Remarks at the U.S. Treasury Market Conference
New York, NY
Sept. 23, 2019
Good afternoon from Washington, D.C. I am grateful for the opportunity to speak with you today during this fifth annual Treasury market conference. I wish I could be there with you in person, but I appreciate the accommodation, and your time, so that I can share a few of my thoughts with you via video. On the bright side, this video may deliver better production value than if I was there live, especially for important aspects like hair and makeup.
I am glad that you are a recently-caffeinated audience, but I will still keep my remarks brief today. Before getting started, I would like to thank each of the other conference sponsors—the U.S. Department of the Treasury, the Board of Governors of the Federal Reserve System, the Federal Reserve Bank of New York (including for hosting), and the U.S. Commodity Futures Trading Commission. In particular, my thanks go to their staffs and the SEC staff who contributed to such a great event. I know planning a conference like this requires significant time and effort from each of you.
I would also like thank SEC Chairman Jay Clayton for his leadership—particularly with respect to the fixed income markets. He has prioritized fixed income issues on the SEC’s agenda, including through establishment of the Fixed Income Market Structure Advisory Committee (“FIMSAC”).
Before I continue, I must deliver my usual disclaimer that my views and remarks are my own and do not represent those of the SEC or my fellow Commissioners.
COORDINATION AND COMMUNICATION
Programs like this highlight the importance and the effectiveness of working together for the greater good of our markets. At any given moment, the several regulators here today are collaborating on numerous initiatives that affect the U.S. Treasury market and, generally speaking, our other markets. I recently completed my first year as an SEC Commissioner, and during that time I have seen firsthand the importance of this coordination. I see it in several forms, including harmonization and mutual recognition of each other’s rules, as well as consistent sharing of critical market information and staff analyses. This past and continued partnership is vital to the health of our markets, and I look forward to finding opportunities for further coordination.
Many of you know this, but for those who do not, I joined the SEC as a Commissioner one year ago, in September 2018. Several years earlier, I was Counsel to an SEC Commissioner. I also spent time earlier in my career working at a public company that owned several exchanges, as well as at a law firm, and most recently working for the Chairman of the Senate Banking Committee Through these various roles, I have met and have spoken with many of you. This should not surprise you, but my views on coordination and cooperation extend not only to the other regulators here today, but also to market participants and investors. Only through heightened levels of communication and partnership will our markets function at their optimal levels. This is especially true for the U.S. Treasury market. It serves so many vital roles, not the least of which is financing the U.S. federal government. Given the importance of the U.S. Treasury market, it is not surprising that multiple regulators have a role in its oversight, which further underscores my views on coordination and communication.
KEEPING PACE WITH CHANGE
Now in year five, this conference annually has explored the evolution of the structure and liquidity in the U.S. Treasury market. In recent years, changes in the U.S. Treasury market have in many ways mirrored changes in the U.S. equity markets in the 1990s and early 2000s. One notable example is a push toward electronification. Another comparable development is the shift to greater levels of liquidity on venues with centralized limit order books. The sources of liquidity and the manner in which transactions are intermediated also are moving closer to that of the equity markets.
The SEC must strive to ensure that the markets it oversees, and the regulations through which it seeks to accomplish this oversight, keep pace with innovation and change. We rely on the tremendous staff of our divisions and offices to help us do this. You in the audience and your colleagues and the organizations you represent also play pivotal roles. Your insight and stewardship are vital to ensuring that our markets not only keep pace with changes in market trends and technology, but that they are orderly and resilient no matter the conditions.
These and other factors lead me to contemplate whether the U.S. Treasury market may benefit from certain elements of SEC oversight that are comparable to the agency’s existing oversight of the equity markets. Before I elaborate, let me be clear—applying existing SEC rules, or elements thereof, to the U.S. Treasury market could be appropriate, but the Commission should pursue such a course only after thoughtful consideration of the potential benefits, risks, and costs—the most important of these benefits being potential advances in investor protection and market stability and resiliency. Additionally, different asset classes have unique characteristics that may require a tailored approach to regulation, rather than simply layering on existing rules from other markets—we must be mindful of this. I will now mention a few specific examples.
First, I would like to discuss SEC Regulation ATS – Alternative Trading Systems (“Regulation ATS”). This framework of rules governs trading venues that fit within the SEC’s definition of “exchange,” but that do not register with the SEC in this capacity. Instead, the operators of these venues register as broker-dealers (including as members of the Financial Industry Regulation Authority (“FINRA”)) and file Form ATS with the SEC. The SEC designed Regulation ATS, in part, to strengthen the public markets for securities and to encourage market innovation, all while furthering basic investor protections and providing regulatory flexibility and choice for market participants.
When it adopted Regulation ATS, over 20 years ago, the SEC chose not to require compliance with these rules by venues that limit their activity to government securities. The basis for this decision appears to be that, while Treasury-only venues present regulatory considerations similar to those in the equities markets, the multiple layers of regulatory oversight of the U.S. Treasury market reduced the need for the SEC to apply Regulation ATS. I am neither questioning the basis for the SEC’s decision 20-plus years ago, nor disputing the conditions that existed in the U.S. Treasury market at that time. However, given the conditions and practices that exist in 2019 and in the foreseeable future, I think it is worth considering whether the Commission should apply Regulation ATS to U.S. Treasury venues that fit within the definition of “alternative trading system.”
What would be the rationale for this change? For starters, I think this would further the original goal of Regulation ATS, in particular by strengthening the public markets for Treasury securities. One specific, potential benefit of applying Regulation ATS to U.S. Treasury venues is fair access for subscribers, including with respect to access to ATS services and application of ATS fees. These venues also would be subject to specific record creation and record retention requirements as well as specific reporting requirements. As registered broker-dealers and FINRA members, the operators of these venues also would be subject to specific SEC and FINRA rules, including with respect to net capital requirements, supervision, and risk management when providing market access. These measures alone could be reason enough to expand Regulation ATS to Treasury venues.
But perhaps most important under Regulation ATS, in my opinion, are the capacity, integrity, and security requirements for the systems that support order entry, order routing, order execution, transaction reporting, and trade comparison. However, these requirements do not apply to the trading of government securities on an ATS. Operational resiliency is critical in the automated and electronic world in which our markets function. Regulation ATS for U.S. Treasury venues could encourage greater system resiliency by requiring that operators establish current and future capacity estimates and conduct periodic capacity stress tests of critical systems. Requiring system development and testing methodology procedures could diminish the risk of inadvertent coding errors, the deployment of which could have significant, negative market effects. Cyber events are a real and constant risk for any organization that is connected, but the likelihood of one occurring, or the significance of the effects if one does occur, could be diminished by conducting assessments of system vulnerability to internal and external threats, physical hazards, and natural disasters. Explicitly requiring contingency and disaster recovery plans for these venues also could be beneficial to the market. Additionally, independent system reviews could identify risks that internal staff might not otherwise discover and could promote heightened focus for management. Finally, it could be useful and prudent to require that these venues promptly notify SEC staff of any outage or even a planned, significant system change.
I recognize that many organizations operating these Treasury venues already may apply some or all of the measures I just described. Nevertheless, doing so pursuant to specific rules would contribute to greater uniformity across venues and the likelihood that such steps are taken in a robust manner.
Expand Existing ATS Requirements
I just outlined some of the potential benefits of requiring that U.S. Treasury venues comply with Regulation ATS. However, there are several venues that already operate pursuant to Regulation ATS that solely, or predominantly, engage in U.S. Treasury activity, including some that account for a significant percentage of daily trading in U.S. Treasuries. I understand that some of these venues may voluntarily operate pursuant to Regulation ATS. The significance of such willingness and the ongoing responsibility it requires does not escape me. Nevertheless, it seems that these venues may not willingly undertake several aspects of Regulation ATS that I previously highlighted and described. This may include the system capacity, integrity, and security requirements as well as the fair access requirements. I think the Commission should consider whether these elements of Regulation ATS should apply to Treasury ATSs that account for a certain minimum level of trading volume, as is the case under Regulation ATS for municipal securities and corporate debt securities.
An additional aspect of Regulation ATS that currently does not apply to Treasury ATSs is the submission of “Form ATS-N.” In July 2018, the Commission adopted amendments to Regulation ATS that were designed to enhance operational transparency and regulatory oversight of ATSs that trade “NMS stocks,” which essentially are stocks listed on a national securities exchange. The amendments require that NMS Stock ATSs file new Form ATS-N and publicly disclose information about their operations and the ATS activities of their broker-dealer operators. Form ATS-N requires more information and greater detail compared to the legacy Form ATS.
The proposal for Form ATS-N elicited numerous comments on whether the amendments, including the requirement to file Form ATS-N, should apply to ATSs on or through which transactions in other securities occur, including for “Government Securities ATSs.” When adopting ATS-N, the Commission noted its belief that it should “take an incremental approach by first applying the amended regime to NMS Stock ATSs before considering a further step.” Any such action would require separate consideration and rulemaking by the Commission. I had not yet joined the Commission when it adopted these amendments, but I think it was wise to take an incremental approach to change in this area, especially before expanding the ATS-N requirements beyond NMS stocks.
The deadline for submission of Form ATS-N was this past February. Several Forms ATS-N are currently available for public viewing and the remaining forms should be available by the end of this year. I think the SEC should consider revisiting the scope of ATS-N next year to consider whether the same or similar requirements should apply to Treasury ATSs. Taking this step could bring greater transparency to the operations of Treasury ATSs, which may help the SEC further its oversight of these platforms, ultimately with the aim of promoting fair and orderly markets and investor protection. On a related note, this undertaking is similar to a recent recommendation from the FIMSAC Technology and Electronic Trading Subcommittee—that the Commission review the framework for the oversight of electronic trading platforms for corporate and municipal bonds.
The points I just raised on Regulation ATS are not intended to suggest that the SEC simply homogenize its rules across different asset classes. But I do think it is worth exploring aspects of our rules that have worked well for one asset class and whether a version of those rules make sense more broadly. This is especially true as all of our markets continue to move further away from voice and manual processes, and closer toward electronification and automation. The Treasury market and markets for other fixed income securities are no exception. As this trend progresses, the systems that facilitate communication, execution, and other related processes become increasingly integral to market stability and investor protection.
To account for the importance of these systems, in 2014 the SEC adopted Regulation Systems Compliance and Integrity (“Regulation SCI”). Regulation SCI is a framework of rules for exchanges, other “SROs” like FINRA and the Municipal Securities Rulemaking Board, clearing agencies, plan processors like the “SIPs,” and certain ATSs. Regulation SCI specifies several requirements for system capacity, integrity, resiliency, availability, and security.
If this sounds familiar, it is because Regulation SCI addresses topics similar to the capacity, integrity, and security requirements under Regulation ATS that I mentioned a moment ago. However, Regulation SCI is significantly more robust than Regulation ATS in terms of the steps it requires to strengthen the technology infrastructure of the U.S. securities markets.
Like Regulation ATS, Regulation SCI currently does not apply to Treasury venues. I think the Commission should revisit this scope, including to consider whether Regulation SCI, or some set of requirements based on Regulation SCI, should apply to all or some of these venues. I understand that the operators of these venues already may voluntarily undertake steps similar to those required under Regulation SCI. But like I noted earlier, it may be important for these undertakings to be pursued in a uniform and robust manner, under a prescribed set of rules, and subject to SEC review and oversight.
I think several benefits could accrue to the Treasury market if the Commission were to apply Regulation SCI or something similar to Treasury ATSs. These potential benefits include reduced likelihood for system outages or intrusions and, when system problems do occur, greater resiliency for faster recovery.
I have shared much of my preliminary thinking with you today, but ultimately, your input helps inform my views. This is especially true for an asset class like Treasuries, given the overlapping and often incongruent nature of regulation in this market. I am interested in hearing from market participants on all of these points. Do you think it would be prudent and appropriate for the Commission to apply Regulation SCI (or similar rules) to Treasury venues? If yes, does the Treasury market present unique characteristics that the Commission should consider?
Thank you again for spending part of your afternoon listening to a few of my thoughts on the U.S. Treasury market. I am sorry I could not be there with you in person, but I look forward to future opportunities to speak with you directly (or, at least via hologram). And thanks again to our fellow conference sponsors, our host, their staffs, and the SEC staff who organized the conference.
Lastly, I will reiterate what many of you have heard me say before—stop in and visit when you are in D.C. Tell us what you are seeing and where you think we may be able to improve the Treasury market. You are working on the front lines and grappling with the market and its idiosyncrasies on a daily basis. I want to continue learning from your experience.
 See Securities Exchange Act Release No. 40760 (December 8, 1998), 63 FR 70844 (Dec. 22, 1998) (“Regulation ATS Adopting Release”). See also Rules 300-304 under the Securities Exchange Act of 1934 (“Exchange Act”). The SEC recently adopted amendments to Regulation ATS to add Rule 304. See ATS-N Adopting Release, infra note 9.
 See Exchange Act Section 3(a)(1) and Rule 3b-16 thereunder. See also Exchange Act Rule 3a1-1(a) (providing the exemption from the definition of “exchange” for ATSs).
 See Exchange Act Section 3(a)(42).
 See, e.g., Regulation ATS Adopting Release at 70859.
 See, e.g., Exchange Act Rule 301(b)(5).
 See, e.g., Exchange Act Rule 15c3-5 (Risk management controls for brokers or dealers with market access).
 See Exchange Act Rule 301(b)(6).
 See Exchange Act Rule 301(b)(6)(i).
 See Securities Exchange Act Release No. 83663 (July 18, 2018), 83 FR 38768 (Aug. 7, 2018) (“ATS-N Adopting Release”). See also Securities Exchange Act Release No. 84541 (November 6, 2018), 83 FR 56257 (making a technical correction to Form ATS-N). See also Exchange Act Rule 304.
 See Exchange Act Rule 600(b)(47). NMS security means any security or class of securities for which transaction reports are collected, processed, and made available pursuant to an effective transaction reporting plan, or an effective national market system plan for reporting transactions in listed options. NMS stock means any NMS security other than an option. See Exchange Act Rule 600(b)(48).
 See ATS-N Adopting Release at 38783.
 Recommendation for the SEC to Review the Framework for the Oversight of Electronic Trading Platforms for Corporate and Municipal Bonds (July 16, 2018), available at https://www.sec.gov/spotlight/fixed-income-advisory-committee/fimsac-electronic-trading-platforms-recommendation.pdf.
 See Securities Exchange Act Release No. 73639 (November 19, 2014), 79 FR 72252 (December 5, 2014) (“Regulation SCI Adopting Release”). See also Exchange Act Rules 1000-1007.