a 

specified bond. Once an auction has concluded, the customer has the option to either sell the 

bond at the winning bid price, or pass if the winning bid price is undesirable. In theory, this is 

8 
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28749.009

how the process should work. In practice. however. there are many anticompetitive practices 

which reduce the effectiveness of these auctions and lead to inferior pricing for customers. 

One such practice, known as a "trade through,"" occurs when a retail broker-dealer obtains 

prices for a customer via a bid wanted auction, but then internalizes the order by purchasing the 

bond from its customer for its own account at a lower price than the winning bid in the auction. 

In April 2017. this occurred on nearly 15% of auctions in which HGM submitted the winning 

bid. The price differential may result from the submitting broker-dealer including a ··desk 

credit"- essentially a markdown in the price at which it purchases the bond from the customer. 

This practice of internalizing orders and allowing for a trade through is harmful to customers 

because it results in bonds selling at inferior prices to those that were available at the time of the 

trade. We are hopeful that. once it takes effect next year, the new MSRB markup rule will help 

eliminate this internalization and trade through practice by revealing to customers the component 

of the trade price that reflects retail broker-dealer compensation on principal buy and sell trades. 

There are also many cases of retail broker-dealers taking advantage of a process known 

as '"last-look," wherein the dealer observes the prices submitted to a completed auction and 

decides to purchase the bond from the customer at a price slightly better than the winning bid, 

even though such practice appears to be prohibited by MSRB Rule G-43. In April2017, nearly 

40% of auctions in which HGM submitted the winning bid resulted in a trade with a different 

counterparty at an equivalent or better price; some of these were undoubtedly cases of dealers 

utilizing their last-look advantage. This process harms auction competitiveness by deterring 

aggressive pricing or participation by other dealers who know the submitting dealer may "step in 

front of" their winning bid prices or is otherwise using the auction process solely for price 

discovery purposes. An alternative approach would be to require the submitting dealer to place 

9 
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28749.010

its own prices in the competitive auction on par with all other participants, thereby removing its 

last-look advantage. This approach would put all liquidity providers on equal footing and 

encourage more aggressive pricing by auction participants, thereby improving pricing quality for 

customers. We believe that municipal bond investors would benefit from enforcement against 

the use of the last-look practice. 

To highlight the overall impact of these anticompetitive practices, HGM is the winning 

bid on over 900 unique auctions each day; however, HGM only receives an execution on 25% of 

these winning bids. 

Bidding Experience in Municipal Bonds 

Conclusion 

In recent years, we have seen important strides in the competitiveness and transparency 

of the secondary market for municipal bonds, thanks in large part to the enactment of responsible 

rules and guidance. We are hopeful that the competitiveness and transparency of the secondary 

market for municipal bonds will only continue to improve as these rules are implemented into 

10 
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28749.011

practice and appropriately enforced by regulatory staff. We appreciate the Subcommittee's 

attention to these important issues, and we are grateful for the opportunity to join in the 

discussion as we work together toward continued improvements in enforcing those rules for the 

benefit of all investors and market participants. 

ll 
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Written Testimony of Jonah Crane 

Former Deputy Assistant Secretary, U.S. Treasury Department 

before the 

House Financial Services Committee's 

Subcommittee on Capital Markets, Securities, and Investment 

July 14, 2017 

Thank you Chairman Huizenga, Ranking Member Maloney and members of the Committee for 

inviting me to participate in today's hearing. Market structure has been a significant focus of my 

policy work in each of my jobs here in Washington, as an advisor to Senator Chuck Schumer, a 

senior advisor at Treasury, then as Deputy Assistant Secretary for the Financial Stability 

Oversight Council. 

I am encouraged that the Committee is focusing on fixed income markets, because these markets 

are critical to the strength and resilience of the U.S. economy. Fixed income markets are 

undergoing structural changes-driven by technology, changing risk appetites and business 

models, financial reform, and changes in the investor base-but have supported record levels of 

bond issuance over the past nine years. 

My written testimony will discuss the primary changes taking place in fixed income market 

structure, related changes in market liquidity, and important developments in the Treasury 

market. I will conclude with some recommendations intended to bring oversight of the Treasury 

market into the 21st Century in ways that facilitate the natural evolution in market structure that 

is already underway. 

Market Structure: Fixed Income Markets in Transition 

In non-financial markets, "market structure" generally refers to the organizational and other 

characteristics of a market-in particular, the competitive dynamics: whether a market is 

monopolistic, oligopolistic, or highly competitive. Competition is an important aspect of a 

healthy financial market structure-a topic to which I'll return. But, in markets for financial 

assets, "market structure" usually refers more broadly to the collection of rules, technological 

infrastructure, processes, and participants that combine to determine how buyers arc matched 

with sellers. 

Liquidity, broadly speaking, refers to the ease with which buyers are matched with sellers. 

Questions about liquidity, which have been much-discussed in recent years, thus inherently raise 

questions about market structure. 

The single most important transformation in financial market structure over the past 20-plus 

years is the shift, in virtually every asset class, towards electronic trading. This evolution began 
44 


28749.013

in equities in the 1990s, and migrated to futures and foreign exchange (FX) markets. The 

transition has been slower and uneven in fixed income, but it is clearly underway. 

Electronic trading can take many forms. In markets for standardized, benchmark securities, highspeed algorithmic trading, often referred to as high-frequency trading or "HFT," has become 

predominant. HFT accounts for a majority of trading in equities, futures, and FX. 

Algorithmic trading that relies less on speed, but nonetheless automates trading decisions and 

order execution, is increasingly common in parts of the fixed income market where trading is 

less frequent, such as corporate bonds or off-the-run Treasuries. 1 Algorithmic trading can be 

thought of as a subset of electronic trading, and HFT can be thought of as a subset of algorithmic 

trading.2 

As discussed in more detail below, HFT now accounts for a majority of trading in the interdealer 

market for Treasuries, which in turn accounts for roughly half of all cash Treasury trading 

volume. 3 The other half of Treasury trading occurs in the "dealer-to-client" market, where there 

is no HFT and, while electronic trading exists, more than half of trades reportedly are still 

conducted by phone or message. 

In corporate bond markets, where the securities are more customized, algorithmic trading has not 

yet become prevalent, but more basic electronification is growing. To some extent, this simply 

means the old ways of transacting by phone are migrating to the screen. But a growing portion of 

corporate bond trading is happening on "all-to-all" venues--that is, trading directly between end 

investors without a dealer between them. Precise estimates are difficult to come by, but nearly 

20% of corporate bond trading is now electronic,4 and the most popular all-to-all trading venue 

for corporate bonds reported record volumes in the first quarter of 2017. 5 

Alongside the transition to electronic trading, fixed income markets are experiencing a shift from 

"principle-based" intermediation to "agency-based" intermediation. 6 Historically, fixed income 

markets have relied heavily on dealers to act as intermediaries, often in a principal capacity. That 

is, a dealer would step in and buy bonds from a trader who wants to sell, holding the bonds on its 

own balance sheet until a willing buyer could be found. To compensate for warehousing that 

1 Off-the-run refers to all but the most recently-issued securities of a given tenor. 2 See "Electronic trading in fixed income markets," Bank lor International Settlements, available at 

bilQ:! iwww .bis. omvu blimkld}7 .pdf. 1 See Joint Staff Report: The U.S. Treasury Market on October 15,2014, July 13,2015 (JSR), available at 

!H!p_s_:~-ww.trc~liY.KQ}}lliss-ccntcr/p~~""L~Leascs/Oocui_!l~l!?il9int St1!fLR~R_ort T.r.t;£!~u_rv 10-j_5._:}_QJ~J:lQf. 4 Greenwich Associates, "Understanding the U.S. Fixed·lncomc Market," (2016). 5 See Rick McVey, Liquidity in the Post-Crisis Era: The Difference a Decade Makes, available at 

h!tn_:!f\Y\~:~ ... m£lrk~~~-l:~~~~.:gQ!ll;traqit~g!9.P.9_D.!I<:l.<!!D_gJ?h1?-

6 See "Electronic trading in fixed income markets," Bank for lntemalional Settlements, available at 

http://~~~-Q_is.org!pJ,.!_l2l/nlktcQ.~9f 
45 


28749.014

risk, dealers would charge a "spread" between the price at which they were willing to buy and 

willing to sell. 

When acting as an agent, a dealer is effectively acting as a broker, matching buyers and sellers 

for a fee or commission, generally without putting its own balance sheet at risk. Fixed income 

markets are increasingly shifting toward agency-based intermediation, aided in part by the 

technological changes discussed above and by the entry of new competitors in the marketplace. 

These transitions likely reflect the confluence of several factors. In addition to technology 

changes that predate the crisis, as discussed above, regulatory reform and changes in business 

models following the crisis also have likely contributed. Large banks and broker-dealers have 

significantly reduced their leverage, heightened risk management, and sought more resilient 

sources of funding. 

Changes in Market Liquidity 

Some have viewed these changes as detrimental to liquidity in fixed income markets--corporate 

bond markets in particular. To date, the data do not show a broad-based deterioration in 

corporate bond liquidity. Tn fact, by many traditional measures liquidity is at least as healthy as 

the pre-crisis period. Bid-ask spreads are back at pre-crisis lows, and trading volumes reached 

record levels earlier this year7 Other liquidity measures show a more mixed picture: average 

trade sizes arc down, as is the proportion of block trades.s 

In the aggregate, it is difficult to say if liquidity is "higher" or "lower," but the data are consistent 

with the trends outlined above: a greater preponderance of electronic trading, and a shift toward 

agency-based intermediation. That is, the shifts in market structure arc changing the nature of 

liquidity provision. 

Recent studies of bond market liquidity appear to support this conclusion. A study by Federal 

Reserve Bank of New York economists, for example, shows that corporate bonds traded by 

dealers with high levels ofleveragc and high reliance on rcpo funding (i.e., dealers who may face 

greater constraints as a result of regulatory capital requirements) are less liquid than bonds traded 

by less-constrained dealers, and those institutions appear to trade less with customers. 9 

Considered in light of the rest of the data, which do not show a deterioration ofliquidity overall, 

the best interpretation seems to be that all of the factors described above are contributing to the 

7 Data available at h!.~;;.(w~Y.'Y:5.!.fn~-~-:Qrg,:r.c5~~li.~tt'8.!:"!!i~li_~~~,i_~'i· 8 For a comprehensive discussion on market liquidity since the crisis, see Market Liquidity After the Financial 

Crisis, Federal Reserve Bank of New York StaiTReport No. 796 (revised June 2017), availah!e at 

I) t tp):/,:\~'\\; w .nC\D~9r~.f~~\.Q.f."_gbllt;9_i.~~ lib,r_ary ~m~d.i~ 'rcsc_aEc.bJ.~~~.fL r_t?P9_[l~! st)9(~~ l?~J f/J<~:'-SI}. 9 Sec Tobias Adrian, Nina Boyarchcnko, and Or Shachar, Dealer Balance Sheets and Bond Liquidity Provision, 

Federal Reserve Bank of New York Staff Research Report No. 803, avaialhle at 

h!_t,r_~~:~vww,J_J_~~9Y~kd.o!:,gk~carcl!_j;tal'f re_pQ!1~srX0..1. 
46 


28749.015

trend toward more agency- and less principal-based intcnnediation. This may make larger 

transactions more difficult to complete, but market participants are responding by looking to 

technology for more sophisticated trading strategies. Investors arc particularly focused on 

deploying technology in corporate bond markets to improve block trading and execution in high 

yield bonds--which tend to be less liquidw 

These trends have occurred against a backdrop of record corporate bond issuance, resulting in 

the outstanding stock of corporate bonds doubling since 2009. At the same time, the changing 

profile of the investor base is also altering the nature of fixed income markets. Mutual funds and 

ETFs now account for nearly 18% of corporate bond ownership, up from 6.3% in 2008.1! The 

combination of greater difficulty executing large trades and increased bond ownership by mutual 

funds and ETFs has raised concerns that fund managers might have difficulty managing large 

redemptions. Mutual funds and ETFs offer their investors much greater liquidity (daily and 

immediate, respectively) than is typically found in markets for the bonds owned by those finds. 

The SEC recently adopted rules requiring more stringent liquidity risk management by mutual 

funds that, if implemented rigorously, should mitigate this risk. 

When assessing whether current policy is achieving the right balance, it is important to keep in 

mind that not all liquidity is created equal. Much of the liquidity apparent prior to the crisis was 

fueled by excessive leverage, and excessive speculation, on the part of banks and broker-dealers, 

as trading became a central profit center for the industry. Not only did this liquidity disappear 

when financial markets became stressed, the rapid unwinding of leveraged positions likely 

contributed to the panic. Liquidity is an important factor but by no means the only test. Robust 

liquidity is a feature of a well-functioning market, but it should not be prioritized at the expense 

of important financial stability safeguards. 

"Flash" Events and "Fragile" Liquidity 

In more standardized fixed income markets, where algorithmic trading has become prevalent, 

price-based measures of liquidity such as bid-ask spreads have improved. However, a series of 

"flash" events in various fixed income markets have raised questions about the nature of liquidity 

in these markets. While liquidity may have improved in normal times, has it become more 

fragile-- that is, more prone than liquidity supplied by traditional intermediaries to disappear 

during periods of extreme volatility'? 

The most notable of these events occurred on October 15,2014, when Treasury yields dropped 

16 basis points in a span ofjust six minutes, fully recovering only minutes later. The 37-basis 

point round-trip in yields that day was the fourth largest moves over the past 20 years, and 

occurred without any apparent fundamental catalyst. 

10 Sec Greenwich Associates, "Innovations Ease Corporate Bond Trading," (April20!7). 11 See hJJ~~_;_L~y_,:vw .ici~QTg·~yi~~i-~1~i~_l]_f_Q_l}Lt!~]~. 
47 


28749.016

These "Hash" events, while not common, nonetheless appear to be a persistent feature of markets 

with a large proportion of high-speed algorithmic trading. We have seen similar events in U.S. 

equities (May 2010), Indian equities (October 2012), the Swiss Franc (January 2015), the British 

Pound (October 2016)12 

The Joint Staff Report notes that "while liquidity ... on average, may have benefited from the 

advent of electronic trading, the changing nature of liquidity provision may have increased the 

likelihood of periodic episodes of intraday volatility."JJ 

Of course, liquidity often deteriorates during volatile periods. One recent New York Fed staff 

research paper examines three recent case studies, including the October 15,2014 Treasury flash 

event, and concludes that "the degree of deterioration in market liquidity was within historical 

nom1s, suggesting that liquidity remained resilient even during stress events." 14 However, that 

conclusion is based on traditional measures of liquidity, such as bid-ask spreads and market 

depth. One of the important questions raised by Hash events across several markets, and implied 

by the Joint Staff Report, is whether traditional definitions and measures ofliquidity are 

sufficient in markets where HFT is predominant and flash events may be expected to occur 

periodically. 

The Bank of England has posed similar questions, and attempted to measure the "resilience'' of 

liquidity in various ways15 Others have proposed incorporating efficient pricing into the concept 

of liquidity to account for the fact lhal, in flash events, prices often move in ways that appear 

completely unlethered from any new infom1ation. 16 

Treasury Market Bifurcation 

October 15, 2014 put a spotlight on the rise of algorithmic trading and PTFs in tbe Treasury 

inlerdealcr market, which has evolved into a fully-electronic marketplace, with two primary 

12 The Market Crash of 1987 shared many characteristics with these recent events-the most notable difference 

being the speed with which recent events have unfolded due to the overall increase in the speed of trading. Indeed, 

such "failures" may be a persistent feature of all complex systems involving the interaction of social systems with 

technological ones. The construction oft11e Millcnium Bridge is one example of the failure to take into account the 

complex interaction of large social systems-in this case the tendency of large groups of pedestrians to 

simultaneously shill their weight in the same direction. Sec Dave Cliff & Linda Northrup, The Global Financial 

/'vfarkt'ts: An Ultra-Large-Scale Systerns Pcn;pective, Government Office for Science (2012}. 13 Sec JSR, p. 42. 14 Tobias Adrian, Michael Fleming, and Or Shachar, Market Liquidity After the Financial Crisis, (June 28, 2017), at 

QgEL:JJ.Q~:r!Y!i~~:.<.:ts£.QEQn!j<.;..s.: nc\\:):~~:.~~~J.'s;sL~2F.£.2QllJH!~!l'!Qds_~-lill!!i"~lliY:.~t~_:_lh~-~ru1@~ i_~ \:_~!:.i~~JJ!D.l!. See also 

Market Liquidity Alter the Financial Crisis, Federal Reserve Bank of New York Staff Report No. 796 (revised June 

20 17), available at h_ttps: 1.-'www .I1~\\yorkfed.org,.mt;diati~rf!ry.-:nw9j~ r_r~~.9!:!!.".~.b .. ~.?t.~JLrc;m~n?_/::;r_7_9{).pdf?l~.~-~~· 15 See Niki Anderson, Lewis Webber, Joseph Noss, Daniel Beale and Liatn Crowley-Reidy, "The Resilience of 

Financial Market Liquidity," Bank of England Financial Stability PaperNo. 34 (October 2015). 

'"Nathaniel Wuer!Tel, "Market Structure and Liquidity in the U.S. Treasury and Agency Mortgage-Backed Security 

(MBS) Markels," May 17, 2016, available at p_ttm;~iL\V.\V\V_,!l''·'~y.o_rkfcd.org.l_newsevenls/sp"£(;b<;s!;2_()j.6/cv_u.f'.l(l.0517. 
48 


28749.017

venues (BrokerTec and Nasdaq Fixed Income, fom1erly eSpeed) that employ eentrallimit order 

books. As discussed above, PTFs now account for a majority of trading on these platforms, 

similar to equities, futures, and FX. 

Perhaps just as notable, however, is the degree to which the Treasury market remains bifurcated 

between the client market and the inter-dealer market The conundrum of the Treasury market is 

that, despite Treasuries being the most standardized security-issued by a single issuer, in large 

quantities, at regular intervals in benchmark maturities, carrying no credit risk-roughly half of 

all trading in cash Treasuries still occurs in the heavily intermediated and largely opaque dealerto-client markets. 

When end users of Treasuries-such as mutual funds or insurance companies-want to trade, 

they still generally do so only with large bank dealers. And most of this trading is done over the 

phone. The dealers internalize a great deal of those transactions-that is, offset risk from 

customer flows across their portfolio--and send the rest to the inter-dealer market Clients 

generally don't participate in the more transparent intcrdcaler markets. Furthennore, the dealerto-client market remains dominated by a handful of large dealers. According to Greenwich 

Associates, '"[t]he top five dealers in U.S. Treasuries handled 58% of client trading volume in 

2016." 17 

This bifurcation may be starting to soften. Non-bank dealers have recently begun to provide 

quotes directly to clients (end users) on Bloomberg and Tradeweb, the two largest dealer-toclient trading platfom1s. 18 Other initiatives have sought to improve liquidity in less liquid 

segments of the market. For example, Nasdaq's off-the-run liquidity offering and new players 

sueh as OpcnDoor, which is bringing together dealers with customers for all-to-all trading 

sessions of off-the-run securities. 

These arc, overall, positive trends. Healthy financial market ecosystems, much like biological 

ecosystems, require diversity--in this case, diversity in sources of both demand and supply for 

liquidity. The Treasury market's current bifurcated structure makes little sense. But as the events 

of October 15 illustrate, these benefits come with certain risks. 

I expect the advent of trade reporting in Treasury markets to lead investors to take a closer look 

at how their liquidity needs arc being met Experience in other markets shows that transparency 

breeds competition, and competition breeds efficiency. The implementation of TRACE reporting 

for corporate bonds reduced trading costs in that market by as much as 50%, and similar 

17 See Greenwich Associates, "New Landscape in U.S. Treasury Trading Benefits the Buy Side," (2016). 

!R "Citadel Securities ratchets up fight against big banks," Crain's Chicago Business, June 21, 2017, available at 

h~~wwA1J~a \!Obt£_~I!~l§.,_<;S~!l~.;!fjJsJ~.~~f!l7i!0~~J_/_i~J) ~~ .~Ql! LZJJ.6~~)_9JQ · 
49 


28749.018

improvements were seen more recently when interest rate swap markets were opened up to 

competition following Dodd-Frank. 

Over time, it is likely that the Treasury market will become a less bifurcated marketplace, one 

where end users with diverse needs have a spectrum of choices when seeking liquidity. Greater 

diversity of supply and demand for liquidity will enhance the Treasury market ecosystem, 

bringing benefits to taxpayers and end investors alike. 

Modernizing Oversight of the Treasury Market 

The structure of the Treasury market has evolved significantly over the years, and the regulatory 

framework goveming the Treasury market no longer fully reflects who is participating in that 

market or how they arc transacting. 

The first step for refonn was for the official sector to get access to Treasury transaction data. 

That proposal became a reality just this week, with Treasury transactions now reported to 

FlNRA's TRACE_~ 9 Regulators have also established standing information sharing agreements 

to facilitate joint analysis in response to future events. The implementation of official sector 

reporting of cash Treasury market transactions was a critical step forward. But there arc other 

important gaps to tlll in the oversight framework for the cash Treasury market. 

FINRA and the SEC have taken initial steps to re-examine their rulebooks, and detem1ine 

whether all of the exemptions that historically applied to the Treasury market still make sense. 

FJNRA already proposed, for example, to make rules against front-running customer orders or 

block orders applicable in Treasury markets. 

There arc many important ways in which the Treasury market is unique, and its unique status 

should be reflected in the rules goveming trading. But it is a large, standardized, liquid marketthe kind of market in other words, where the benefits of transparency and competition arc most 

likely to outweigh the costs. 

Therefore, I would argue for a presumption thai Treasuries should be traded more or less like 

other securities, except where the unique features of the Treasury market, and the role of 

Treasuries in the economy, dictates a different result. For example, the fact that the dollar is a 

global reserve currency means that central banks and other reserve managers hold large stocks of 

Treasuries-the largest asset class denominated in dollars -and may need to transact in very 

large quantities relative to most other traders and most other markets. There arc benefits that 

accrue to the United States as the issuer of the global reserve currency and safe haven asset, so 

we should be sure to preserve a market structure where very large block trades can be facilitated 

without being exposed to the market. 
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lndeed, this is the approach proposed by the Treasury department last year in suggesting a 

framework for enhanced public transparency of Treasury market activity. Specifically, Counselor 

Antonio Weiss proposed three ways to mitigate concerns that had been raised about additional 

transparency: 

• First, appropriate time delays to enable intcm1cdiaries time to hedge or find the other side 

of a trade, especially in less liquid products like off-the-runs or TIPs; 

• Second, limitations on disclosure of size for large trades (i.e., masking of block trades) 

largely for the reasons suggested above; and 

• Third, a phased-in, gradual approach over time. similar to the way TRACE was phased in 

for corporate and mortgage bonds. Gradually phasing in public transparency allows for 

adjustments along the way, and has the added benefit of facilitating independent analysis 

of each phase--much like a series of pilots. All told, the implementation of TRACE for 

corporate bonds took more than three years and involved extensive consultation and 

adaptation along the way. 

In addition, I would urge this Committee and other policy makers to consider the following 

steps, all of which reflect the work undertaken in the comprehensive review of Treasury market 

structure we conducted following the events of October 15,2014: 

• Registration of PTFs. We know that some of the biggest players in this market are 

different than they used to be, and are not subject to the same level of oversight as 

traditional intermediaries--or in some cases any oversight at all. The SEC should require 

registration of PTFs who arc active in the Treasury market. At the very least this would 

allow the transaction rep01iing now underway to identifY PTFs, who currently do not 

report trades directly because they arc not FINRA members. 

• Registration and oversight of trading venues. When it proposed revisions to Reg ATS, 

the SEC asked preliminary questions regarding whether altemative trading systems 

(ATSs) for govemrnent securities should be required to register. The SEC should follow 

up on those questions by establishing minimum standards applicable to all Treasury 

trading platforms. The membership and trading rules for these venues should be clear and 

public, and they should be required to implement important operational risk controls such 

as Reg SCL For its part, the CFTC should move forward with Reg AT to address 

operational risks in the futnres market 
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• Central Clearing. Cash Treasury transactions arc not required to be centrally cleared in 

the way that equities and futures arc, and the way most swaps now arc following DoddFrank-including interest rate swaps, which can act as a substitute for Treasuries. 

Moreover, many PTFs active in the Treasury cash market are not members of Fixed 

Income Clearing Corporation (FICC), the central counterparty that facilitates clearing and 

settlement for a significant portion ofthc cash Treasury market20 As a result, PTF 

transactions arc often cleared bilaterally, increasing counterparty risks. Many PTFs limit 

their overnight exposures, but may rapidly accumulate large intraday exposures. The 

request for information issued by Treasury in January 2016 asked whether existing the 

clearing arrangements and margin regime arc sufficient or whether reforms are necessary. 

Relatedly, increased access to central clearing for repurchase agreement transactions-an 

important source of financing for Treasury securities-has the potential to both reduce 

counterparty risk and facilitate the entry of more new competitors in the Treasury market. 

Concerns have been raised about the impacts of post-crisis reforms, specifically the 

supplemental leverage ratio applicable to the largest banks, on rcpo funding. The leverage 

ratio is an important backstop, and should not be set aside to address marginal concerns 

about trading liquidity. Instead, policymakers should consider ways to facilitate broader 

access to central clearing for repo transactions. 

As we often reiterated at Treasury, our first maxim in dealing with the Treasury market was "do 

no harm." But that does not mean doing nothing. Markets and market participants arc evolving, 

and in the face of this change the biggest risk may be doing nothing at all. I am encouraged by 

the progress made by the SEC and FTNRA to date, and hope that this Committee will work with 

them and other policy makers to continue on the path of steadily bringing oversight of the 

world's most important asset class into the 21st Century. 

Thank you and I look forward to taking your questions. 
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28749.021

T.RowePrice 

STATEMENT 

OF 

ALEXANDER SEDGWICK 

HEAD OF FIXED INCOME MARKET STRUCTURE & ELECTRONIC TRADING 

T. ROWE PRICE ASSOCIATES, INC. 

BEFORE THE 

US HOUSE OF REPRESENTATIVES 

COMMITTEE ON FINANCIAL SERVICES 

SUBCOMMITTEE ON 

CAPITAL MARKETS, SECURITIES, AND INVESTMENT 

ON 

A REVIEW OF FIXED INCOME MARKET STRUCTURE 

JULY 14,2017 
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EXECUTIVE SUMMARY 

• We greatly appreciate the Subcommittee's continuing interest in ensuring the quality and 

integrity of the fixed income markets. Enhancing the transparency. liquidity, and overall 

functioning of these markets is critical to the success of millions of American savers who use 

the types of funds that T. Rowe Price and other lCI members sponsor to gain access to the 

fixed income markets. 

• The fixed income market is a collection of several diverse markets, which differ in tenns of 

the drivers of retums, liquidity characteristics, and the amount of electronic trading that takes 

place. 

• Fixed income products can, and indeed historically have, traded in a variety of ways, and the 

evolution of market structure in this space has never been-and is not be expected to belinear. There are ongoing changes in market structure as a function of the market participants 

and their needs, and tradeo!Is with respect to the immediacy of liquidity, depth of that 

liquidity. and price transparency. 

• Fixed income markets provide a critical source of funding to companies and govemments. 

The capital raised in our markets provides growth capital for corporate America to create 

jobs, fund key infrastmcture projects for municipalities to upgrade roads and bridges, and 

provide a vital funding mechanism for the federal govemment. The fixed income markets 

also play a critical role in helping investors achieve important financial goals, as fixed 

income investments are used by investors to generate returns for pension funds, retirement 

plans, and college savings. 

• Liquidity is a critical clement of efficient markets, and is particularly important in the 

everyday operations of mutual funds like those sponsored by T. Rowe Price. Although 

liquidity in the fixed income markets can be difficult to measure. it is our opinion that over 

the past decade. we have seen greater fragmentation, a more bifurcated market, and lower 

overall liquidity. 

• A number of new regulatory requirements, including the Volcker Rule, have limited the 

incentives for banks to use their balance sheets to engage in market making activities. 

• Although there has been no shortage of commentary regarding liquidity risks in the fixed 

income markets, we maintain a constructive outlook. New technology and other new 

protocols for trading have given fixed income traders additional tools for sourcing liquidity 

and, to the extent the markets experience a measured increase in volatility and rise in yields, 

two-way trading activity may increase. 

With respect to the Treasury market, we generally support the recommendations of the Joint 

Staff Report on the Treasury flash rally, particularly the utility of enhanced regulatory 

reporting to help the Department of the Treasury and other stakeholders better ensure an 

efficient and competitive market for all participants, including funds and other investors. 
54 


28749.023

Buy-side finns have a range of strong views on transparency and the public dissemination of 

trading infonnation in the fixed income markets, as well as the utility of existing reporting 

mechanisms. T. Rowe Price has been and continues to be broadly supportive of greater 

transparency in fixed income markets, although we recognize risks in this regard. We 

encourage regulators, both domestic and international, to thoughtfully consider requirements 

to foster transparency, and then to implement those requirements in phases with regular 

periods of review and study to minimize any unintended consequences for market 

participants or market dislocations. This kind of careful approach can produce a 

transparency regime that appropriately balances the benefits of transparency with the risks to 

market functioning that may be caused by the public dissemination of sensitive trading 

infonnation. 

• We arc excited about the continued development of greater "electronification" in the fixed 

income markets. Electronic trading ("'e-trading'') has proven to be most successful in 

markets that are characterized by an active and diverse set of participants and a smaller set of 

homogenous securities that allows buyers and sellers to focus their interest, such as for onthe-run Treasuries and Treasury futures trading. E-trading is less advanced in corporate 

markets, but it continues to grow steadily. T. Rowe Price believes that removing obstacles to 

further electronification will improve price discovery, facilitate best execution, and enhance 

capital fonnation. 

ii 
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I. INTRODUCTION 

Thank you. Chaim1an Huizenga. Ranking Member Maloney, and members of the Subcommittee 

for inviting me to testify. My name is Alexander Sedgwick. I am the Head of Fixed Income 

Market Structure and Electronic Trading at T. Rowe Price. a global investment management 

organization with $861.6 billion in assets under management as of March 31, 2017. 

In addition toT. Rowe Price. I am also appearing at this hearing as a member of the Investment 

Company Institute ("ICI"). a leading global association of regulated funds. 1 !CI's members 

manage total assets of $19.9 trillion in the United States, serving more than 95 million US 

shareholders, and $5.6 trillion in assets in other jurisdictions. 

We greatly appreciate the Subcommittee's continuing interest in ensuring the quality and 

integrity of the fixed income markets. The types of funds that T. Rowe Price and other lCI 

members sponsor play a critical part in capital formation in the United States by investing in the 

fixed income markets on behalf of millions of retail investors saving for their long-term financial 

goals. And as such, the fixed income markets play an important role in helping the young invest 

for their first home, helping parents invest so that their children might attend college, helping in 

the preparation for retirement, and helping current retirees meet the challenges of retirement. 

Fixed income market dynamics and factors relevant to trade execution affect our ability to 

deliver on our investment mandates and, in tum, help our investors achieve those financial 

investment goals. Enhancing the transparency, liquidity, and overall functioning of these 

markets is thus critical to the success of millions of American savers. 

In the sections that follow, I provide a brief outline on the evolution of the fixed income markets 

and T. Rowe Price's role in them. discuss the current state ofliquidity in the fixed income 

markets, and provide T. Rowe Price's recommendations for enhancing market efficiency. I also 

discuss some of the promising developments in the electronification of fixed income trading. 

II. Background on the Fixed Income Markets and T. Rowe Price 

a. Evolution of Market Structure 

The history of the government bond market provides a helpful illustration of the evolution of 

fixed income market structure as it speaks to several important points: 

Fixed income investments can, and indeed historically have, traded according to diverse 

market conventions. 

• Changes in market structure result in tradeoffs, reflecting the relative importance of 

features like immediacy ofliquidity, depth of that liquidity, and price transparency. 

1 Regulated funds include mutual funds, exchange-traded funds ("ETFs"), closed-end funds, and unit investment 

trusts in the United States and similar funds offered to investors in jurisdictions worldwide. lCI seeks to encourage 

adherence to high ethical standards, promote public understanding, and otherwise advance the interests of funds, 

their shareholders, directors, and advisers. 
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28749.025

• The evolution in market structure of any fixed income asset class is not linear-rather it 

is influenced by the needs and constraints of all market participants, including issuers, 

buyers, sellers and liquidity providers, over time. 

• Perhaps most importantly, the participants themselves and their needs are not static but 

have changed over time. 

The evolution of organized fixed income markets in the United States began in 1792 when the 

New York Stock Exchange was founded primarily as a government bond exchange. Since then. 

US Treasuries have moved from trading on an exchange to trading over-the-counter ("OTC") 

and back several times, largely depending on which market structure best reflected the current 

needs of investors. 

War funding precipitated many of the changes in Treasury market structure. First, the dramatic 

increase in the funding needs for the Civil War incentivized private finns to act as sales agents, 

and also provide OTC secondary markets for their customers. Later, the issuance of exchangelisted Liberty loans to fund World War I increased the volumes on the exchange. 

This trend reversed in the mid-1920s due to a number of factors: (i) the retirement of war debt; 

(ii) the growing concentration of new Treasury issues in non-exchange listed securities; and (iii) 

increased institutional buying from an emerging financial sector. Further gravitation to OTC 

markets resulted in 1925 when, at the suggestion of the Federal Reserve Bank of New York, 

Treasury stopped executing its open market operations via the exchange. Moreover, the 

introduction of the Treasury bill in 1929 as the dominant liquidity instrument of the money 

market cemented the importance of the OTC market. as only marketable Treasury bonds 

remained exchange listed. By 1958, trading in government securities on the exchange totaled 

only $100,000, compared with $2.9 billion in 1919.2 

As this brief history shows, the evolution of the fixed income market has not been--and should 

not be expected to be-linear. Moreover, fixed income market structure tends to be a reflection 

of the changing needs of its participants, the evolution of technology, and underlying financial 

conditions at the time. 

b. T. Rowe Price's Role in the .Fixed Income Markets 

T. Rowe Price provides a broad array of mutual funds, subadvisory services, and separate 

account management for individual and institutional investors, retirement plans, and financial 

intermediaries using a disciplined, risk-aware investment approach that focuses on 

diversification, style consistency, and fundamental research. T. Rowe Price sponsors over 175 

mutual funds, including over 50 fixed income funds and approximately 40 retirement/target date 

funds. 

2 See "Treasury-Federal Reserve Study of the Government Securities Market" ( 1959). available at 

https://fraser.stlouisfed.org/title/317. 

2 
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Accordingly, we are a significant participant in the fixed income markets. On behalf of our 

clients. we participate across a range of investment strategies and fund types. As of March 31, 

2017, over $123 billion of our total $861.6 billion in assets under management are attributable to 

fixed income portfolios. Fixed income investments can also play an important role in other types 

of portfolios managed by the finn, such as target date funds and other asset allocation 

portfolios. 3 Overall, as of March 31, 2017, T. Rowe Price managed over $195 billion in fixed 

income investments. 

c. The Importance of Fixed Income Markets to Capital Formation 

Fixed income markets provide a critical source of funding to companies and governments. The 

capital raised in our markets provides grmvth capital for corporate America to create jobs, fund 

key infrastructure projects for municipalities to upgrade roads and bridges. and provides a vital 

funding mechanism for the federal government. 

The structure of the fixed income markets is more complex than the equity markets because each 

issuer can issue an array of instruments with varying maturities. debt structures. and covenants. 

That diversity of fixed income instruments is an important factor in how T. Rowe Price manages 

portfolios. The wide variety of bond characteristics including return profiles, maturities, ratings 

and individual issuers. provides a robust universe of potential investments. Importantly, these 

characteristics play a prominent role in how we prudently manage risks associated with our 

investments and how we gain desired exposure. A diverse set of bond characteristics ensures 

that we can appropriately position a portfolio with the desired credit risk, duration, and industry 

exposures we need in order to match the investment goals of our clients. 

This diverse market structure for debt issuance also provides flexibility to corporate borrowers. 

It ensures that borrowers can manage their capital structure and debt maturity profile in a flexible 

manner while also raising capital at attractive interest rates. While the market may over time 

gravitate to a more standardized structure. we believe any change in this regard would need to 

balance the needs of issuers with those of investors and should not create an undue preference for 

secondary market liquidity over the ability of issuers to access capital. 

III. Liquidity Considerations in the Fixed Income Markets 

The Subcommittee has expressed interest in the current state of liquidity in the fixed income 

markets and the impact of the domestic and international regulatory regime. 

3 As of March 31, 2017. T. Rowe Price manages $255.2 billion in asset allocation portfolios, of which $202.6 billion 

relates to target date retirement portfolios. 

3 
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28749.027

Liquidity is a critical element of efficient markets, and is particularly important in the everyday 

operations of mutual funds like those sponsored by T. Rowe Price and other ICT members, which 

typically offer their shares on a continuing basis and are required by the Investment Company 

Act of 1940 ("Investment Company Act") to issue "redeemable securities.''4 Mutual funds must 

have efficient, orderly markets to invest new cash when investors purchase fund shares or when 

the fund sells portfolio securities, either in pursuit of the funds' investment strategies or to meet 

investor redemption requests. Accordingly, our portfolio managers carefully consider liquidity 

when making investment decisions, particularly in the fixed income markets. If we are 

concerned about the possibility that the liquidity of particular instruments could deteriorate in the 

future, we may need to factor this into portfolio construction. 

That said, measuring the liquidity of a market is a challenge. The sections below discuss 

liquidity in the US Treasury markets and corporate bond markets, and consider the impact of 

recent regulatory developments in this regard. 

a. US Treasury Liquidity 

There are a number of common metrics used to measure liquidity in the fixed income market. 

including the bid-ask spread, depth of market, average trade size and the market impact of 

trading. The bid-ask spread represents the difference between where a market maker will buy or 

sell a security. Spreads are typically narrower in frequently traded, liquid securities. The depth 

of market and average trade size measure the amount that may be traded at the best price and the 

average size of a trade in the market-in both cases, higher numbers suggest more liquid 

markets. Finally, the market impact measures the expected market movement associated with a 

trade and in liquid markets this value is typically small. indicating investors can transact in size 

without materially altering price. 

These common metrics paint a mixed picture on the state of liquidity in the Treasury market. 

For example, in 2015, start' at the Federal Reserve Bank of New York observed that post crisis 

bid-ask spreads have been nan·ow and stable by historical standards. Order depth has varied 

more over time, recovering after the crisis but declining during both the 2013 ''taper tantrum" 

and the 2014 flash rally. As of201 5, it was not unusually low by historical standards. The same 

report also found that measures of price impact rose during the same periods of declining market 

depth indicating periods of lower liquidity. Over this same period, the author noted that trade 

sizes have decreased. Overall the study concluded that average market liquidity is generally in 

line with historical standards though there may be reasons to be concerned about liquidity riskor how resilient liquidity is during periods of stress. 5 

4 See Section 2(a)(32) of the Investment Company Act (generally defining "redeemable security" as "any security . 

. under the tem1s of which the holder, upon its presentation to the issuer or to a person designated by the issuer, is 

entitled ... to receive approximately his proportionate share of the issuer's current net assets, or the cash equivalent 

thereof:'). 

5 See "Has U.S. Treasury Market Liquidity Deteriorated", available at 

http://libertystreeteconomics.newyorkfed.org/20 1 5/08/has-us-trcasury-market-liquidity-deteriorated.html. 

4 
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28749.028

We are encouraged by the efTorts of regulators-including those who contributed to the Joint 

Staff Report 6 on the 2014 flash rally-to study these market structure issues. We agree with the 

Joint StafTReporfs recommendations to strengthen the monitoring and surveillance of this 

market while promoting inter-agency coordination and data sharing. We would also echo the 

qualification noted in the Joint Staff Report that many of the statistics cited in it and the Federal 

Reserve Bank of New York report were derived from data collected hy inter-dealer trading 

platforms because a comprehensive data set for the entire market does not currently exist. This 

lack of a comprehensive, real time data repository undoubtedly delayed the issuance of the Joint 

Staff Report, which acknowledges: 

There are several aspects of the U.S. Treasury and broader U.S. fixed income 

market that are not represented in this data. For, example cash Treasury market 

data do not include the large dealer-to-customer market, in which dealers 

transact--either through voice or electronic means-with their customers. 

This "dealer-to-customer market" referenced above is the portion of the market that T. Rowe 

Price trades in. We would caution that the metrics from the inter-dealer market alone may 

provide a skewed and incomplete picture of the overall Treasury market. as there are significant 

differences in the participants transacting in the inter-dealer and dealer-to-customer markets. For 

example, according to a stud/ done by the Federal Reserve, the inter-dealer market constitutes 

approximately 45% of total Treasury trading volumes and approximately 72% of the inter-dealer 

trading volumes are executed by principal trading firms ("PTFs") with the balance traded by 

dealers. Of the top 10 liquidity providers on BrokerTec during a period of months in 2015, only 

two were traditional dealers. In contrast, dealers continue to provide the vast majority of the 

liquidity in the client-to-dealer market. 

This leads us to two comments on the market structure for Treasuries: 

• The Joint Staff Report notes that the proliferation of PTF trading in the inter-dealer 

market ·'raises questions about the evolving risks" in this market. T. Rowe Price 

recommends a review of the regulatory framework that governs liquidity providers in this 

market, but asks that regulators resist the temptation to import rules or regulations 

designed for other markets without tailoring them appropriately. 

• Both T. Rowe Price and ICI are supportive of the efforts of FfNRA to require regulatory 

reporting of Treasury trades. This reporting requirement, however, applies only to 

FINRA members broker-dealers --and not to PTFs, and therefore will provide the 

official sector with only partial infOimation about the Treasury market. Until regulators 

are able to obtain a more complete view of market activity, we caution them against using 

6 Joint Staff Report: The US Treasury Market on October 15. 201./ (July 13, 2015). available at 

b!1!1s:!/www.treasurv.gov/prcss-centerlpress-releases/Documents/Joint Staff Report Treasury I 0-15-20 15.pdf. 

7 See "Primary Dealer Participation in the Secondary U.S. Treasury Market", available at 

http://libertvstreeteconomics.newyorkfed,org/2016/02/Qrimary,p_ealer-parti<;jpation-in-the-secondary-us-JreasurymarkeJ,.h!m.!. 

5 
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28749.029

the data obtained through this reporting requirement to make more fundamental changes 

to Treasury market structure. 

b. Credit Market Liquidity 

In contrast with exchange-traded products like equities, buyers and sellers in over-the-counter 

fixed income markets frequently access the market at different times. Historically. brokerdealers have been a necessary intermediary providing liquidity, often on demand, for end 

investors by purchasing bonds from asset managers and other buy-side firms wanting to selL 

They would hold these securities for a period of time-which could range from a few hours to 

several weeks--until they could locate a counterparty to take the other side of the trade, eaming 

a bid-ask spread as compensation for taking risk onto their balance sheets. When markets 

become more volatile, bank dealers widen their spreads or reduced the size of the trades they 

were willing to perform to reflect the increased risk and/or reduced price transparency. 

At their pinnacle in late 2007, primary dealers' net inventories of corporate bonds exceeded $235 

billion. These positions declined by nearly three-quarters during the credit crisis as banks shed 

risk and wrote down assets. Inventories then stabilized for a time before declining further as 

more stringent post crisis banking regulations, including the Dodd-Frank Act and Basel III 

Accord. increased banks' cost of capital and disincentivized the warehousing of risk. In today's 

market structure, dealers are still responsible for the majority of corporate bond trading volume 

and connecting buyers with sellers. However, due to increased regulation, dealers have less 

incentive to hold securities on their balance sheets for extended periods thereby reducing 

liquidity. As a result, dealers are increasingly acting in an agency capacity for their customers. 

Greater market fragmentation 8 has also impaired liquidity. A low interest rate environment has 

encouraged debt issuance, and many companies issued bonds for the first time. Although a 

flurry of activity from issuers who are new to the fixed income market is indicative of a healthy 

credit market, it may skew common measures of liquidity. In the secondary market, institutional 

investors tend to gravitate toward larger more liquid issues in a given capital structure. 

Secondary trading volumes have actually been resilient. increasing since the financial crisis 

despite banks' retreat from market making. However, the overall market grew at an even more 

rapid clip, leading to greater market fragmentation. Turnover--the ratio of trading activity 

relative to total market size-in both the investment-grade and high yield markets has dropped to 

levels below those achieved during the 2008 credit crisis. 9 

However, liquidity is bifurcated. The 1,000 most actively traded bonds have relatively high and 

consistent average turnover rates (about 150% annually). But excluding these popular, 

benchmark-names, the rest of the market has much lower average turnover (about 37% 

8 In equity market structure discussions, "market fragmentation" ofien refers to the proliferation of trading venues 

and routing requirements. We use the term here to mean the volume of new issuances and diversitv of bond 

offerings. " 

9 See MarketAxess Research available at http://www.markc_l!!1i.".s.s.com/research/marketinsights/turnover hghv usa.pfm. 

6 
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annually). This larger. less-liquid market segment has grown significantly with the surge in new 

issuance, explaining the decline in overall turnover. 

Another notable development in the post-crisis environment is a marked decline in the average 

size of trades. This is attributable to several factors. In the low-rate, low-volatility environment 

that prevailed in recent years, there have been fewer large, conviction-driven trades. With 

dealers less inclined to use their balance sheets to broker trades, institutional investors like T. 

Rowe Price are being more strategic about trade execution, splitting up large trades into smaller 

ones and executing with a greater number of counterparties. As we will discuss, investors are 

increasingly utilizing electronic trading platforms. where average trade sizes are lower. 

In a liquid market of any sort, there are multiple buyers and sellers looking to exchange a 

particular asset for cash at a given time. This enables rapid execution and clear, competitive 

pricing. However, this situation rarely occurs in fixed income markets, which are fragmented 

into a number of distinct sectors. Within each sector, there are thousands of individual bonds, 

each with unique characteristics-yield, duration, quality, subordination level, etc.-that appeal 

to different types of investors. Some long-tenn investors buy and hold to maturity, removing 

bonds from circulation after issuance. 

Only a fraction of the corporate market trades on a daily basis. In the U.S. high-grade market, 

on any given day only about a quarter of the approximately 20,000 bonds outstanding traded on 

at least one side of the market (i.e .. bought or sold) last year. As trade size increases, the number 

of bonds with daily liquidity shrinks. Looking at trades exceeding $1 million, a common size for 

institutional investors. on an average day only 431 index-eligible bonds--less than 7% of the 

investable universe-were bought and sold. 

e. Impact of Regulation on the Fixed Income Markets 

A number of new regulatory requirements have limited the ability of banks to use their balance 

sheets to engage in market making activities. This includes the Volcker Rule, which seeks to 

restrict banks from using their own resources to trade for purposes unrelated to serving clients 

and address perceived conflicts of interest in certain transactions or relationships. 10 

After the financial crisis and the ensuing regulatory refom1, the role of dealers has changed, with 

resulting effects on the fixed income markets. The Volckcr Rule, for example, has compelled 

large banks to spin off or wind down their proprietary trading operations. These "'prop desks'' 

used their bank's capital to profit from shmt-term market dislocations. Although speculative 

traders rather than pure market makers. prop desks frequently served as a source of uncorrelated 

demand when buy-side investors needed to sell pmticular securities. Today their role is 

diminished, and remaining investors often find themselves on the same side of the market. 

10 To accomplish these goals. the Volcker Rule prohibits banks and their aftiliates and subsidiaries (referred to as 

''banking entities") from engaging in ·"proprietary trading.'' There are exclusions for ''permitted activities," such as 

market making, as defined in the statute and implementing regulations. The Volcker Rule also generally prohibits 

banking entities from sponsoring or investing in hedge funds, private equity funds, or other similar funds (referred to 

as "covered funds"). 

7 
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The role of dealers more generally has changed as well, with dealers reducing inventory and 

acting more in an agency capacity for their customers. Dealers may have chosen to reduce their 

holdings of corporate bonds for a number of reasons, including the Volckcr Rule and other 

regulatory requirements. Given the central role that dealers have played in providing liquidity in 

a principal capacity in the corporate bond markets, these changes have led to a shift in the fixed 

income trading environment. 

d. T. Rowe Price's Outlook on Fixed Income Market Liquidity Risk 

There has been no shortage of commentary regarding liquidity risks in the fixed income markets. 

However, we see several reasons for having a more constructive outlook. 

Dealers are making more efficient use of their smaller balance sheets through technology, and 

institutional investors have responded in kind. It is still too early to tell which of the new trading 

protocols will gain traction, and e-trading will not be a panacea for liquidity shortfalls at times 

when risk aversion is high and buyers are scarce. That being said, it is positive to see new ideas 

being tested, and our fixed income traders are taking advantage of having more tools at their 

disposal for sourcing liquidity. 

As noted above, stricter regulations have made bond trading less profitable for banks. ln 

addition, an environment oflow volatility, yields, and credit spreads has also reduced incentives 

for banks to make markets. It is difficult to assess whether stricter regulations or the market 

environment has had a greater impact in discouraging banks from trading more. In any case, if 

there is a moderate increase in volatility as the Fed gradually tightens monetary policy, bid-ask 

spreads could widen from today's tight levels, enticing market makers to allocate more capital to 

facilitate secondary market trading. 

An uptick in volatility also should encourage market participants to develop differing views of 

value, which is critical for creating more vibrant markets with a diverse pool of buyers and 

sellers. In the recent environment, trading activity has been highly correlated, and compelling 

relative value opportunities have been harder to find. A measured increase in volatility and rise 

in yields should foster an increase in two-way trading activity as investors' assessments of a 

bond's fundamental value diverge. 

An increase in rates would likely pull investors with substantial buying power-such as insurers, 

pensions, and sovereign wealth funds----off the sidelines. As evidence, when Treasury yields 

rose sharply in mid-20 13 during the ''taper tantrum," we witnessed a surge in trading flows into 

the long end of the curve. which helped to calm the bond scll-offthat followed. Dislocations in 

certain market segments may also attract crossover and speculative investors, such as hedge 

funds, into sectors that they normally ignore. 

Finally, in recent years it has been relatively easy for institutional investors to gain credit 

exposure through the primary market. The flood of new supply made secondary trading less 

essential. However, if rates start to rise and companies become less keen on raising new capital 

in the credit market, we expect renewed focus on secondary market trading. 

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While liquidity risk is always a consideration in investment decisions, we should note that less 

liquid markets can also work to the advantage of long-term investors and create excess-return 

opportunities. We believe that managers who are diligent with risk management, emphasize indepth fundamental analysis, and hold sufficient liquid assets in portfolios---to both meet 

redemptions and benefit from security mispricings-may be able to profit from less liquid 

conditions. To this end, T. Rowe Price fixed income managers continually engage with the 

finn's trading specialists, credit analysts, and quantitative analysts to assess market conditions 

and valuations, evaluate potential risks for portfolios. and identify opportunities to both source 

and supply the market with liquidity. 

IV. Transparency 

Buy-side firms have a range of strong views on transparency and the public dissemination of 

trading information in the fixed income markets, as well as the utility of existing reporting 

mechanisms. T. Rowe Price, for example. has been and continues to be broadly supportive of 

greater transparency in fixed income markets. We believe that greater pre-trade price 

information supports the price formation process, ensuring that buyers and sellers can negotiate a 

mutually agreeable trading price, and consequently supports liquidity. Moreover. greater market 

transparency supports the ability of fund managers to provide more granular infotmation to the 

public about the performance of their investments and the costs of transacting in the market. 

At T. Rowe Price. as we look at transparency efforts across the globe, we continue to advocate 

for an approach similar to that taken by FINRA in the introduction of the TRACE system. The 

introduction of TRACE included a phased-in approach with regular periods of review and study. 

Further, as the system has been extended to other asset classes. the level of transparency and the 

specific inforn1ation disseminated has been adjusted based on the nuances of each market and 

individual transactions. We see this as a careful approach that has produced a transparency 

regime which is helpful to regulators and market participants alike. 

Greater transparency in the OTC markets also may raise risks. however. Some have expressed 

concerns that the public dissemination of trading data may reduce liquidity and impair market 

quality to the detriment of the markets and their participants. 

Regulators need to appropriately balance the benefits of transparency with the risks to market 

functioning that may be caused by public dissemination of sensitive trading infonnation in an 

effort to ensure efficient and competitive OTC markets for all participants, including funds and 

other investors. To that end. we encourage regulators, both domestic and international, to take a 

thoughtful and measured approach to transparency in the fixed income markets, with careful 

analysis of data over an extended period of time including a variety of market conditions. 

V. Electronification and Technology Across Markets 

Because of the challenges of directly matching buyers and sellers of bonds. developing 

alternatives to the traditional dealer-centric model to enhance liquidity is not a simple task. 

Nonetheless, there have been some promising technological developments in the form of new etrading platforms. 

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The more established systems debuted in the early 2000s. These multi-dealer platforms 

essentially applied technology to add scale to the traditional request-for-quote model: investors 

place a trade request, dealers respond with prices, and investors decide whether to accept the best 

offer. More recently, several new entrants have experimented with less conventional protocols, 

including auctions; dark pools; and "all-to-all'' systems that seek to cross trades between any 

interested pmiy, whether on the buy side or sell side. 

E-trading is less advanced in corporate markets, but it has grown steadily. According to a recent 

report from Greenwich Associates, I 9% of investment-grade corporate trading volume was 

executed electronically in 2017. E-trading accounted for just II% of volume in the high yield 

market, where bond structures and covenants are more tailored to issuer-specific credit risk, and 

liquidity can be especially constrained for distressed names or smaller and less frequent issuers. 

But the report predicts that high yield will be a growth area, with several new trading platforms 

focusing on less liquid securities. 

E-trading has proven to be most successful in markets that are characterized by an active and 

diverse set of participants and a smaller set of homogenous securities that allows buyers and 

sellers to focus their interest. For example, there has been a high level of adoption for on-the-run 

Treasuries and Treasury futures trading. as many different market participants use U.S. 

government instruments for a variety of purposes, including for hedging and collateral. Foreign 

exchange is another market where electronic trading has been very effective, as there is 

widespread demand for specific currency exposures and hedges. 

It is T. Rowe Price's view that greater transparency naturally fosters electronification, which 

improves price discovery, facilitates best execution, and enhances capital fonnation. We would 

encourage regulators to consider requirements that would increase transparency as a way to 

encourage greater use of e-trading. In addition, given the proliferation of e-trading platforms, 

regulators might consider standardized reporting for trading volumes, which would help market 

participants evaluate which platform may meet their needs for a set of transactions. 

* * * * 

I appreciate the opportunity to share these views with the Subcommittee. As I said at the outset, 

the fixed income markets play an important role in helping millions of Americans save and 

invest, and enhancing the transparency, liquidity, and overall functioning of these markets is 

critical to their success. We greatly appreciate the Subcommittee's continuing interest in these 

issues. 

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Testimony of John Shay 

Senior Vice President and 

Global Head of Fixed Income and Commodities 

Nasdaq 

Before the 

House Financial Services Committee's 

Subcommittee on Capital Markets, Securities, and Investment 

Thank you Chainnan Huizenga and Ranking Member Maloney for the opportunity to testify 

today on fixed income market structure. The market for U.S. Treasury Securities ("USTs") is 

widely recognized to be the most liquid and consequential market in the U.S. and perhaps the 

world. Trillions of dollars of USTs circumnavigate the globe, trading across, and resting in, the 

accounts of individual investors, institutions. corporations, and governments on every continent. 

Trillions of dollars more in derivatives on USTs trade separately and just as actively. The U.S. 

Treasury Bond reflects the stability of the United States and its strent,rth and is, quite literally, the 

coin of the realm for the world. That said, the market for USTs could benefit from greater 

transparency, organization and efficiency. 

As you know, Nasdaq has extensive experience operating markets and protecting 

participants and investors. We operate 25 exchanges and six clearinghouses around the globe for 

equities, options, commodities, power, freight, interest rates, and fixed income trading, as well as 

providing technology to power more than 70 other brokers, markets, and regulators around the 

globe. With Nasdaq Fixed Income (NFI), previously known as eSpeed, with its lineage as the 

first electronic trading platfonn for Core Benchmark USTs, providing real-time institutional 
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trading of benchmark USTs and is one of the largest and most liquid fixed-income cash markets 

in the world. Currently our client profile features 112lnstitutional Clients consisting of23 

Primary Dealers, many Banks and Broker Dealers, Proprietary Trading Firms and a number of 

non-banks. We offer trading through our SEC registered Alternative Trading System (ATS) and 

Financial Industry Regulatory Authority (FINRA) regulated broker dealer entity utilizing an 

anonymous, fully electronic central limit order book using price time priority. Currently, among 

our competitors, our activity represents around 20% of the daily market share. Competitors in 

our space includes NEX (Brokertec), BGC, and DealerWcb. On the Nasdaq Fixed Income- US 

Treasury platform we offer: 

• US Treasury active Benchmarks. 2yr, 3yr, 5yr, 7yr, I Oyr, and 30yr. 

• In addition the most actively traded US Treasury T-Bills, newly announced supply 

and short dated notes. 

• Recent enhancements included '·Off-The-Run" product offering which are 

previously issued US Treasury Notes. 

Our market continues to evolve with the release this year of several functionality enhancements 

that we believe will make us the market leader: 

o Nasdaq FIRST: Allows users to provision additional liquidity between the bid-offer 

spread. When better pricing is available, the Nasdaq Fixed Income Front-end GUJ will 

display an asterisk (*) indicator on the Bid I Offer Price. 

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o Off-the-run (OTR) Swaps: Nasdaq Fixed Income is offering a new Price Swap Box for 

trading off-the-runs. 

o Best Price Accelerator (BPA): When a new price is entered that improves the current 

BBO spread, trade state will immediately end and start a new trade state at the better 

price. In the event of a Trade Through scenario. we display the aggregate total size filled 

through our interface. 

o Show Instrument Trade History: The new trade history window will show all trades in 

detail in the instrument you want to view. 

Nasdaq's analysis of market structure and market structure reforms is driven by the 

application of core principles derived from this experience. Nasdaq believes that the market for 

USTs can be significantly improved on in each of these measures: 

• Tramparency Benefits all Market Participants. Markets must be transparent in each of 

several respects to serve market participants and investors fully and fairly. The structure, 

regulation, and operation of the market should be readily understood to inspire trust and 

confidence. Widespread availability of the best available prices ensures that market 

participants make informed investment decisions and receive high quality, low cost 

service from intermediaries and markets alike. 

Regulation Must be Clear, Consistent, and Technology Dril'en. Markets and market 

participants should be held to clear, high, and consistent standards of conduct. As 

markets evolve and automate, regulators must maintain a coordinated and complete view 

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of market activity. Full transparency to regulators underpins fair markets. 

• Competition on a Level Playing Field. Market structure serves market participants best 

by including a diverse set of participants. The open interaction of diverse trading interests 

and strategies- whether long term, short term, institutional, or proprietary- promotes 

continued innovation and etriciency. 

• Equal Access to Trading Promotes Efficiency. Equal access fosters order interaction, 

price discovery and market efficiency. Restricted access and liquidity fragmentation 

creates order isolation, price opacity and inefficiency. 

• All Investors are Entitled to a Fair Deal. The quality of execution for market 

participants should not depend on the venue they choose. If all venues that trade the same 

securities are equally transparent, equally regulated, and held to equally high standards of 

conduct, investors will be fairly treated. 

These markets are evolving and they are becoming more fragmented and segregated; 

more opaque to competitors and regulators alike; subject to uneven and uncertain regulation and 

enforcement less efficient; and less clearly focused on serving market participants. Therefore, 

Nasdaq recommends the following basic improvements that it believes are necessary to better 

serve market participants and protect investors: 

I. Transparency: TRACE Reporting to FINRA was a positive step; further evolution 

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towards a comprehensive, centralized reporting mechanism is critical. 

2. The establishment of minimum regulatory requirements on all venues to ensure fair and 

orderly markets. 

3. Reduce systemic risk by requiring cost effective clearing of all transactions. be it 

centralized or through an interoperable model for all market participants. 

By introducing these changes, Nasdaq believes that operational and systemic risks will be 

reduced and market efficiencies will be improved. 

Current State of the Market 

As it is generally known, the secondary market for USTs has two segments: the Dealerto-Customer segment and the Inter-Dealer Broker ("!DB") segment. NFI operates exclusively in 

the !DB segment, offering a Central Limit Order Book ("CLOB") based on Price/Time matching 

principles. 1 As such. NFI provides a venue through which dealers can trade in ways that 

facilitate their customer-facing business. For example, a dealer can access liquidity in Nasdaq 

Fixed Income to rebalance inventory in reaction to a large customer trade. A liquid, wellfunctioning IDB market therefore ultimately benefits end investors. 

As opposed to "Workup" matching protocols, offering exclusivity and queue priorities 

originally introduced in early !DB solutions. These are no longer available on eSpeed for 

Treasury Benchmark securities. 

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The post financial crisis regulatory framework has impacted traditional providers of 

liquidity, mainly the enhanced compliance and regulatory burdens of the Volcker Rule2 and Basel 

III Capital Requirements3 Principal Trading Firms ("PTFs") have become an increasingly 

important part of the !DB market, and currently represent a significant portion of Nasdaq Fixed 

Income activity. PTFs act as both liquidity providers (submitters of passive bid and offer quotes) 

and liquidity takers. This latter role is often associated with a variety of arbitrage strategies that 

tie together the prices of related asset classes, such as prices in the futures markets with prices in 

the cash market. PTF participation increases liquidity and price discovery in the !DB market. 

These PTFs have accounted for a substantial increase in trading volumes without any significant 

increase in overnight risk. Liquidity provisioning PTFs facilitate risk transfer while continuing to 

allow primary dealers to serve the buy side. 

In response to the October 2014 market volatility in Treasuries, the Treasury Department 

and the SEC asked the FINRA to require their member finns to report their transactions so that 

the information can be made available to regulators. While this step is a good and reasonable 

place to start, it is not complete. As an operator of one of the primary UST venues, Nasdaq 

cannot completely evaluate the liquidity and/or etliciency of the entire market either in real-time 

or on a delayed basis. Nasdaq Fixed Income can only assess the activity on its own platfom1 and 

See 79 F.R. 5808 (January 31, 2014); §619 (12 U.S.C. § 1851) of the Dodd-Frank Wall 

Street Refonn and Consumer Protection Act. 

See http://www.bis.org/bcbs/basel3.htm. 

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does not have visibility into the best prices currently available or those recently executed at 

competing CLOBs or Single/Multi Provider Streaming (''SMPS") or Request For Quote/Request 

For Stream ("RFQ/S") venues. 

The challenges of incomplete information is also compounded by the proliferation of 

trading venues and the resulting fragmentation. Since the introduction ofNasdaq Fixed Income. 

the number of CLOBs has grown from one to three (with more signaling that they will enter the 

market) and the emergence of several SMPS and RFQ/S solutions. 

As this Committee is aware, the U.S. equities markets have experienced a similar 

proliferation of venues and similar fragmentation. However, the one true strength that mitigates 

some of the negative effects of fragmentation in the equity markets is the wide availability and 

cost-effectiveness of real-time data about prices and liquidity each security. Although we are not 

advocating for something similar to Regulation NMS being applied to the UST market, better 

regulation developed on a stronger base of transparency and coordination, would be an 

improvement to that which currently exists in the UST market today. 

Without consistent rules and oversight of all liquidity pools. including private venues, 

fragmentation may lead to reduced levels ofliquidity and wider spreads for those ineligible to 

participant in those private venues. Current regulations are largely focused on financial risk 

mitigation, leaving a number of important areas unaddressed such as trading infrastructure, 

system resiliency. technology requirements. and operating standards across venues. Nasdaq 

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notes that it voluntarily publishes its operating manual online for the benefit of its market 

participants. 

Perhaps understandably, the significant increase in the levels of automated trading has 

necessitated the development of advanced automated risk control systems. The leading 

marketplaces, such as Nasdaq Fixed Income, utilize a suite of financial risk management controls 

based on the SEC Market Access Rule,4 including daily trading limits, profit and loss (''P&L") 

and market risk monitors, as well as counterparty credit monitoring processes. Many of these 

and other risk management solutions are widely available to market participants and are 

supported by a network of third party vendors who specialize in the provision of this technology. 

We advocate for the implementation of uniform standards with respect to these areas, 

accompanied by greater supervision. provided that it is applied equally across all venue types, 

including CLOBs, SMPS and RFQ/S systems. We welcome competition, as long as it is based 

upon sound fundamental and operational structures. 

See SEC Rule 15c3-5. 17 C.F.R. 240.15c3-5. 

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Recommendation Number One: I. Tramparency: TRACE Reporting to FINRA was a 

positive step; further evolution towards a comprehensive, centralized reporting regime is 

critical .. 

As previously stated. the incremental action to require FINRA members to report trades 

for regulatory purposes is a positive step. but will only bring transparency to a limited segment of 

Treasury market activity. Nasdaq believes that UST regulators should establish a truly 

comprehensive central registration and transaction reporting regime for their own use in the UST 

market, preferably based upon existing proven industry protocols, and encourage venues to offer 

services for the submission of transactions to reduce the overall impact on market participants. A 

comprehensive system would gather all transactions. including those executed on CLOBs, those 

executed on SMPS and RFQ/S platforms, and those executed bi-laterally between participants. A 

system that focused on creating transparency in just one segment of the market, such as IDBs, 

may encourage participants to shift transactions to segments of the market that remain dark, and 

therefore fail to capture the true breadth of transactions within the marketplace. The case for full 

and immediate data transparency to regulators and increased public transparency of venue 

operating guidelines is abundantly clear. 

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Nasdaq also supports price transparency. Strong reference prices created by exchanges, 

Trade Reporting Facilitics,5 and network proccssors6 through the SEC's transaction reporting 

regime have helped make those markets the deepest, most liquid markets in the world. In fact, 

Nasdaq has been a leader and innovator in supplementing that already-strong transparency with 

an even wider and deeper range of"non-core" data products that provide market participants 

greater freedom to choose pre- and post-trade data. While Nasdaq does not support radical 

change in this area, preferring a more cautious and incremental approach to regulatory reform. 

Full pre- and post-trade transparency requires a level and breadth of technical infrastructure that 

does not currently exist in the market for USTs. For example, trading venues and market 

participants must operate under uniform quoting and trading conventions before data from 

multiple venues can be aggregated. Also, quotations must be uniformly accessible, requiring 

connectivity and operational frameworks. 

Investor protections, considered standard in the equity and options markets, are 

unavailable to UST market participants due to the lack of a comprehensive, centralized reporting 

mechanism. Every protection offered in response to the equity '·flash crash" of 20 I 0 depends on 

centralization and cooperation; this includes market-wide and single stock circuit breakers, and 

standardized market making and trade break rules. Enforcement of best execution and trade 

through protection are facilitated by the same coordination and centralization. Reasonable minds 

See FINRA Rule Series 6700-6770. 

Sec 15 U.S. Code §78k-l, Exchange Act Section llA; see also SEC Rule 603 of 

Regulation NMS, 17 C.F.R. 242.603. 

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can differ on whether all of these protections are currently necessary in the UST market, but it is 

clear that proponents would be seriously hindered by the current market structure. On October 

15, 2014, the current market structure, as we know it today, experienced an unusually high level 

of volatility and significant price movements. It is important to state that such events are not 

common in the UST markets- absent market or policy driven announcements. October 15'11 

prompted five Federal Agencies to review the day's events along with trading data. The resulting 

findings report published July 13, 2015 noted that while banks and non-banks continued to 

execute transactions, non-banks firms represented more than half the traded volume'. 

Recommendation Number Two: Impose minimum regulatory requirements on all venues to 

ensure fair and orderly markets. 

Well-functioning markets must be transparent, fair, and orderly. This requires uniform 

minimum regulatory standards across all trading venues, whether electronic multiparty trading 

platforms or bi-lateral dealer-to-customer arrangements. For example, rules similar to Regulation 

SCI,1 recently implemented by the Securities and Exchange Commission to enhance the 

technology infrastructure of securities markets, would ensure that participants in the UST markets 

develop systems with sufficient capacity, resiliency, availability and security to minimize the 

See 17 C.P.R. Parts 240, 242, and 249; https://www.gpo.gov/fdsys/pkg/FR-2014-12-

05/pdf/20 l4-27767.pdf. 

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occurrence of disruptive systems issues. SCI also provides requirements for industry-wide 

testing that could enhance the stability of these markets. 

It is critical that trading venues do their part to keep bad actors out of the treasury market. 

NFI is operated by a FINRA-regulated broker dealer and SEC-registered ATS and upholds its 

duties through a holistic vetting process that includes robust Know Your Customer and AntiMoney Laundering monitoring standards under the USA PA TRTOT Act. NFI uses a third party 

vendor to investigate each prospective customer by comparing customer infonnation against 

120+ government-managed lists and websites for any potential negative information. Resources 

used for this review include lists and websites maintained by agencies such as the Office of 

Foreign Assets Control, Federal Bureau of Investigation, Department of Justice, Securities and 

Exchange Commission and Financial Crimes Enforcement Network. 

NFI does not allow any customer to access the ATS prior to receipt of confirmation of 

clearance. Additionally, NFI engages this same third party vendor to conduct continuous realtime monitoring on all of its customers and receives alerts whenever negative news associated 

with a customer is obtained. 

Beyond minimum regulatory standards, Nasdaq believes that market protection requires 

sound surveillance and monitoring to ensure fair and orderly markets. The securities and futures 

markets have developed a tiered approach to market surveillance with individual firms and 

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trading platforms tasked with compliance monitoring of their activity, and self-regulatory 

organizations ('"SRO") given front-line responsibility for market surveillance and enforcement. 

In the UST market. as with our other markets, Nasdaq has implemented operational and 

compliance best practices to promote and maintain the integrity and efficiency ofNasdaq Fixed 

Income, and the overall UST market. Similar to other securities and futures markets, Nasdaq 

Fixed Income employs its own surveillance program, which is designed to review its participants' 

trading activities for instances of manipulative or deceptive practices. Surveillance reviews 

currently deployed or in development include manipulative wash trading, spoofing, layering, 

mid-point price manipulation, and flipping. Each UST venue should perform similar market 

monitoring surveillance for the activity related to that venue. In addition, Nasdaq believes the 

UST market would benefit from consolidated surveillance by a SRO with regulatory 

responsibility for the trading activity. 

Of course, proper surveillance of a fragmented UST market requires that regulators have 

visibility across all UST cash and derivative markets with the ultimate goal of efficiency and 

transparency. Regulators could significantly benefit by being a central repository of information 

to monitor trading across the UST cash and derivative markets using order and transaction 

activity. This could be accomplished by using trade data similar to that which is available to 

FlNRA from the securities exchanges. 

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In summary, we strongly advocate for the standardization of regulatory standards and 

surveillance practices across all UST venues. This would benefit market participants, regulatory 

agencies, and potentially a centralized clearing provider should the UST markets evolve in that 

direction. In setting these standards, we believe regulatory agencies should leverage models 

similar to those that already exist in the securities markets (such as Regulation SCI, SRO 

oversight, the Consolidated Tape, and TRFs) before devising new sets of rules or requirements 

that might have unintended consequences on the UST market. 

Recommendation Number Three: Reduce systemic risk by requiring cost effective clearing of 

all transactions, be it centralized or through an interoperable model. 

The clearing market structure, in our view, has fallen behind the realities of automated 

trading. The uneconomical cost of clearing large volumes of trades with very small net 

positioning has resulted in the majority of trading that occurs in the UST market being done 

without utilizing a centralized clearing counterparty ("CCP"). This development poses material 

counterparty risk to the market. The market instead relies on the solvency of the trading venues 

and an ever diminishing number of Clearing Brokers. 

Clearing Brokers are the only third-party that can view a client's full trading position, as 

they typically act as settlement agents. Trading venues only receive get an incomplete view 

based upon the transactions being executed on their platform. However, Clearing Brokers acting 

as agent are not legally bound to guarantee the settlement of executed trades. This exposes 

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trading venues and market participants to counterparty risk and it creates a scenario whereby 

default management must involve multi-lateral coordination of clearing brokers, trading venues, 

and clients, thus adding unnecessary complexity and risk to the market. 

To mitigate counterparty risk, Nasdaq Fixed Income has implemented a suite of pre-trade 

and post-trade risk controls as well as a thorough credit review of clients that do not clear trades. 

The Nasdaq Fixed Income Credit Risk team conducts annual credit due diligence exercise to 

evaluate each client's management and finn history, trading strategies, risk management policies 

and procedures, operational controls and compliance, financial condition, and past pcrfonnance. 

This data is used to assess each client's credit quality, which drives client daily trading limits and 

any collateral posting to Nasdaq Fixed Income. This is supplemented by market risk monitoring 

of unsettled trades and internal default management policies and procedures. For example, realtime P&L monitoring will alert the Credit Risk team to any unusually large client P&L or 

exposure that exceeds pre-detennined thresholds. 

In addition to the counterparty risk associated with the clearing structure currently in 

place, there are very large inefficiencies in tenns of the required collateral for clients to trade 

effectively across the different venues. Cash trades done on different venues require individual 

margin postings that do not net across a client's positions. Also, trades done in the futures 

market against cash positions do not always receive the benefit of netting and require even more 

collateral. A centralized clearing solution would very likely help to significantly reduce 

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counterparty risk (and help the default management process) while making the collateral margin 

requirements reflect the actual risk being taken by particular entities. 

In summary, the lack of a centralized clearing solution poses material counterparty risks 

to the market and leads to the following: 

• Less transparency as to the size of the exposure faced by individual participants; 

Concentration risks that are not properly managed; 

• Clients having to post collateral to multiple venues and brokers creating inefficient 

management of settlement and counterparty risk; and 

• A decentralized default management process that is cumbersome and prone to 

delays and errors, thus increasing the chances of financial losses and/or 

subsequent litigation. 

We believe that, so long as market liquidity is maintained, the ideal clearing solution 

involves a CCP, be it centralized or through an interoperable model, as is the case with many 

asset classes. The CCP has a complete view all trading by all participants. It is ideally suited to 

provide uniform capital and risk controls applied equally to all market participants. 

The caveat is that clearing costs represent a frictional market force which leads to either a 

virtuous or a vicious cycle. Lower costs lead to more liquidity and less market risk, while higher 

costs lead to less liquidity and more market risk. The virtuous cycle would be aided, for 

example, by a model including intra-day netting because allowing immediate offsetting of 

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positions would reduce both systemic risk and member margin requirements. The relationship 

between risk and cost closes the cycle. Lower risk leads to lower clearing costs and vice-versa. 

Thus, it is imperative that the CCP be cost efficient and well governed, having representation 

from a cross-section of all market participants. 

We appreciate the opportunity to testify on these important issues. I am happy to answer 

your questions. 

'Summary Section 3 of the Joint Staff Report ofJuly 13 2015. 

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Written Testimony of Randolph Snook 

Executive Vice President 

Securities Industry and Financial Markets Association 

before the U.S. House of Representatives 

Committee on Financial Services 

Subcommittee on Capital Markets, Securities, and Investment 

Hearing entitled "A Review of Fixed Income Market Structure" 

July 14, 2017 

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Chairman Huizenga, Ranking Member Maloney, and distinguished members of the 

Subcommittee, thank you for providing me the opportunity to testify today on behalf of the 

Securities Industry and Financial Markets Association (SIFJVL'\) 1 and to share onr ,~iews on the 

strncture and health of the U.S. fixed income securities markets. SIFMA represents a broad range of 

financial services firms active in the fixed income markets and is dedicated to promoting investor 

opportunity, access to capital, and an efficient market system that stimulates economic growth and 

job creation. The U.S. fixed income markets arc a fundamental tool for raising investment for 

businesses, home buyers, and the federal government itself. Tlus Subcommittee's oversight of the 

fixed income markets and the regulatory framework that supports them is critical to protecting 

market efficiency and access to capital. 

This testimony will go into more detail on each asset class but let me state up front that the U.S. 

t!xed income markets arc truly without parallel. Total outstanding llxed income debt is almost $40 

trillion dollars, with new issuance in the range of $6 to $7 trillion per year over the last 5 years. On 

average $775 billion of securities are traded each and every day. 

Tlus central role played by the U.S. capital markets, and the tlxed income markets in particular, 

contrasts "~th other major economics, where a far greater proportion of consumer and commercial 

finance is provided by traditional bank lending. 

Changes in the capital markets since the tlnancial crisis, be they changes in risk appetites or 

regulatory approach, have heightened concerns that our capital markets are not providing the 

necessary funding to our businesses, individuals, and governments in the most efficient way 

possible. Private credit extended to households and nonfinancial businesses has grown at a slower 

pace than in all recoveries in the past 60 ycars.0 Small businesses in particular have found it difficnlt 

to obtain credit.' In its recent report on banks rrnd credit unions, the Treasury Department pointed 

out that real gross domestic product is only 13°;(, higher than in 2007 and lags previous recoveries.' 

1 SIFI\L\ is the voice of the U.S. securities industry. \\7c represent !'he broker-dealers, banks and asset managers whose 

nearly 1 million employees provide access to the capital markets, r.aising over $2:.5 trillion for businesses and 

municipalities in the U.S., serving clients with over $18 . .S trillion in assets and managing more than $67 trillion in assets 

for individual and institutional clients including mutual funds and retirement plans. SIFl\L\, with offices in New York 

and \X1

ashington, D.C::., is the U.S. regional member of the Global Financial ,\Iarkers .-\ssociation (GF~L \).For more 

information, visit lillll:LL-lo=GJ.tm&Qrg 2 Zheng Liu & and Excess Returns on Capital (Fed. Reserve Bank of San Francisco 

l~conOinic Letter 2016-28, Sept. 26, 2016) 

3 Fed. Reserve Banks of ~-\danta, Boston, Chicago, Cleveland, Dallas, Kansas City, l\finncapolis, New York, Philadelphia, 

Richmond, St. Louis & San Francisco, Sm::~ll Business Credit Survey (Apr. 2017) 

-t U.S. Treasury, _A Financial System That Creates Economic Opportunities- Banks and Credit Unions Qunc 2017), at 6 

and 44. 

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As an example, corporate debt markets have seen robust overall issuance but most of this has been 

in large deals and the number of smaller new debt issues coming to the market has fallen5 Previous 

SIFl'vL\ testimony to this Committee explained that as of a year ago: 

1) the average size of an irwestment grade corporate debt transaction approached $1 billion; 

2) the number of deals sized above $2 billion had doubled (since 2010), 

3) the number of smaller deals had fallen by nearly 50%" 

The fact that smaller firms are challenged in effectively financing themselves in the debt market has 

many potential implications for the economy. Similar difficulties arc faced by smaller broker-dealers 

who play a critical role in the financial markets. Sand has been thrown in the gears of economic 

growth by regulation such as the Volcker Rule, among other things, and the impact has been 

disproportionately felt by smaller participants in the market issuers and market makers alike. 

The economy is not functioning as well as it should be at this point in the recovery, and SIFl'vL-\. 

believes that policymakers have the ability to improve this situation through tailored recalibration of 

regulations affecting fixed income markets. This commonsense recalibration could belp jumpstart 

the economy v.~thout sacrificing financial stability. 

Impact of Post-Crisis Regulation 

As SIFI\L\ has frequently stated, we believe that tbe Volcker Rule as drafted and implemented has 

impaired bendicial activities (such as permitted market making) and has led many firms to scale back 

their trading operations as well as their irwcntories of financial assets. In order to avoid any doubt, 

firms take a more conservative approach to building inventory or facilitating customer activity than 

rcguired by the rule. We believe that the Volckcr Rule remains a policy prescription in search of a 

problem and would be better off repealed. However, if it is retained, a more focused approach to 

definitions of important concepts, such as market making and inventory accumulation, with a review 

of the compliance regime to better tailor requirements with each firm's business proflle would be 

appropriate. 

In addition, while SIFl'vL\ supports many of the post-crisis regulatory reform efforts in the area of 

capital and liquidity and believes that these efforts have enhanced the overall resiliency of the capital 

markets, now is the time to review how these rules work together-for example by examining how 

the licjuidity requirements work with leverage rcguirements-- \\ith a p<itticular emphasis on 

determining where they may be impeding liguidity by targeting the same risk in multiple ways. A 

review should include these liquidity and leverage rec1uirements but also look at the effects of and 

interactions with CC;\R, Basel III capital rules, and single counterparty credit limits. We finnly 

believe this sort of clear review of the potential costs of additional requirements which could limit 

the capital available for lending against any incremental benefits of resiliency should be undertaken 

3 
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with respect to capital and liquidity regulation, and are pleased that policymakers ha\'e begun to 

move in that direction. 

;\t the highest level, SIFMA believes that: 

• The U.S. fixed income markets are unparalleled in their size and importance. They are the 

largest source of financing for Atncrica 's hon1eowners, consumers, and businesses. 

• Fixed income markets continue to adapt to changes in technology, the regulatory 

environment, and market participant needs, 

• Notwithstanding this adaptation, fixed income markets face challenges in continuing to 

provide the deep liquidity and capital that consumers, businesses, and investors require. 

• In order to ensure the continued depth and diversity of the fn,ed income markets, 

policymakcrs should review the myriad regulatory and prudential actions taken since the 

crisis with a goal to eliminate overlapping or conflicting regulation, capital requirements, and 

unnecessary activity restrictions. 

• This review should include the Volcker Rule, liquidity requirements, leverage requirements, 

aod other rules and regulations that have impaired market efficiency and capital formation. 

• Regulators must move very cautiously when considering oew requirements and restrictions 

oo activities aod participants in the fixed income markets. 

Overview of the U.S. Fixed Income Markets 

1\s of the end of 2016 there were almost $40 trillion of fixed income securities issued io the U.S. 

outstanding in the market8 These include U.S. Treasury securities issued by the federal government 

to finance operations, securities issued by Ginnie Mae, Fannie Mae, and Freddie Mac to provide 

mortgage financing for homebuyers, bonds issued by corporations to finance capital investment, aod 

bonds issued by state and local governments to build infrastmcture, among others. 1l1e fixed 

income markets also provide ao important source of income-producing investments for indi,·idual 

and institutional investors. The steady, predictable income generated by most hood investments is 

where the fixed income markets get their name. 

The fixed income markets are generally segmented by sector according to the category of issuer. The 

Treasury or government securities market includes debt issued by the federal government. The 

corporate bond market includes debt securities issued by businesses. The mortgage- (MBS) and 

asset-backed securities ("\BS) markets include securities issued to finance home mortgages, car loans, 

or other types of loans extended to consumers and businesses. l\faoy but not all MBS arc issued 

and/ or guaranteed by Ginnie :VIae, Fannie Mae and Freddie Mac. Government agency securities are 

debt securities issued by government agencies, including Fannie l\{ae, Freddie Mac, Federal I lome 

Loan Banks, the Farm Credit System and others to carry the missions of the agencies. The municipal 

7 See, e.g., https:/ /W\V\v.treasury.gov I press-center/ press-releases/ ... /:\ %20Financiai%:10System.pdf 

"SIF~L\., "US Bond :\larket Issuance and Outstanding" Ounc 5, 2017), available at: 

http:/ I www.sifma.org/ uploadcdFilcs /Research /Statistics ISta tisticsFiles I CM-US- Bond-,\Iarket SIF;..L\.xls>n = 336 72, 

June 5, 2017, 

4 
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securities market includes bonds issued by state and local governments to finance im-estment in 

infrastructure. 

Attributable primarily to the low interest rate environment, issuers sold more than $7.3 trillion of 

new fixed income securities in the U.S. market in 2016, the third highest year on record. (Sec Chart 

1) This contrasts sharply with the $197 billion of equity securities issued in the same year9 Jssnance 

in the bond markets occurs practically every day. Companies and governments depend on ready 

access to capital to respond quickly to business opportunities. For example, it is not unusual for a 

well known company to issue billions of dollars of fixed securities to finance a new investment with 

only a few days notice if market conditions are favorable. This kind of ready access to capital 

promotes growth and is a cornerstone of our economy. 

ss,ocnoo 

$6.000DO $tW,.OOO 

$4.000.00 

~2,0{)0.00 

¥11 Municipal MWMunlcipa! 

Mortgage-Related W Corporate 

lMi Agency Backed Backed 

As shown in Chart 2, at of the end of 2016 there were $40 trillion of fixed income securities 

outstanding in U.S. markets. By comparison, U.S_ equity market capitalization at the end of2016 was 

approximately $.30 trillion.'" 

Holdings of fixed income securities vary by sector, but generally include both individual investors 

and institutions like mutual funds, pension funds, insurance companies and others. Some sectors 

feature significant participation by individual investors (e.g. municipal securities), whereas others are 

primarily institutionally based (e.g. Treasuries and securitized products). Data on holdings of the 

Treasury and municipal bond markets are presented below. (See Charts 3 and 4) These charts show 

the distinct investor bases of the two markets. 

''Source: SIFI\L\ 10 Source: Nasdaq and NYSE. 

5 
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$4,500.00 

$4,000.00 

$3,500.00 

$2,500.00 

$2,000.00 

.$1,500.00 

$1,000.00 

$500.00 

s-

;tt Individuals ·Mutual Funds 

\1$ Banking Jnstitutions 100: lnsurance Companies 

II Other 

Chart 3. l Ioldings of municipal securities by 

investor category, 2007-2016. Source: Board of 

Governors of the Federal Reserve. 

$18.000 

$16_.000 

I IIIII II II $14,000 

V1 $12,000 

] $10.000 

:5 $8,000 

"' $6.000 

:',>4,000 

$2,000 

$-

lilndividual:s Jll!Mutua!Funds 

of 

ln 2015 fixed income investment comprised 28% of institutional investors' portfolios. (See Chart 5 

below) 

Chart 5. Institutional portfolio holdings for defined benefit plans and investment pool assets, 2005-

2015. Source: Greenwich Associates. 

6 
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Fixed Income Market Structure Overview 

Most fixed income securities have a stated maturity that can range from a week or less to 30 years or 

more. Investors often buy fixed income investments w-ith a targeted maturity in mind. A life 

insurance company, for example, may want to match the length of their investments with the timing 

of claims expected to be paid in the distant future. Families may save for an anticipated future 

expense like college tuition. However, circumstances change, and sometimes investors may want to 

exit their fixed income investments before they mature. The "secondary market" exists so that 

investors who want to sell bonds before they mature can find ready buyers. 

The secondary market for fixed income securities differs in important respects from the secondary 

market for equities. The most important difference is that most fn:ed income securities trade not on 

an exchange or national market system but over the counter. \'\lhile some very small cap companies' 

stock also trades over the counter, this accounts for only a tiny portion of all stock transactions. This 

means that unlike the stock market, where shares are often traded directly between two investors, 

trading in fixed income securities almost always includes an intermediary, generally a bank or brokerdealer, that buys bonds from one investor and resells them to others. 

The over the counter nature of the ftxed income market has been its defining structural 

characteristic and contrasts witb the structure of the equity markets. At the end of 2016 there were 

5,204 companies whose stock was listed on a ~U.S. exchange." Each company generally has just one 

class of common stock outstanding, and most listed equities trade actively. Market makers and 

specialists ensure that there are active, two-way (buy and sell) quotations available for every listed 

stock throughout the trading day. In the U.S. municipal bond market, by contrast, almost one 

million individual bonds outstanding have been issued by tens of thousands of st5ltes, cities, towns, 

school districts, authorities and other state and local "political subdi,·isions." Each issuer may have 

hundreds or, for large, active issuers, thousands of individual bonds outstanding. It is simply not 

possible for dealers to provide active quotes for the approximately one million municipal bonds at 

all times as most issues do not actively trade. Similarly, there arc over one million corporate bonds 

and mortgage-backed and asset-backed securities outstanding. The vast majority of fixed income 

securities do not trade every day. Many bonds go months or even years without trading at all. 

Indeed, in some cases an investor may buy a bond when it is newly issued and never trade the bond 

at an before it n1aturcs. 

1l1at is not to say, however, that the fixed income markets are illiquid. \'\/hen investor wants to sell a 

bond, it should be possible to get executable price quotes from one or several dealers on request. 

Dealers buy bonds directly from customers and keep them in their inventory while they search for a 

buyer, either an investor or another dealer. In addition, underwriters of fixed income securities 

typically make markets in securities that they underwrite. While the dealer owns the bond in its 

inventory, the firm is exposed to the risk that the price of the bond will fall before the dealer finds a 

buyer. While many dealers use products and strategies to hedge that risk, hedging comes with costs, 

and hedges are not always perfect. In addition, under banking and securities mles, firms must 

commit capital against trading positions to prm·idc a "cushion" against any losses. In any case, 

11 Source: \\lorld Federation of Exchanges 

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liquidity in the fixed income markets generally depends on the ability and willingness of dealers to 

commit capital and take on risk in order to buy bonds from customers who want to sell. 

Another difference between equity and fixed income trading is how dealers are compensated. In the 

stock market, many trades are brokered. Dealers match buyers and sellers of securities but usually do 

not take shares into inventory or take on any market risk and earn commissions for executing trades 

for customers. In the fixed income markets, by contrast, dealers rarely earn cotrunissions for 

secondary market transactions. Instead, a dealer buys a bond from a customer at one price, the 

"bid," and resells the bond at a slightly higher price, the "offer" or "ask." In simplistic terms, tllis 

difference between the bid and ask prices, known as the "markup," is a reference point for the 

dealer's compensation for executing the transactions and taking the market risk associated with the 

position. Conversely, for the customer selling their bond to a dealer, the dealer's compensation is 

known as a "markdown." The difference between the bid and ask prices, the "bid-ask spread," can 

also he an indication of market liquidity. The more liquid the instrument and the less risk the dealer 

takes on, the smaller the bid-ask spread. 

The best example over an active and deep fixed income market is the "on-the-run" market for 

Treasury securities. On-the-run Treasuries are the most recently issued of the various securities the 

Treasury Department sells regularly (4-, 13-,26- and 52-week bills, 2-, 3-, 5-, 7-, and 10-year notes, 

2-year tloating rate notes, 30-year bonds, and 5-, 10-, and 30-year Treasury Intlation Protected 

Securities, or TIPS). The market for on-the-run Treasuries is very large and active and is dominated 

by large institutional investors, investment funds, banks and others. Around 2/3 of all fixed income 

trading volume in the U.S. is in the Treasury market, and the vast majority of that activity is in onthe-run issues. The on-the-run Treasury market is the most active and liquid securities market in the 

world. Bid-ask spreads for round-lot institutional trades are near zero, meaning there is virtually no 

cost to transacting on-the-run securities. Also, because this segment of the market is so liquid and 

active, alternative forms of electronic trading have evolved that allow investors to trade directly with 

each other without dealer intermediation. 

Market Liquidity 

One way to det1nc liquidity is in relation to the ability to execute a large secondary market 

transaction at a reasonable cost and without significantly affecting tbe price of the security. 

Indications of liquidity can be measured by various indicators, including trading volume, bid-ask 

spread, dealer inventories and other measures. However, the ultimate measure of liquidity is in part 

subjective and depends on market participants' perceptions of the ease and cost of executing 

institutional size trades. 

8 
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$1,200 

$800 • I I I I I $400 I $200 

In 2014 and 2015 surveys of corporate bond investors, Grecm\~ch Associates asked about the ease 

of trading corporate bonds by size." In each year of the survey, over 75% of investors found it 

"difficult" or "extremely difficult" to trade larger-size blocks of corporate bonds. (See Chart 7 

below.) by trade size." Source: Greenwich Associates. 

A number of factors affect market liquidity, and market liquidity can improve or deteriorate 

depending on these factors. These include, among others: 

• Regulation. Regulation of dealer activity can affect liquidity. For example, the Volcker Rule 

limits on trading by banks in some cases constrain dealers' ability to take on trading positions 

and build inventory necessary for market making. Capital and leverage rules also limit 

dealers' ability to ti.nance positions held in inventory, and can clearly limit their ability to 

comruit to customer trades. 

• Monetary policy. In the wake of the financial crisis and the 2008-2009 recession, the Federal 

Resetvc undertook an aggressive policy of "quantitative easing" whereby it purchased 

12 Greenwich ~-\ssoci.ates, "Understanding the US Fixed Income Markets" Oct. 2016, at 9. 

9 
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significant volumes of Treasury securities and Agency MBS. One goal of this effort was to 

reduce yields in the markets for the securities that are purchased and drive investment from 

these safe haven markets into other markets, such as corporales, through the so-called 

portfolio balance channel. Importantly, the Federal Reserve is a buy-and-hold investor, so 

bonds it purchases are effectively removed from tradeable float. Accordingly, from a wholemarket perspccti,-e impacts on liquidity of these operations are mi..xed -in some markets 

(e.g., TBA MBS where Federal Reserve ownership approached one-third of available 

securities the market), Federal Reserve activity would crowd out other investment and have 

the effect of reducing liquidity for participants, while it would simultaneously increase 

demand and liquidity in other markets as investors shift their activity to them. 

• Market activity. \v'hen many investors attempt to sell bonds in the secondary market at the 

same time, liquidity usually suffers. Dealers have a limited balance sheet capacity to absorh 

customer requests to sell bonds, and when significant trade flow imbalances arise, dealers 

may be constrained in their ability to provide liquidity to the market. Since liquidity in most 

sectors depends heavily on dealers committing capital and taking risk positions, dealers 

withdrawing from the market necessarily dampens liquidity. Tlus affect may be exacerbated 

in a market where prices are declining, since neither dealers nor investors want to be exposed 

to market risk under those conditions. 

• Dealer risk management. \Vhile regulations and capital requirements can dramatically affect 

liquidity, non-regulatory changes in dealer behavior can also affect liquidity. Since the 

financial crisis many dealers have reduced the sizes of their balance sheets and, as a matter of 

prudent risk management, limited their own exposure to market risk, which can limit their 

ability to ahsorb customer positions. 

Fixed Income Market Regulation 

The U.S. fixed income markets are strongly regulated with ten federal agencies and self-regulatory 

organizations involved in rulcmaking or enforcement regarding fixed income securities and related 

products. SIFMA believes that a wave of new laws and regulations implemented after the financial 

crisis, that were designed to address financial stability concerns and not targeted directly at fixed 

income markets, have nonetheless constrained dealers' ability to provide liquidity. These include, 

among others: CCAR, Basel III capital rules, leverage ratio, liquidity coverage ratio, single 

countcrparty credit limits and the Volcker rule. \Xie have not yet seen how the combined effects of 

these regulations 'W-ill affect fixed income liquidity in a truly stressed market environment but many 

market commentators and policymakers have expressed concerns. As mentioned above, we believe 

the time is right for a review of the effects of these rules and requirements. 

What follows is a brief outline of how fixed income markets are regulated. 

• All broker dealers who participate in the fixed income markets are required to be registered 

with the U.S. Securities and Exchange Commission (SEC) and one or more self-regulatory 

organizations (SROs) such as the Financial Industry Regulatory Authority (FINR!\) or the 

Municipal Securities Rulemaking Board (MSRB). The SEC also oversees mutual fund 

10 
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companies and registered investment advisors and Automated Trading Systems (ATSs). The 

SEC and FINRA. also regularly examine bond dealers to check for regulatory compliance. 

• Bank regulators, inclnding the Federal Reserve Board (the "Fed"), the Office of the 

Comptroller of the Currency (OCC) and the Federal Deposit Insurance Corporation (FDIC) 

make rules that impact bank and bank holding company participation in the markets, 

including areas such as capital and liquidity. 

• The U.S. Treasury Department is the primary mle maker with regard to the market for U.S. 

government securities. 

• The Commodity Futures Trading Commission and the National Futures Association oversee 

the markets for fixed income derivatives. 

• The Federal Reserve Bank of New York exercises oversight of the primary dealers. 

• Finally, the Department of Labor oversees entities that manage investments that fall under 

the Employee Retirement Income Security Act of 1974 (ERISA). 

In the area of investor protection, U.S. regulators hm'e several areas of focus. FINRA and the MSRB 

haYc rules in place that require dealers to have a "reasonable basis to believe" that investments they 

recommend to customers are suitable. In addition, dealers arc required to provide investor 

customers with prospectuses, official statements or other key disclosure information at the time they 

recommend an investment. FINJU\. and the MSRB also have rules in place to help ensure that 

investors pay or receiYe fair prices for the securities they buy or sell and rules that require dealers to 

report relevant information about an investment to a customer at the rime of a transaction, as well as 

certain best execution obligations. The SEC m'crsees mutual fund companies and registered 

investment advisors to ensure that investors receive clear information about investments in their 

funds and that asset managers adhere to a fiduciary duty with regard to customers' investments. 

The SEC has a panoply of disclosure rules in place that (among other things) require an issuer of 

registered securities to produce a prospectus at the time that bonds are offered for sale. SEC rnles 

also require corporate securities issuers to publish annual, audited financial statements, quarterly 

financial statements and notices of certain events that could affect the value of their securities. 

Securities are also issued in non,registered forms, most notably in the so,called Rule 144A market. 

W'hile these securities are not registered with the SEC, and not necessarily subject to disclosure rules 

applicable to registered offerings, they remain subject to the SEC's anti, fraud regulations such as 

rule 10b,S and other requirements that provide im'estor protections. SfFM .. /\. members believe that, 

in some sectors, burdensome and unnecessary increases in registration requircn1ents have increased 

risk to issuers and underwriters, driving issuance into the unregistered markets (e.g., private,label 

MBS). 

Disclosure rules in the municipal bond market do not apply directly to issuers. l Iowevcr, the SEC 

has rules in place designed to help ensure that both at the time of issuance and on an ongoing basis, 

investors have readv access to issuer financial and risk information. Financial information from 

corporate issuers is available to investors free on the SEC's EDGAR platform, and municipal bond 

information is available on the MSRB's EMM1\ platform. 

In the area of price transparency, both FINRA and the MSRB have rules in place that require dealers 

to report the prices of most agency, corporate, mortgage·· and asset,lncked, and municipal bond 

11 
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transactions to a central repository. This trade information is publicly diS>eminated for most of these 

markets through FINRA's TR.A.CE system and the MSRB's EMi'v1A platform, in real-time in the 

case of agency, corporate and municipal securities. 

Prudential regulation is mostly the purview of the SEC (for broker-dealers) and the federal banking 

agencies, the Fed, the OCC and the FDIC (for banks). These agencies have in place rules that 

require broker-dealers and banks to hold minimum levels of capital against the investments they 

hold, providing a "cushion" against losses the bank may suffer if positions they hold perform 

poorly. The bank regulators' "r~sk-based" capital rules account for the relative risks of various 

categories of investments, and in general require banks to hold more capital against riskier positions. 

Banking agencies also have rules in place to limit lew:rage and to help ensure that banks have 

sufficient liquid im·cstments that they can sell quickly if the need atises. In addition, the "V olcker 

Rnle," a provision of the Dodd-Frank Act, prohibits banks from engaging in "proprietary trading" 

of many categories of investments, including certain fixed income securities. 

Corporate Bond Market Overview 

The corporate bond market provides the means for businesses to raise capital to finance investment 

in new capital assets. The primatT market is active and in recent years and has experienced 

significant growth given the interest rate and economic climate \\~th both a rise in annual issuance 

(together with a rise in the average deal size) and a commensurate rise in the dollar volume of bonds 

outstanding. For example, investment grade corporate bond issuance in grew from $1,032 billion in 

2012 to $1,286 billion in 2016 (a 24.6% increase) while the size of the overall corporate bond market 

or dollar volume of bonds outstanding was approximately $8.5 trillion in 2016, a 21 'Yo increase since 

2012 (i.e. $7 trillion). In 2016 average daily trading volume in U.S. corporate bonds was $30.0 billion. 

By comparison, average daily stock market trading volume in 2016 was $273 billion. Looking at 

trading in relation to the size of the market, in 2016 average daily corporate bond trading volume 

represented 0.35'Yo of total volume outstanding at the end of the year. In the equity market, trading 

volume represented 0.94% of end-of-year market capitalization-" 

As discussed in the introduction, access to the market for smaller issuers has declined in recent 

years, as growth (or decline) in issuance is clearly correlated to issuer size. (Sec Chart 8) 

12 
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Secondary market trading volume in most fixed income markets is unsurprisingly dominated by 

trading in newly issued securities. Corporate bonds tend to trade very actively in the weeks 

immediately follo'W~ng a new issuance and trading activity wanes considerably as bonds come to rest 

with more buy-and-hold investors. Similar to the municipal securities market, it is not uncommon 

for individual bonds to trade very infrequently in the secondary markets which can make price 

discovery more challenging. 

Market structure for corporate bonds, which had historically relied heavily on dealer intermediation 

over the phone, has been evolving in recent years to adapt to a host of regulatory and market forces. 

Importantly, there has been significant competition and innovation in electronic trading platfonns 

and increased investment in data aggregation and client connectivity among market participants. 

There are now likely to be upwards of 20 operational electronic platforms serving the corporate 

bond space compared to only a handful in 201014 and the electronic trading of investment grade 

corporate bonds has grown from approximately 8% in 2013 to 20°;(, in 2015 15• A number of new 

electronic trading platforms have functionality that allows any market participants, dealers or 

investors, to trade directly with each other. While adoption of electronic trading has been 

incremental, the growth in electronic trading platforms for corporate bonds ,_,;]] most certainly 

change the way many corporate bonds trade over time even \vith some or even signit!cant continued 

reliance on dealer intermediation. Electronic trading has been dominant in retail-size transactions, 

but institutional market participants have [begun] increased their use of new trading mechanisms as 

well, albeit slowly. The market share of the top 10 dealers in what f'INRA categorizes as "more 

active" corporate bonds is 69%, while the same measure is 56% in what they classify as "less active" 

corporate bonds. 1

' 

~~~~;T,~~~~=~~;~~:~Tr~~~;;~;~B~ond Evolution", (Q4 2015). Please note that Greenwich 

in Fixed Income between February and ,\pril2015 to 

gather the information on Corporate Bond electronic trading. 

10 FJNR.'., .\nalysis of Securitized .\sset Liquidity, (June 2017), at 14. 

13 
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28749.064

There has been also been an increasing focus among corporate bond market participants on better 

data capture and more efficient use of trade data to aid in price discovery and in finding ready 

buyers, and a marked increase in the availability and utilization of pricing systems in that regard to 

both price bonds and measure best execntion. 

New market regulations, especially the Volckcr Rule and mlcs governing capital and liquidity, have 

affected dealers' willingness to make markets and readily commit capital in corporate bonds. 

Unsurprisingly, the New York Federal Reserve Bank's Liberty Street Economics team recently 

summarized a separately published study that found that institutions more affected by post-crisis 

regulation are less able to intermediate customer trades." Compressed bid-ask spreads are often 

cited as evidence of continued strong liquidity and an efficient market. However, liquidity can be 

measured in a number of wavs and one metric won't give an accurate piemre of the health of the 

marketplace as a whole. As the Greenwich Associates survey result shown in Chart 7 suggests, a 

significant percentage of survey participants believe larger trade si?.es are difticult to execute. A 2015 

FINR:\ Analysis on Corporate Bond Liquidity also indicated there is evidence that finding liquidity 

is now associated \\~th smaller trade si?.es, more transactions and larger dealer networks and while 

the absolute number of block trades continues to increase, the proportion of block trades to total 

volume is also falling as is the average trade si?.e." Importantly, these reference points may reflect a 

market in transition where liquidity is more dynamic and where market participants are trying to 

adapt. 

Corporate Bond Market Policy Questions 

New market regulations, especially the Volckcr Rule and rnles governing capital and liquidit)', have 

affected dealers' willingness to make markets and readily commit capital. 

Recently published data shows tlut the Volckcr Rule has impacted tirms' ability to make markets 

and provide market liquidity-particularly in times of stress. A recent Federal Reserve staff paper 

concluded that "the Volckcr Rule has a deleterious effect on corporate bond lic1uidity and dealers 

subject to the Rule become less willing to provide liquidity during stress rimes." 

This adverse impact on market liquidity will cause the greatest problems in times of stress. During 

times of stress, financial institutions "'ill be disincentivized from providing liquidity, precisely when 

it is most needed, if trading in a stressed environment subjects them to regulatory risk and potential 

sccond~guessing resulting from the unclear and complex standards of the current Volckcr Rule. 

Also of relevance to tlus discussion is the recent FlNRA. proposal to modify Rules 2241 and 2242 

governing investment rcscarch 1 " FINRA's proposal would to create a limited safe harbor for 

specified brief, written analysis distributed IT> eligible institutional investors that comes from sales 

Dealer Balance Sheets and 

14 
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and trading or principal trading personnel but that may rise to the level of a research report, known 

as "desk commentary". The proposed safe harbor would be subject to conditions, including 

compliance with a number of the Rule 22-H or Rule 2242 provisions to mitigate research-related 

cont1icts. In addition, the proposed safe harbor would require firms to include a "health warning" 

on desk commentary and to obtain negative consent from eligible institutional investors to receive 

such cotnn1entary. 

l n our response to the FTNRA proposal we argued that that certain "conflict management" 

provisions relating to im·estment banking should be eliminated and modified because these 

provisions, as currently contemplated, would preclude sales and trading personnel who author 

eligible desk commentary from engaging in many ordinary course activities. These restrictions may 

be particularly onerous for smaller firms that have limited resources and are less likely to have 

dedicated im·estment banking personnel with cerL1in stmcturing expertise that exists in sales and 

trading. 

\'Chile we provided substantive and constructive comments to the proposal, we are not aware of any 

substantial im·estor concerns that have arisen from historical or existing desk commentary content 

or pcrcciYcd conflicts of interest to warrant the proposal and we remain concerned that valuable 

communication tools could be unnecessarily stifled to the detriment of the marketplace. \'1/e believe 

that most desk commentary does not risk technically being considered a research report. hom our 

pcrspectiYe, most desk commentary lacks analysis and to the extent desk commentary contains 

analysis, it would not be sufficient to make an investment decision. 

Finally, FlNRA recently issued a request for comment as part of its FINRA360 initiati'-e intended to 

streamline FINRA's rules that affect the access to capital among securities issuers." In our 

response" we argued, based on our member firms' experience, that FINRA's debt research rule has 

eroded the frequency and quality of interactions between debt research and trading desk personnel, 

putting both at a significant information disadvantage. Given the relative complexity of the debt 

market and the breadth of debt security classes, debt research analysts need access to current market 

infonnation from traders, and traders need research analyst input to accurately price positions for 

clients and 1113 nagc finn risk. 

This issue is particularly acute when significant news stories or corporate c\~cnts arc announced, and 

the absence of guidance from an analyst can prejudice a trader's ability to price debt securities in real 

time. ,\dditionally, the absence of tllis information negatively affects investors' ability to make 

informed decisions on debt securities in their portfolios, constraining market liquidity in less liquid 

securities or durln~ tirnc'.:> of n1arket stress. 

,\!though F!NRA permits certain interactions between research and trading, the boundary of 

permitted and prohibited interactions is are confusing and does not go far enough to give firms 

comfort that certain communications are appropriate, thus discouraging debt aoalysts from engaging 

Letter from Sean Davy, SIF;'\L-\, to Jennifer Piorko :i\fitchdl, FI~RA, on Desk Commentary Safe Harbor from 

FI~R.\ Equity and Debt Research Rules, 31.2017. 

~~ FINRA, Regulatory Notice 17-14, 

Letter from Scan Davv, SIFJ\f.\, on Request for Comment on FINK\ Rules 

Impacting Capital f<orm~trion Qunc (J, 

15 
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in even permissible interactions. FINR.c\ should revise the rule or otherwise issue guidance to 

provide both clarity and greater flexibility to the interactions between research and trading to avoid 

these unnecessary impediments. 

Treasury Market Overview 

The importance of the U.S. Treasury market to the national-indeed, the global--economy cannot 

be overstated. 2

-' This market is unique and provides key functions that underlie financial markets 

throughout the world. 

The U.S. Treasury market, the largest segment of the fixed income market, continues to function 

well in its role providing the benchmark risk-free rate for the global economy. This unique, resilient, 

and robust market serves multiple roles including as the transmission mechanism for monetary 

policy, as a safe-haven investment particularly during times of financial stress, and, most importantly, 

as the source of stable and efficient and low-cost funding for the Federal government. Treasury 

securities also underpin the new prudential regulatory framework for li<Juidity of U.S. and many 

other global financial institutions that has made our financial system significantly more resilient. 

Recent reviews of the changes in this market have noted the participation of new types of 

participants and a significant move to electronic dealing. 

Given the importnnce of this market, continued study and review of these changes is necessary to 

ensure that the Treasury market remains the efficient centerpiece of the economic framework. Any 

changes to regulation should be carefully calibrated to support both the resiliency and the role of the 

Treasury market and recognize the uni<jue structure and auction process that has allowed the 

Treasury to finance government activity at a low cost to taxpayers. \Ve note recent market 

improvements, most notably the collection, set to begin in July 2017, of secondary market 

transaction data for use by Treasury and the regulators and supervisors. Additional changes, 

including public dissemination of secondary market transaction data, need further careful study to 

ensure that no harm comes to this market. 

Treasury's ability to borrow to finance the federal gcwernment's debt is built around a truly unique, 

principal-based market structure, one that is not easily (or appropriately) comparable with more 

traditional agency (e.g., equities) markets. The fundamental starring point of this market rests in the 

Treasury auction process. 

Treasury has structured the auction process to nlininll7.c governn1ent costs by promoting broad, 

competitive bidding. Primary dealers-banks and broker-dealers that have been approved to trade in 

C.S. Treasuries with the Federal Reserve Bank of New York (New York Fed)-hm·e traditionally 

constituted the largest group of buyers in such auctions (bidding on behalf of their own accounts or 

market is drawn from the SIFi\L\/~\B_\ letter, dated ,\pril22, 2016, in response to 

The letter is available at lliljL'i_Yl~CC'!.lJilc"Q!,QJ.£2'llillD1Ic 

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on behalf of identified customers). 24 Other direct auction bidders include investment funds, 

pensions and retirement funds, insurance con1panies, foreign accounts and others. Primary dealers 

are, however, the only market participants who are obligated to participate in all auctions of U.S. 

government debt, with all bids to be made (at a minimum), for an amount of securities representing 

their pro rata share of the offered amount. 

The New York Fed further expects primary dealers to act as "responsible counterparties and market 

participants in their overall conduct and support of market efficiency and liquidity." The obligation 

to support market liquidity extends not only to on-the-run securities, but also to a host of less liquid 

off-thc-mn securities. In meeting those obligations set forth by the New York Fed, and in 

attempting to satisfy nYarket and client demands, primary dealers are frcquendy required to commit 

capital in significant size. Principal trading acti,~iry in the "when-issued" market, during auctions, in 

the aftermarket of auctions, and in the secondary market (including with respect to off-the-run 

securities) correspondingly requires these dealers to hedge their positions with other treasury 

products (both in the specific security and other related securities) on a confidential basis. The abilitv 

of primary dealers to do so is critical to the m·erall functioning of the U.S. Treasury market and to 

helping maintain appropriate Ic,~c[s of liquidity in this market. 

Other market participants arc not similarly bound by the market-making obligations that put primary 

dealers in a position of providing both buy and sell quotes on a more-or-less continuous basis. 

Corporate hedgers and hedge funds, for example, seek to hedge specific business risks but do not 

serve clients as in a typical broker-dealer business model, and arc generally liquidity takers, rather 

than liquidity providers. Principal trading firms (PTFs) similarly do not serve clients, but play a more 

pronounced role in providing liquidity, trading for their own accounts and in volume to maximize 

profit on all trades, for which ,~cry limited capital is committed. ;\ssct managers, by contrast, serve 

investors and clients as fiduciaries, on a low-Jc,·eragc, long term investment basis, and ·while they 

have the capacity to prm'ide Iiguidity, their primary obligation is to serve their clients and investors, 

making them predominantly liquidity takers. At the same time, each of these non-primary dealer 

market participants contributes in unique and important ways to the liquidity profile of the US 

Treasury market. 

;\ wide range of market participants-including bank portfolio and asset managers, fixed income 

and swaps dealers, bond underwriters, and mortgage bankers and serYiccrs-rely on Treasury 

securities to actively assurne interest-rate risk or to manage the rate risk inherent in their business 

activities. Each of these participants will have a unique risk protlle-by tenn and duration, scale, and 

variability. Collectively, they rely on the availability of Treasury securities across an cxtensi'i.T term 

structure for their investtnent and hedging needs. 

The characteristics of the market also vary significandy across product segments, particularly with 

t·espcct to the on-the-run and off-the-run segments, with the on-the-runs trading much more 

frequently and electronically (i.e., typically on many-to-many platforms in both the cash and futures 

markets). 

dealers. 'fhc primary dealers list is available at 

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28749.068

Signitlcant differences among market participants may also be seen in their business models, 

functions, trading practices and strategies. Some factors and forces that haYe been reshaping the 

Treasury market have enhanced liquidity and stability, and others have had more negatiYe effects. ln 

addition, the suggestion by some that cash Treasuries trading acti>·ity may be shifting toward the 

futures n1arkct, or other markets, increases the in1portancc of understanding the reasons for these 

changes, and how an appropriate regulatory response could enhance market operations while 

facilitating greater liquidity. 

Treasury Market Policy Questions 

Oflicial sector data repository 

SIFMA fully supports increasing oftlcial sector (i.e., market and prudential regulators) access to data 

related to U.S. Treasury market transactions. \Ve strongly believe that the oftlcial sector must have 

access to the data necessary to carry out its various regulatory functions, to develop a more 

comprehensive understanding of U.S. Treasury market activity and to improve Treasury's ability to 

oversee market liquidity, resiliency and eftlciency. SIFJ\lA has been working with its members as 

they prepare to begin reporting secondary market Treasury transactions to FlNlc"'. through the 

TRACE reporting engine. \Ve believe once fully implemented this will materially increase the 

official sector's ability to fultlll its market surveillance duties. To enhance the data a\·ailable to 

regulators, consideration should be gh·en to including market participants who arc not currently 

subject to TRACE reporting requirements. 

Public dissemination of Treasury transaction data 

\\'ith respect to further pnblic dissemination of Treasury secondary market activity, STFM.A's 

feedback from members indicates that there is an abundance of publicly available information 

sufficient to allow market participants to obtain infonnation needed to trade in a competitive, fair 

and cftlcicnt manner. Indeed, the unique nature of the Treasury market and the Treasury auction 

process, with the need for primary dealers to be able to hedge their positions on a confidential basis, 

counsels extreme caution in moving forward with additional public disclosure. 

For the most liquid segment, on-the-run securities, executions and a range of other data are 

observable by monitoring infonnation a\·ailablc from the primary execution venues for these 

products. Specifically, we believe there is considerable price transparency in the on-the-run market 

through trading platforms such as BrokerTec and N;\SDAQ Fixed Income (previously known as 

eSpeed) and the futures markets, where indicative bids and offers are available and executable, and, 

for customers, through direct access to dealer franchises. \vith respect to less liquid products (e.,~., 

off-the-rnn securities), indicative pricing and other market data arc available from Tradcweb and 

Bloomberg, and customers also ha\-c multiple options for direct access to dealer franchises that can 

also provide indicative bids for less liquid products. 

\X'e do not believe that increased reporting of Treasury transactions to the public would have any net 

positive effect on improving market functionality or liquidity. Specifically, we believe that there arc 

si~,,.niflcant identifiable and predictable risks to market di,·ersity, lirjuidity and resiliency that arise 

18 
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from the prospect of mandatory increased public disclosures that outweigh any potential-as yet 

unidcntitlcd---benefits. Two aspects should be considered in this context: (i) large positions/ client 

accommodation, and (ii) primary dealers' ability to hedge. 

\\1c bclic,-c that a range of market participants would be inhibited in their investing activity if they 

deemed the detail and frequency of public data dissemination too high, particularly for the off-.[herun market and large trades across market segments (which also require time to hedge). Parts of the 

Treasury market arc very concentrated and transactions occur in large sizes. 25 Third-party im·estors, 

particularly those providing the principal-based liquidity that is so critical to this market, have a 

legitimate and well-established interest in maintaining the confidentiality to be able to trade without 

concern that too much public information will hurt bilateral price formation. 

Similarly, the ability of primary dealers to hedge their positions around Treasury market auctions 

and in meeting counterparty demand in the secondary market, which is critical for such market 

participants to continue sencing as principal-based liquidity providers for a diverse investor base, 

would be compromised if they were unable to do so on a confidential basis. \\lith out this ability, it 

would be materially more difflcult for primary dealers to commit significant amounts of capital to 

satisfY market and client demands, and to meet their obligations set forth by the New York Fed. 

Gi,·cn the importance of primary dealers' role in the auction process, and for maintaining liquidity 

in the market, SIFMA believes that the prospect of losing confidentiality for these market 

participants would haYe serious conse<1uences for their critical role and the market more broadly. 

Mand,ltory Central Clearing 

Additionally, SIFi\1,\ supports the further investigation and study, to be led by Treasury, of the 

potential costs and benetlts of implementing a mandatory central clearing requirement for the cash 

Treasury market, and we believe this study should consider all potential forms of a clearing 

requirement that could be implemented across rhc cash Treasuries product ecosystem (i.e., on and 

off-the run issues, the when-issued market, repos, etc.). \'fe also support further study and 

eYaluation of the costs and benefits of mandatory centralized rcpo clearing. 

Capital and Liquidity 

i\s noted above, liquiditv and capital requirements ha\'C had a material impact on banks' traditional 

role as primary dealers and their associated market-making function in the Treasury market 'md 

their willingness and ability to hold inYcntory. Specifically, SIF1L\ belieYes that the measurable 

reduction in primary dealer inventory and market-making capacitv that is potentially affecting 

Treasury market liquidity can be tied, at least in part, to banks' responses to the implementation of 

new prudential regulations. The new rules increase the amount and quality of capital that banks 

have to hold and introduce a minimum leverage ratio requirement designed to limit excessive 

See Joint Staff Report at 52. 

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leverage in the banking sector. \\'c arc supportive of the capital and liquidity regulations that have 

been put in place since rhe crisis to improve the safety and soundness of banking institutions. \X7e 

are concerned, however, that the resulting reduction in primary dealer inventory and market-making 

capacity being driven by what is, in some cases, non-harmonized capital rules that target the same 

risk numerous times, may be hampering the ability of other market participants to execute trades, 

particularly in stressed environments. This is because as the mandate of the franchise business is 

narrowed by external regulatory requirements, the ability to service customers is constricted. 

The re<1uirement for bank·afflliated primary dealers to hold High Quality Liquid Assets (HQL\) 

illustrates our concern. 1\s banks, such primary dealers are required to hold a buffer of HQL\, e.x, 

Treasuries, to meet the requirements of the Liquiditv Coverage Ratio (LCR) niles. The increased 

demand for HQL1\ has decreased their supply (and has decreased the level of inventory that may 

otherwise be available). Rdatcdly, higher capital charges on banks for low yielding assets ha\T 

increased the banks' need to hold higher \'ielding collateral and decreased their ability to act as 

dealer or market makers in low 1·iclding assets such as Treasuries. At the same time, the cost of 

financing capital has increased. Banks traditionally use repo markets to finance trading and marketmaking actiYit:y. Because rcpos were traditionally assigned low risk weights, since they are normally 

ti.lily collateralized with high quality collateral, banks only needed to allocate limited capital to repo 

positions. However, banks now face higher capital charges to account f(Jr counterparry credit risk 

from rcpo exposures." 

1\s the capital constraints on banking institutions continue to increase due to recent proposed 

changes to capital and leverage ratio calculations, banks' willingness to engage in such low margin 

businesses will likely come under increased pressure and their ability to step in and support the 

market during times of stress v,~ll be challenged. The liquidity being provided bv PTFs has filled the 

liquidity void under normal market conditions to some extent, but market depth has become more 

fleeting in general. Moreover, less diversity in liquidity providers leads to less resiliency, particularly 

during stress periods. 

\'V'e bclinT that a re,·iew of the coherence of the current regulatory regime is timely and should 

include, among other assessments, an e\·aluation of several issues, including, for example, how the 

Treasury market is impacted by the LCR. As described above, under the l.CR, banks arc on one 

hand forced to hold HQLA, such as Treasuries, and on the other hand they arc forced to hold more 

capital as a result of holding these very same assets. \Vc urge a re,-icw and assessment of these 

concerns by examining duplicative and 0\Trly burdensome capital and liquidity regulations on 

market participants, and determining whether they arc having the unintended effect of reducing or 

weakening market liquidity. 

PricewaterhouseCoopcrs LLP, "Global Financial ,\larkets Liquidity Study ("\ug. 2015) (GF:\L\. Study) at 36, available 

at lltm~.~_,~::'\LJ2:l\T .. ~~, -~~ps-ltiT.Pilii~i.~~h}ll.!.d- UI.M.D£ial.JJJarb:J-~t.s_-_li_q_ui_dip~"-Il-ld~-

/rl. at 39. 

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Municipal Securities Market Overview 

Municipal securities are issued by state and local governments to finance investment in schools, 

roads, airports, water and sewer systems, and all manner of infrastrncture. Approximately 75% of 

the nation's infrastmcture is tinanccd, built and maintained by states and localities, and nearly all of 

that was financed v,1th municipal bonds. 

Municipal securities are unique in several respects. First, unlike stocks and corporate bonds, 

municipal securities are exempt from registration from the SEC, meaning that municipal bond 

issuers are not directly required to produce prospectuses for new bond issnes or file them with the 

SEC Instead, SEC rules require dealers to obtain and distribute official statements (OSs), which arc 

similar to prospectuses in some respects but do not require SEC approvaL Also, municipal issuers 

must produce a new OS for each new bond deal-there is no concept of"shclf registration" in the 

mnnicipal market Continuing disclosure for municipal issuers-rules go,-erning the dissemination 

of disclosure infom1ation after bonds have been issued-is also quite different in the municipal 

market. As the SEC does not ha\·e statutory authority to regulate municipal issuer disclosure directly, 

the disclosure mles in the municipal market are implemented through dealers. 

Second, the interest on most municipal securities is exempt !rom federal and, in many cases, state 

and local income taxation. This feature signiticantly reduces borrmv:ing costs for state and local 

government Howe\·er, the tax-exempt nature of municipal interest cftcctively prevents market 

participants from "shorting" municipal secmities, which is a common hedging strategy across the 

capital markets. Hedging positions in municipal securities must be accomplished by shorting 

Treasury securities or using derivative products that are tied to non-municipal securities, like 

Treasurv futures contracts. Howe\·er, because these hedges may not mirror the underlying long 

position in the bonds, the hedges are inefficient and mav not offer much protection at,>ainst market 

losses. The tax-exemption for municipal bond interest, while important for reducing state and local 

borro'Wing costs, effectively makes the municipal market a long only market by preventing shorts. 

This in turn negatively affects market liquidity since dealers often cannot perfectly hedge trading 

positions. 

The usc of electronic trading platforms as a price discovery toof8 has become more prevalent in 

recent years. Two platforms in particular have established significant footholds in the market, TMC 

Bonds and Tradeweb DirccL TMC Bonds provides a means for dealers to post executable offerings 

of bond positions. Buyers can execnte trades directly on screen_ Participants can see full depth of 

market with visibility of prices, yields, spreads and sizes of all orders. Users can search and execute 

orders by CUSIP, direction, price, yield, spread and size "~than option to define minimums, 

increments, and minimum balance remaining. All orders arc live and executable. Tradeweb Direct 

offers a means for users to solicit bids for bonds they may want to sell. The platform supports both 

dealer-to-dealer and dealer-to-investor (mid-size institutional users)- Dealers often use the platform 

to solicit <]Uotes for their retail customers_ A number of other platforms, including electronic 

interfaces opera red by traditional voice brokers' brokers, also offer the ability to discover prices and 

28 The i\!SRB has warned that should not use the bid wanted process for price discovery if they have 

of the bid-wanted and offering processes. 

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execute trades in municipal securities, and the use of electronic trading in the municipal market is 

likely to grow in the future. 

Municipal Securities Market Policy Questions 

Several actions bv regulators in recent years ha,·e threatened to hamper municipal and corporate 

bond market liquidity. In 2012, the SEC published a comprehensive report on municipal securities 

market structure and regulation." In the report, which was unanimously endorsed by all SEC 

commissioners at the time, the SEC discusses two general areas of focus, municipal disclosure 

regulation and municipal market structure. SEC Chair White accelerated the push for an 

examination of both the corporate and municipal bond market structure in 2014 with focus on 

markup disclosure, best execution and increased pre-trade transparency-'" The best execution rules 

have been implemented, the markup disclosure rules are pending implementation, and consideration 

of pre-trade transparency requirements continues. 

Markup Disclosure 

Dealers are in favor of disclosure of relevant transaction data to retail investors, as such transparency 

supports investor trust and confidence in the markets. However, although the markup rule will not 

take full effect until l'v!ay 2018, it is already raising concerns among market participants as firms 

develop the systems needed to implement the new rule. The MSRB and FINJV\ rule changes will 

require dealers to begin disclosing the amount of markup and markdown they earn on same-day 

trades where at least one leg of the trade involves a retail customer. ln other words, if a dealer buys a 

bond from a customer and resells the same bond to another customer on the same day and at least 

one of those im-cstors is an indi,"idual, then beginning in May 2018, the firm must begin reporting 

the amount of markup/markdown to the retail customer. 

Markup and markdown are defined as the difference between the price char1,>ed to the customer and 

the interdealer price for the bond at the time of the customer trade. Determining the markup is easy 

when a dealer buys and sells a bond simultaneously, sometimes called a "riskless principal" 

transaction. The markup is simply the difference between the price the dealer bought the bond from 

another dealer and the price the dealer sold the bond to the customer. However, if some hours have 

passed between the dealer's purchase and sale, market prices may have moved. The rules in these 

cases will require the dealer to calculate the markup based not on their acquisition price but on the 

"prevailing market price" at the time the dealer sells the position. 

Because the vast majority of municipal and corporate bonds trade infrequently, determining the 

prevailing market price in a moving market when there may not have been many or any recent 

interdealer transactions in the bond can be difficult. Both the FINRo-\ and l'viSRB rule specify a 

prescriptive list and priority of factors that dealers must step through in determining prevailing 

market price under these circumstances, referred ro as a "waterfalL" These factors include the prices 

of any contemporaneous inter-dealer trades, institutional trades, or guotations. 1 f those factors are 

Commission, "Report on the i'dunicipal Securities \larket," 

'

0 SEC Chair i\fary Jo Intermediation in the ;\fodern Securities ~Iarkcts: 

\\'ork for Investors (June 20, :2014), available at: 

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not available, the rules specify additional factors dealers must review to establish prevailing market 

price, including prices, or yields calculated from prices, of contemporaneous inter-dealer trades in a 

specifically defined "similar" security, institutional trades, or <]UOtarjons; 

The rule includes some indicators for determining whether another bond is "similar" to the bond in 

gucstion. If these factors involving "similar" bonds are not available, the MSR\3 and FINRA rules 

specify that dealers must usc "economjc models" to dctermjnc prevailing market price, and if that is 

unreliable, the dealer should look to customer transactions and make "adjustments" to calculate 

prevailing market price. 

"·\s it should appear, the process for determining prevailing market price on days when the market 

has mm·ed during the time between transactions is complex, nonspecific and subjective. In a market 

where many bonds trade infregucntly, detem1ining the value of a bond at any point in the day can be 

both art and science. Experienced bond traders arc adept at detcmlining bond prices. However, the 

overly specific nature and order of the steps prescribed in the rules create very significant 

compliance burdens, given the shift from a historical focus on a range of reasonableness of markups 

to the accuracy of a very specific data point derived from subjectiv·e analysis. Moreover, there are 

serious guestions regariling the kind of documentation firms must maintain to demonstrate that they 

followed the waterfall precisely in determining prevailing market price. Perhaps most importantly, 

the prescriptiYe yet subjective waterfall does not lead itself to automation in an environment that is 

increasingly adopting electronic trading \v~th less human inten·ention. Market participants have 

asked for more t1exibility in the implementation standards but there appears to be an umvillingness 

to better balance multiple objectives while not signil!cantly compronlising the objective of increased 

transparency. Even in light of the recent guidance, we remain concerned about unintended 

consequences of the rules. For example, if dealers face unmanageable compliance risks and 

significant implementation costs, they may reduce their market activity in ways that ultimately 

iliminish market liquidity. 

Pre-trade Price Transparency 

In its ~01 ~ paper on the municipal securities market, the SEC made two recommendations to 

enhance "pre trade" price transparency in the municipal market:" 

• ''The Comnlission could consider amendments to Regulation ;\TS to reguire an alternative 

trading system (ATS) with material transaction or dollar volume in municipal securities to 

publicly disseminate its best bid and offer prices and, on a delayed and non-attributable 

basis, responses to 'bids \Vanted' auctions;'' and 

• "The MSRB could consider rules rcguiring a brokers' broker with material transaction or 

dollar volume in municipal securities to publicly disseminate the best hid and offer prices on 

any electronic network it operates and, on a delayed and non-attributable basis, responses to 

abids wanted" auctions." 

Both FINRA and the MSR\3 have been exploring ways to further the development of a pre-trade 

transparency regime consistent with the above recommendations. SIF!\1A strongly supports 

reasonable efforts to improve price transparency in the municipal and corporate securities markets. 

' 1 SEC, pages 143-144. 

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The dc>tler community has supported the MSRB's Real-time Trade Reporting System (R'll~S), the 

MSRB's E~L'VL-\ platform, and FINRA's Trade Reporting and Compliance Engine (TRACE). These 

are the mechanisms for collecting and accessing trade prices and other trade information, but the 

MSRB systems also provide for the collection of disclosure information and other related municipal 

market information and data. \Ve continue to support the ongoing development and operation of 

these systems through the fees our industry pays. However, we are concerned that a pre-trade price 

transparency regulatory initiati\-c could be expensive to deYelop and implement wlllic yielding 

limited useful information for im-estors. \Ve belieYe that regulators need to carefullv and thoroughly 

assess the costs and benefits of any pre-trade transparency proposals. 

Part of the SEC's analysis leading to its recommendations was based on an academic studY 

published 11 years ago, using data that is now 17 years old." Policymakers should be cognizant that 

the transparency of the market has improYed significantly since that time from both further 

dn,clopment of the post trade reporting regime and forthcoming regulatory requirements on 

markup disclosure, as well as by market driven efforts. 

\\'bile we support improvements to market transparency, we urge the SEC, MSRB and riNRA to 

allow the best execution and markup disclosure rules to take full effect so as to permit additional 

time to reevaluate the issue of retail price transparency and trade execution. 1\fter monitoring the 

effect of those rules and with the benefit of the additional obsen,atjons and data, rcgnlators will be 

better positioned to weigh the cost and benefits of any initiati\TS while taking into account the 

cumulative impact of more recent rule changes. 

Securitization Market Overview 

Securitized products arc bonds that arc collateralized by cash flows from transactions such as loans 

or leases. The issuer of a mortgage-backed security ("MBS") or asset-backed security ("ABS") 

assembles a pool of assets snch as mortgage loans and sells securities to investors backed by the cash 

flows on the underlying assets. \Vhcn a homeowner whose mortgage has been securitized makes her 

monthly mortgage payment, the principal and interest she pays is passed through to MBS investors. 

The securitization markets funded 60'/o of consumer lending in 2016." 

The securitization markets can be generally di,,idcd into three distinct but broad markets. The MBS 

market can be divided into agencv and non-agency markets. The agency market is those for MBS 

issued and/ or guaranteed by Fannie Mac, Freddie Mac, or Ginnie Mae. The non-agency market is 

for MBS issued by private··sector institntions. 1\BS markets arc markets for securitized consumer 

debt, auto loans and leases, conunercialloans and leases, credit cards, and other types of 

securitizations. 

Lawrence~:. Harris and ;\fichael S. Piwowar, Secondaty' Trading Costs in the 1\Iunicipal Bond ~'larkct,J.FIN. (1une 

2ilUo), 1361. 

Reserve Bank of New York, Quarterly Report on f IouscholJ Deb~ and Credit, (Feb. 2017). 

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Agency MBS Market 

Agency J\!BS are MBS issued and/ or guaranteed by Fannie 1\lae, Freddie Mac, or Ginnie Mac. 

These J\IBS carry a guaranty of timely payment of principal and interest that is backed by the full 

faith and credit of the US government in the case of Ginnie Mae, and a significant US Treasury 

capital commitment in the case of Fannie Mae and Freddie Mac. This means that investors in these 

markets arc not exposed to credit risk instead, they focus on interest rates and the prepayment risk 

of the securities. Prepayment risk is the risk that a mortgage borrower will repay some or all of their 

mortgage before it is due. This can be good or bad for the MBS investor, depending on the price 

they paid for the bond and the current le,·d of interest rates. Importantly, investors in Agency MBS 

do not want to be exposed to credit risk similar to Trcasurv investors, they are "rates" investors. 

The largest portion of the agency MBS market is the "To-Be-.\nnouncecl" (TBA) market. In a TBA 

trade, bonds arc sold and bought on a forward basis-settlement is typically 30-60 clays out from the 

day of the trade-and the exact identity of securities to be delivered is not known. Securities in the 

TBA market are subject to "Good Delivery Guidelines" and are considered fungible. Market 

standards, settlement conventions, and tracling practices in the TBA market were de,-eloped by 

market participants under the auspices of SIFl\fA's predecessor organization the Public Securities 

Association, and have been organized and maintained by SlFJ\,L\ since the early 1980s. There is a 

separate TBA market for each of Fannie Mac, Freddie Mac, and Ginnie J\fac. This may change in 

2019 if the Federal Housing Finance Agency (FHFA) and government-sponsored enterprises 

implement their single-security project, which is designed to merge the Fannie and Freddie TBA 

markets into one single market. 

The TBA markets are very liguid, although less liguicl than in prior yeltS. In 2016, an average of 

$210 billion ofTBA trading took place on a daily basis, second only to US Treasuries, and bid-ask 

spreads average 4 basis points." It attracts investment capital from around the world foreign 

im'estors provide important funding to US mortgage borrowers. The main benefits of this market 

are: (1) the ability of lenders to provide 30-60 day rate locks to borrowers at low or no cost since 

they arc able to sell loans on a forward basis, locking in prices, (2) the ability of banks to 

economically underwrite freely prepavable 30 year mortgages, (3) 1 he ability of lenders and scrvicers 

to hedge risk, ( 4) the ability of investors to access liguicl, safe, and long-term investment markets, 

and (5) Jo,ver cost of rnortgagcs due to immense liquidity. 

TK\ market liguiclity has declined somewhat in recent years. Factors driving this include the 

shrinking of balance sheets by capital constrained dealers, the low interest rate environment, which 

has driwn investors into other higher--yielding sectors, and a FINJ~\ rule requiring most MBS and 

i\BS trades to be reported in real time to FINRNs Trade Reporting and Compliance Engine 

(ri0\CE), which has made harder for participants to transact in larger blocks of securities. The 

market share of the top 10 dealers in the TB;\ market is 81';,'(,, according ro FINID\ data." 

There is a significant volume of trading on electronic platfonns in the TBA sector particularly 

among larger dealers. S!Fl\L\ members have reported up to 75% or more of"I13A tracling taking 

place on an electronic platfonn. Similarly, some firms ha\'e estimated that a significant proportion 

31 f<I~R \, ~\nalysis of Securitized _:\sse! Liquidity, at 12. 

;; ld., at 14. 

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of dealer to customer trading takes place on platforms, possibly as much as half. This trend may 

vary by institution. 

The vast majority of dealer-to-dealer 'I13A trading is cleared at the Fixed Income Clearing 

Corporation (FICC). Clearing and settling trades involves the process of matching trade details 

between two counterparties and moving securities and cash from one owner to another. A smaller 

proportion of customer trading is directly cleared through FICC, but many customers clear through 

an FICC participant so that their trading may be netted and cleared. FICC also operates an 

electronic pool notification system, which is how the majority of market participants notify one 

another of the actual pools that will be delivered to fulfill the TBA contract. 

Non-TBA Agem:.y MBS 

The other parts of the Agency MBS market are the specified pool and Collateralized Mortgage 

Obligation (CMO) markets, The specified pool market is where l\!BS trade on a specified basis and 

where the specific security to be delivered at settlement is known at the time of trade. C~v!Os arc 

structured bundles of Agency MBS. 

Liguidity in specified pools and CMOs is far lower than in the TBA market. FINRA. reports average 

daily trading volume of approximately $20 billion and $3.3 billion, respectively, for specified pools 

and "\gency CMO." There is far less electronic trading in this market than in the TBA market, 

although some members report increasing electronic trading in specified pools. The market share of 

the top 10 dealers in the specified pool market is 67%, and in the Cl\10 market 62'Yo, according to 

l'INRA data 37 

Non-Agency MBS /Private Label MBS 

Non-Agency, or Pri,·ate Label MBS are :'\1BS issued by private entities such as banks or finance 

companies. These MBS do not carry a government guarantee, and investors are exposed to both 

credit risk and prepayment risk. Due to a variety of issues, the non--agency MBS markets ha,-e seen 

very low issuance of securities backed by new mortgage loans since 2007. In 2005-2006, these MBS 

represented almost half of total MBS issuance, whereas today they represent less than 5% of MBS 

issued. Today's non-agency MBS new issnance market is defined by sccuritizations of reperforming 

loans, defaulted loans~ and loans that were originated a numbct· of years ago. 

Non-agency mortgage securities tnarkcts are far less liquid than THA. The average age of a nonagency i'v!BS that traded in 2016 was over 10 years," which is indicative of the lack of new issuance, 

and average daily trading volumes arc just under $3 billion." The market share of the top 10 dealers 

in the non-agency MBS market is 67%, according to F!NRA data.'' 

'' ld., at 9. 

ld .. at H 

}\< ld., at 6. 

3() IJ., at 9. 

10 Jd .. at 14. 

26 
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28749.077

Asset-backed securities 

:\ broad range of cash t1owing instruments are securitized in the ABS markets. They range from 

credit cards and auto loans to trade rccci,·ablcs to equipment loans and leases to the cash flows from 

entire businesses (i.e. whole business securitization, used by franchises such as Dunkin Donuts and 

\Vendy's). The most liquid sectors are those for debt issued by large, regular issuers of credit card 

and auto loan debt (e.g., Capital One, Ford Motor Credit), where bid-ask spreads averaged 4 basis 

points in 2016.41 All together, about $2 billion of i\BS trade on a daily basis"' The market share of 

the top 10 dealers in the mainstream ABS sectors (credit cards, auto loan/lease, and student loans) 

ranges from 83-84'Yo. Other types of ,\BS sec a top 10 share of74%." 

Securitization Market Policy Questions 

It has been estimated that had the capital requirements for securitization been rationalized, the 

complexity of disclosure been li.rnited to what was reasonable, and other related securitization and 

lending regulations been similarly tailored, approxirmtely $1 trillion of additional residential 

morts>age loans would have been made over the last five years, resulting in 0.5% higher GOP growth 

in each of those yearsH 

Capital requirements arc increasingly risk-insensitive while both capital and liqnidity requirements 

are excessively conservative and do not adequately consider the effects on financial market activity. 

There arc a number of Haws in the capital and liquidity rules covering securitization, the overall 

effect of which has been to diminish the participation hy banking institutions in the securitization 

process both as investors and as originators, thereby decreasing the a\·ailability of funding to the real 

economy. These include the CCAR rules for calculating capital to address defined shocks to the 

system for securitizations arc excessive and should be revised for securitization positions. ln 

addition, the recent Basel Ill revisions to securitization capital requirements that ha,·e not yet been 

applied to the risk-based capital reqoirements in the United States, should not be adopted, or, if they 

arc adopted, their deficiencies should be addressed so that in either case the U.S. risk- based capital 

requirements for both the banking book and trading book arc more rational. 

Under the rules as now written, required capital may exceed the maximum possible loss on the 

position, i.e., a total write-off. GSE MBS and asset-backed securities should receive more equitable 

treatment under the LCR. If capital reguirements were rebalanced, and securitization's litluidity 

characteristics more sensibly rccogniud, growth and employment would follow without any material 

diminution in safety or liquidity. 

-ll ld., at 12. 

"!d., at 9. 13 ld., at 14 . 

.w Letter from .Jamie Dimon, Chair of the Board and CEO,.JP Morgan Chase, to shareholders, April4, 2017. 

27 
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Regulatio11 AB II 

Regulation AB ll is overly burdensome and has effectively shut down registered markets for nonagency residential mortgage-backed securities and has significantly curtailed registered issuance for 

smaller or more infrequent asset-backed securities issuers. \X:hilc private offerings-unregistered, 

often relying upon Rule 144A-remain viable, they face the risk of proposed similar regulation and, 

by definition, are constrained sources of capital and funding since the investor base is far smaller 

than that for registered transactions. This regulation has effectively constrained real economy acti,·ity 

that public offerings of securitization transactions could more efficiently fund. 

Credit Ri.<k Rete11tio11 Rules 

The credit risk retention rules are very lengthy, detailed, and complex yet fail to adequately reflect 

important characteristics of the different kinds of securitization transactions that finance distinct 

asset classes, such as mortgage loans, auto loans, and con1tncrcialloans. In some cases, the rules 

require an excessive amount of risk retention by failing to make any adjustment for the related 

funding and non-credit risks, for example, market and interest rate risk, or to give appropriate credit 

for other forms of risk retention. The rules arc overly prcscriptiv·c regarding the manner in which the 

required retention must be held and for many asset classes require that the retention be held well 

beyond the period in which weak underwriting, or other similar moral hazard, would be expected to 

become evident. 

Margi11 Requireme11ts for U11clearcd Swaps 

Many securitization transactions employ swaps to match or hedge the cash flows hat arise from the 

assets that collateralize the transaction to those which are required to be paid to investors in the 

liabilities issued by the transaction. These regulations fail to reflect the fact that special purpose 

entities are different from typical counterparties on flow-traded swaps. Special purpose entities arc 

not operating companies, and they contain special structural features designed to mitigate 

countcrparty risk. As a practical matter, special purpose entities \\~!I lind it difficult if not impossible 

to comply with the margin and clearing requirements as implemented and "'-ill either have to forego 

derivatives and their risk mitigating benefits or lind a way to comply which will not be efficient for 

the transaction. Either way, the rules '"~ll have a hannful effect on the cost and availability of 

securitization as a financing tool hindering the vibrancy of the financial markets. 

Qualified Mortgage Sta11dards 

\'Chile the CFPB published the lengthy and detailed Qivl rules and their Appendix Q in an effort to 

proYide guidance to lenders on how to underwrite loans in compliance with the law, the practical 

impact has been that the requirements arc complex, inflexible and fail to properly take into account 

differing circumstances of particular types of borrowers. z\t the same time, despite their complexity, 

the rules and their appendix lack important clarity on critical aspects of the lending process. For 

example, how a lender may rely on borrower bank statements or document the income of selfemployed borrowers remains unclear years after the rules were enacted. 1 ,enders, securitizers and 

investors ha\'C found it difficult to obtain written guidance on these and similar issues upon which 

they can be comfortable relying. 

28 
110 


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Volcker Rule Impact on Securitization 

The agencies responsible for implementing the Volcker Rule created an overly inclusive definition of 

covered fund that subjects many securitization entities to the Volcker Rule's restrictions, even 

though they are clearly not private equity or hedge funds. The compliance burden for banking 

organizations that hold or trade securitization transactions is significant, with no or few 

corresponding benefits. We believe the Volcker Rule's definition of covered fund should be 

narrowed to ensure that only those investments (particularly in hedge funds and private equity 

ti.mds) intended bv Congress to be captured are captured. 

TILA-RESPA Integrated Disclosure Rule (TRID) 

TRID is the CFPB's rule which combines the pre.-ioush· separate TIL\ and RESPA disclosure 

fonns. It is very detailed and prescriptive, yet unclear. Lingering misperceptions and technical 

ambiguities in the regulations have resulted in significant market disruptions. Many market 

participants are reporting very high TRID fail rates on closed loans delivered for sale. Moody's 

recently reported that approximately 90°;(, of one sample of loans did not fully comply with TRID 

requirements." If these conditions persist, many lenders will experience liquidity issues as unsold or 

repnrchased loans clog warehouse funding lines and balance sheets. Further, although some lenders 

may have multiple investor options, investors often have different standard for TRID compliance. 

As a result, originators are not always able to deli.-er loans to the investor with the best price, and 

hence the best rate for the consumer, and instead must deli\"et based on investors' TR!D 

interpretations. For consumers, these dynamics will increase both the costs of origination and the 

interest rates they pay. 

Conclusion 

Traditional bank lending often recei\'CS considerable consideration by policymakers, much of it 

appropriate. But to exclusively focus on those policy questions ignores the more significant source 

of financing that drives onr economy---our capital markets. Bonds finance everything from home 

mort£,'>~ges and car loans to highways and schools to factories and equipment as well as the very 

federal government itself. The bond markets set interest rates for commercial and consumer lending 

and provide a safe and predictable investment for millions of Americans. 

\Vhile the fixed income markets are fundamentally healthy today, there arc significant uncertainties 

about whether our economy is operating at full efficiency. Most important, a plethora of financial 

regulations has been adopted since the crisis and the cumulative effects haYc not been measured or 

analvzcd sufficiently. In the fixed income markets, li'luidity depends on the ability and willingness of 

dealers to commit capital to market making. Accordingly, policymakcrs need to calibrate existing 

and future rules to ensure they do not unduly impede the ability of the market to provide the capital 

needed to finance strong growth in the economy. 

~5 Moody's Inves!"Or Scn1ce, U.S. I\{ortgagc Lenders Face Difficult1cs Complying wifh New Rules, a Credit Ncg>ttive for 

R.MBS, December 10, 2015. 

29 
111 


28749.080

\\;? e appreciate the opportunity to present our views and we look forward to working with the 

Congress, the Administration, and the independent agencies and regulators to help ensure that the 

bonds markets continue to pcrfoun their vital functions and operate safdy and efficiently to move 

1\merica forward. 

30 

28749.081

Source: SIFMA 

Figure 1. Issuance in the U.S. Bond Markets, May 2017 (in$ billions) 

Treasury, $323.4 

Mortgage Related, 

$111.1 
113 


28749.082

DTCC 

The Honorable Bill Huizenga 

Chairman 

Julyl8,2017 

Subcommittee on Capital Markets, Securities, and Investment 

2129 Rayburn House Office Building 

Washington, DC 20515 

The Honorable Carolyn B. Maloney 

Ranking Member 

Subcommittee on Capital Markets, Securities, and Investment 

4340 Thomas P. O'Neill, Jr. Federal Building 

Washington, DC 20515 

Re: Hearing entitled "A Review of Fixed Income Market Structure" 

55 WATER STREET 

NEW YORK, NY10041-0099 

TEL: 212-855-7522 

mpa:manter@dtcc.com 

Dear Chairman Huizenga, Ranking Member Maloney, and Members of the Subcommittee, 

The Depository Trust & Clearing Corporation ("DTCC") 1 appreciates the Subcommittee 

on Capital Markets, Securities, and Investment's ("Subcommittee") oversight and interest in the 

fixed income market. The Subcommittee's hearing entitled "A Review of Fixed Income Market 

Structure" ("Hearing") was timely and raised important issues about the fixed-income markets. 

As an integral part of those markets, DTCC is submitting this letter to address some of the issues 

raised in the Hearing related to the U.S. Treasury market. We also understand tltat tlte 

Subcommittee is planning subsequent hearings on these important topics, and we look forward to 

continuing a constructive dialogue witlt the committee in order to share our views and inform tlte 

Subcommittee to help ensure changes that serve the marketplace as a whole and the public. 

DTCC's wholly-owned subsidiary, the Fixed Income Clearing Corporation ("FICC"),2 is 

a critical part of the U.S. Treasury market. FICC is a clearing agency registered with the 

DTCC provides critical infrastructure to serve all participants in the financial industry, including investors, 

commercial end-users, broker-dealers, banks, insurance carriers, and mutual funds. DTCC operates as a 

cooperative that is owned collectively by its users and governed by a diverse Board of Directors. DTCC's 

governance structure includes more than 300 shareholders. 

FICC is designated as a systemically important financial market utility ("SIFMU") pursuant to Section 805 of 

Title VIII of the Dodd-Frank Wall Street Refonn and Consumer Protection Act of2010 ("Dodd-Frank'') in 

recognition of its critical role in the national financial infrastructure. 
114 


28749.083

DTCC 55 WATER STREET 

NEW YORK, NY 10011-0099 

TEL: 212-85S.7522 

rnpazmanter@dtcc.com 

Securities Exchange Commission ("SEC"). It provides central counterparty ("CCP") services to 

its customers in the U.S. government securities market, which includes facilitating the 

submission, comparison, risk management, netting and settlement of Treasury securities 

transactions. 

As the primary CCP for Treasury securities, FICC is committed to maintaining the safety, 

soundness and resiliency of this critical market. We agree with the Subcommittee that requires 

having and adjusting to market changes in a responsible manner for the benefit of the entire 

system. Likewise, the rules promulgated by the SEC for Covered Clearing Agencies - the 

registration category for FICC - are designed to ensure appropriate risk-management standards 

and safeguards are being met by all CCPs serving the U.S. cash markets. 

Within this framework, DTCC is committed to responding to market-structure changes 

in the Treasury securities market to meet our customers' needs and serve the interests of the 

marketplace as a whole. Toward this end, DTCC has expended considerable effort, especially 

in recent years, to expand access to clearing for more and different types of market participants 

across asset classes. These efforts serve as evidence of DTCC' s commitment to tailor clearing 

and settlement services that respond to market demands. 

FICC has launched recently two initiatives that should expand access to clearing, and its 

associated benefits, while building on existing risk safeguards at FICC and among its members. 

First, FICC submitted- and the SEC issued an order approving- a rule change that expands 

the types of entities that are eligible to participate in FICC as Sponsored Members. 3 Previously, 

to become a Sponsored Member an entity was required to be a registered Investment Company 

under the Investment Company Act of 1940, be a "qualified institutional buyer" ("QIB"t, and 

have at least one Sponsoring Member willing to sponsor the entity. 5 FICC eliminated the 

requirement that a Sponsored Member be a registered Investment Company and clarified that a 

firm whose entity type does not fall clearly into one of the enumerated categories in Rule 

144A's QIB definition may still qualify for Sponsored Membership so long as it meets the 

financial requirements listed in paragraph (a)(l)(i) of Rule 144A of the Securities Act of 1933.6 

Securities and Exchange Act Release No. 34-80563 (March !, 2017) (SR-F!CC-2017-003). The FICC 

Rulebook defines "Sponsoring Member'' and "Sponsored Member" in Rule 3A. Generally, a Sponsoring 

Member is permitted to submit to FlCC for comparison, novation and netting certain types of eligible 

transactions between itself and its Sponsored Members. The Sponsoring Member is required to establish an 

omnibus account at FICC for all of its Sponsored Members' FlCC-cleared activity, which is separate from the 

Sponsoring Member's regular netting account. For operational and administrative purposes, FICC interacts 

solely with the Sponsoring Member as agent for purposes of the day-to-day satisfaction of its Sponsored 

Members' obligations to FICC. 

QIB is defined in Rule 144A of the Securities Act of 1933. 

!d. at 2-3. 

Jd. 

2 
115 


28749.084

DTCC 55 WATER STREET 

NEW YORK, NY10041-ll099 

TEL: 212-855-7522 

mpo:mant.el®dlcc.cam 

Critically, this expansion of Sponsored Member eligibility did not alter risk management 

practices applicable to Sponsoring Members. 7 

Second, FICC also sought approval to broaden the clearing of tri-party repurchase 

agreement ("repo") transactions.8 The SEC recently approved a change to FICC's rulebook 

broadening the pool of entities that would be eligible to submit tri-party repo transactions for 

central clearing at FICC.9 Specifically, FICC established the "Centrally Cleared Institutional 

Tri-Party Service" or the "CCIP"M Service."10 To effectuate the proposed CCIT Service, FICC 

created a new limited service membership category for institutional cash lenders. 11 The SEC 

approved this rule change as we!l. 12 

These examples illustrate the progress being made to modernize the existing Treasurysecurity marketplace in a manner that is consistent with the SEC's and Congress' broad policy 

goals. But there is more to do. 

The U.S. Treasury Department issued a Request for Information ("RFI") last year 

asking stakeholders for their views about the Treasury market structure, includin¥ the growing 

presence of principal trading firms ("PTFs") in the Treasury securities markets. 3 As DTCC 

and others shared in that context, unlike the trades of Treasury securities between bank dealers, 

PTFs' trading activity typically is not cleared by a CCP, such as FICC.14 This bifurcates the 

Treasury market, with a growing percentage of the market being bilaterally cleared by PTFs, 

while much of the bank-dealer trading activity continues to clear at FICC. 15 

!d. at 17. 

Repo transactions involve the sale of securities along with an agreement to repurchase the securities on a later 

date. Bilateral repo transactions involve a cash lender (e.g., a money market mutual fund, pension fund, or 

other entity with funds available for lending) and a cash borrower (typically a broker-dealer, hedge fund, or 

other entity seeking to finance securities that can be used to collateralize the loan). In the opening leg of the 

repo transaction, the cash borrower receives cash in exchange for securities equal in value to the amount of 

cash received, plus a haircut. In the closing leg of the repo transaction, the cash borrower pays back the cash 

plus interest in exchange for the securities posted as collateral. In tri-pany repo transactions, a clearing bank 

tri-party agent provides to both the cash lender and the cash borrower certain operational, custodial, collateral 

valuation, and other services to facilitate the repo transactions 

Securities and Exchange Act Release No. 34-80574 (May 2, 2017) (SR-FICC-2017-005). 

10 !d. at3. 

tl Jd. 

12 !d. at 15. 

" /d. 

14 DTCC RFI Comment Letter (March 18, 20 16) at 2. 

1> !d. 

3 
116 


28749.085

DTCC 55 WATER STREET 

NEW YORK, NY 10041-Q099 

TEL: 212-855-7522 

mpozrnanter@dtcc.com 

In the response to the RFI, market participants from across the financial sector generally 

expressed broad support for greater clearing of Treasury securities transactions. 16 Greater 

clearing of Treasury securities would provide several benefits, including the reduction of 

aggregate counterparty and credit risk in the system; increased transparency; more efficient use 

of collateral; and increased balance sheet relief for CCP members. 

To address these challenges, DTCC has been in active dialogue with its various 

stakeholders from the marketplace as well as the official sector. Among FICC's members, the 

legal structnre and risk profile of PTFs would be relatively unique and do not fit neatly into 

FICC's traditional categories of Clearing Members or Sponsored Members. Nonetheless, 

DTCC is committed to finding a solution to expand the clearing of Treasury securities in a 

marmer that adheres to the framework established by both Congress and the SEC, and that 

would help deliver the policy goals envisioned by the official sector and market participants 

alike. 

We appreciate the opportunity to comment on these important issues. We hope we can 

be a resource to the Subcommittee going forward. Please let us know if you have any questions 

or comments. 

Si/~/7 __.-

Murray 

-V~ Pozmanter 

Managing Director 

Head of Clearing Agency Services 

16 Remarks by Acting Assistant Secretary for Financial Markets Daleep Singh at the SIFMA Fixed Income 

Market Structure Seminar (May 24, 20!7) (available at https:l/www.treasurv.gov:press-center/pressreleases/Pages.'il0465.aspx). 

4