The recent failures of regional banks is emboldening Washington’s administrative state to double down on regulation. Regulators across the city are rushing to write new rules to further inject Washington’s central planners into the functioning of our capital markets.
The American Securities Association, which I run, recently sent a letter to the Washington bureaucracy with a simple message: leave the U.S. fixed income markets alone.
These markets have performed remarkably well despite the regional bank failures and the Covid crash in March 2020. The resilience of the fixed income market, having weathered multiple crises and black swan events without experiencing any market failure, is real-time evidence that it works. When markets work, the public must question the motivation for any “regulatory change” sought by professional bureaucrats.
To be very clear, any attempt to use regional bank problems or the March 2020 market volatility as a justification to change the fixed income markets is not only misleading, but it will also needlessly increase costs for the governments, towns, cities, states, and millions of American investors who rely on these markets.
Volatility in fixed income prices, which has risen recently, should not be mistaken for a systemic flaw in market structure or be used as a “strawman” to fix the plumbing and functioning of these markets. Despite the volatility, there have been no issues with pricing, settlement, clearance, or payment in the fixed income markets through multiple black swan events.
The Silicon Valley and Signature Bank failures are also an important reminder that the “risks” regulators identify do not always align with the actual risks in today’s markets. On that point, one glaring question is why did they focus on climate risk and ignore the risks rising interest rates posed to the financial system? One might conclude that they missed the real risk in the system because they were so focused on using regulation as a means to inject politics into markets.
Regulators must be questioned and held accountable when they attempt to use unsubstantiated academic theory, ideology, or politics to adopt “reforms” that would needlessly disrupt well-functioning markets.
For example, the Municipal Securities Rulemaking Board has no legal or evidentiary basis to move forward with its costly pre-and post-trade pricing initiatives, FINRA hasn’t analyzed the impact of its Rule 4210 amendments on the low-income housing market, and the SEC’s unnecessary application of Rule 15c2-11 to fixed income markets would have shut off funding for numerous auto, consumer, and real estate loans. These are a few examples of how untested theory driving regulatory change threatens to undermine the efficiency, stability, and functioning of the fixed income markets.
Career bureaucrats whose only understanding of bond trading is derived from textbooks and academic papers must not be allowed to test their theories in America’s most important capital market.
To avoid this, regulators should seek industry expertise before any new policy is considered. Engaging the industry and the public after an ill-conceived policy has bubbled up within the agency is too late. Ongoing communication and collaboration with market professionals who understand the intricacies of markets is essential to developing a rational, evidence-based approach that maintains a well-functioning market. Involving the voices of experienced bond traders and advisors will help regulators to learn how the fixed income markets function in practice.
Thankfully, the resilience of the fixed income market has proven itself time and time again, which is why any changes to these markets, absent a market failure, must (1) be rooted in law, (2) be driven by a rational, evidence-based understanding of market dynamics, and (3) prove they can withstand unforeseen crises and black swan events.
Our democracy must work for the American people, not the professional class of lawyers and consultants whose compensation rises with every new rule regulators adopt. We care deeply about preserving the integrity and functionality of the U.S. fixed income markets because they drive capital to our local communities, small businesses, and working families that benefits the entire American economy.
Christopher Iacovella is the President and CEO of the American Securities Association