July 14, 2017

House Financial Services – Capital Markets Subcommittee: A Review of Fixed Income Market Structure

Key Topics & Takeaways

  • Volcker Rule and Liquidity: The Volcker Rule and its impact on liquidity was discussed repeatedly during the hearing. Witnesses disagreed on the impact of Volcker on liquidity in corporate bond markets, though Randy Snook of SIFMA pointed out that a recent Federal Reserve staff paper found an impact on liquidity, and that the issuance of debt by small-cap companies has failed to keep pace with the growth of the corporate bond market since Volcker’s implementation.
  • Electronic Trading: Several witnesses discussed the shift in fixed-income markets towards more electronic trading, noting that electronic trading platforms have increased in prevalence in the last twenty years. Some witnesses endorsed government action to encourage electronic trading.
  • Municipal Bond Market: During the hearing, several Representatives had questions about the municipal bond market, including the municipal tax exemption and the classification of municipal securities under capital regulations. Randy Snook argued for retaining the municipal bond tax exemption and for classifying municipal securities as high-quality liquid asset (HQLA)-eligible.



  • Matthew Andresen, Founder and CEO, Headlands Technologies LLC
  • John Shay, Global Head of Fixed Income and Commodities, Nasdaq
  • Alex Sedgwick, VP, Head of Fixed Income Market Structure and Electronic Trading, T. Rowe Price
  • Jonah Crane, Former Deputy Assistant Secretary, Financial Stability Oversight Council, U.S. Department of the Treasury
  • Randy Snook, EVP, Securities Industry and Financial Markets Association (SIFMA)


Opening Statements

Chairman Bill Huizenga (R-Mich.) began his opening statement by noting that the Unites States has the “strongest and most liquid capital markets in the world.”  He also stated that the fixed income market is one of the largest sources of capital for issuers and investment opportunities.  Consequently, he expressed the importance of improving the liquidity, efficiency, and transparency of fixed income markets.  Huizenga also supported Securities and Exchange Commission (SEC) Chairman Jay Clayton’s idea that the SEC should extend its review of market structure to include the efficiency of fixed income markets.


Ranking Member Carolyn Maloney (D-N.Y.) opened by echoing Chairman Huizenga, saying the corporate bond market is important for capital formation and job creation.  She also noted the importance of the municipal bond and treasury markets in providing the government with funding at low rates.  Maloney also stated that the United States “raised over $1.5 trillion in the bond market in 2016,” and that it is the fifth consecutive year of record issuance.  She then described the key differences between the bond and equity markets, such as the fragmented and unstandardized nature of fixed income trading.  Maloney also discussed the significance of the Treasury market as it is “the largest, deepest, and most liquid bond market in the world.”  She urged policymakers to cautiously approach fixed income markets, noting that these markets will never have the liquidity of the stock market.


Representative Randy Hultgren (R-Ill.) opened by saying Congress should not overlook the fixed income market. He echoed Chairman Huizenga by supporting Jay Clayton’s proposal that the SEC form a committee to advise the Commission on fixed income markets.   Hultgren closed by discussing the significance of municipal bonds as a tool for local governments to raise capital.



Matthew Andresen, Founder and CEO, Headlands Technologies LLC

In his testimony, Andresen provided an overview of his background and the company he founded, Headlands Technologies (a quantitative trading firm, primarily of municipal bonds). Andresen discussed his ideas to improve trading in fixed-income markets, including 1) eliminating filtering of bids in online auctions 2) eliminating the trade-through practice, and 3) eliminating the “last-look” that he claims harms competitiveness.


John Shay, Global Head of Fixed Income and Commodities, Nasdaq

In his testimony, Shay said that fixed-income markets would benefit from greater transparency and efficiency, and he praised SEC Chairman Jay Clayton’s recent call to form an advisory committee for fixed-income markets. Shay’s recommendations for Congress were to 1) encourage transparency in the trading and pricing of fixed-income products 2) impose minimum regulatory requirements on all trading venues to keep bad actors out of the market, and 3) require the cost-effective clearing of all transactions. Shay advocated for standardizing as many practices as possible across trading venues.


Alex Sedgwick, VP, Head of Fixed Income Market Structure and Electronic Trading, T. Rowe Price

Sedgwick began his testimony by outlining T. Rowe Price’s business as an investment manager, and the importance of fixed-income markets for the company to deliver on its investment mandates. Sedgwick described the fixed-income market as being made up of several sectors, each with unique structures. Sedgwick noted that many studies on the Treasury security market are constrained by a lack of data due to a lack of reporting. Sedgwick said that ICI and T. Rowe Price are supportive of the regulatory reporting of Treasuries (TRACE). Sedgwick then moved to discuss improving transparency in fixed-income markets, though he recognized that transparency could carry risks. Sedgwick also said that the move to electronic trading platforms will encourage best execution practices and improve market liquidity.


Jonah Crane, Former Deputy Assistant Secretary, Financial Stability Oversight Council, U.S. Department of the Treasury

In his testimony, Crane described the October 15, 2014 “Flash Crash” event from the perspective of the Treasury, and how it took five agencies months to conduct a comprehensive review of the event.  Crane discussed the evolution of fixed-income markets, and described these markets as “in transition.” Crane also discussed what he called a “bifurcation” in the market for Treasuries, between client and inter-dealer markets. Crane called for modernizing oversight of the Treasury market, praised TRACE, and said that Treasuries should be traded like securities in other large, standardized, liquid markets.


Randy Snook, EVP, Securities Industry and Financial Markets Association (SIFMA)

In his testimony, Snook said that while banking is a driver of economic growth, the country’s capital markets are an incredibly important source of funding for businesses and economic growth, but that fixed income markets face challenges in providing deep liquidity from capital regulations and other rules. Snook called for a review of post-crisis regulations to evaluate whether U.S. capital markets are “as efficient as possible” and for this review to also explore capital regulations, including the Comprehensive Capital Analysis and Review (CCAR) in addition to trading rules, like the Volcker Rule. Snook also called on regulators to move cautiously when considering new requirements and restrictions in the Treasury securities market given its importance as a global, liquid security and a key source of funding for the federal government. Snook said that SIFMA supports the Trade Reporting and Compliance Engine (TRACE) reporting which began last week, but said that public reporting of Treasury trading should not be undertaken until regulators have carefully studied the issue to determine the benefits of additional disclosure. Snook said that this is necessary to ensure no harm is done to the Treasury security market.


Question and Answer

The Volcker Rule and Liquidity

Rep. Jim Himes (D-Conn.) asked the panel if the Volcker Rule is meaningfully constraining liquidity in fixed income markets. Crane responded that he did not think there was evidence that Volcker had harmed liquidity. Crane also noted that the Federal Reserve staff report on the impact of Volcker on corporate bonds during downgrades does not deal with systemic, market events, only events specific to the issuer.


Snook said that the Volcker is in fact impacting liquidity and defended the Federal Reserve study discussed by Crane. Snook also noted that secondary market trading has not kept pace with the growth of the market for corporate bonds, and that the growth in the market has been concentrated in large cap companies while the issuance of small cap companies has fallen dramatically. Snook also said that there is concern that in a higher-volatility, higher-interest rate environment than exists today, that market liquidity could be harmed by trading restrictions.


Rep. Ted Budd (R-N.C.) asked Sedgwick if he agreed that the Volcker Rule specifically, the Dodd-Frank Act generally, and the Basel III agreement have hurt market liquidity for fixed-income products. Sedgwick agreed that these all disincentive dealers from engaging in secondary trading. Sedgwick said that the rules have forced many firms to work with smaller trade orders and source liquidity from different places to trade.


Rep. Trey Hollingsworth (R-Ind.) asked the panel if the Treasury’s recent report on Banks and Credit Union’s recommendations for adjusting the Volcker Rule “went far enough.” The report itself recommended eliminating the 60-day rebuttable presumption period and providing different definitions for proprietary trading. Hollingsworth noted that dealer inventories are down substantially from 2013. Shay said that it would be beneficial “to have the chains taken off” large banks so that they can resume acting as risk-transfer agents.


Electronic Trading

Huizenga asked Andresen for his thoughts on building a more universal electronic trading platform for fixed-income products. Andresen endorsed the idea, noting that municipal bonds have the EMMA system that discloses trade and price information to investors. Huizenga said that he is looking for “industry consensus” on the topic.


Hultgren asked Andresen if he had any insights on the evolution of electronic trading in equity markets that could be applied to fixed-income markets, and for his views on the proper role of government in encouraging the transition. Andresen said that government “could play an important role” in developing electronic trading platforms through rules that encourage their development. Andresen said that most municipal securities mainly trade on electronic Alternative Trading Systems (ATSs) which yields highly competitive auctions.


Snook responded to Andresen’s comments by saying that SIFMA is in favor of “pro-competitive forces” shaping the electronic trading of different fixed-income products. Snook said that these platforms should be developed in an organic manner, and that external factors should not determine how to organize electronic trading. Snook noted that different fixed-income securities trade on electronic platforms in markedly different proportions.


Municipal Bond Market

Rep. Luke Messer (R-Ind.) asked the panel about the impact on cities and towns of banking regulators reclassifying certain municipal bonds as high-quality liquid assets (HQLA) at either the 2B or 2A level. Snook said that banks should be encouraged to hold high-quality municipal obligations on their balance sheets, and noted if these obligations were classified as HQLA it would reduce the borrowing costs for municipalities.


Rep. Bruce Poliquin (R-Maine) asked the panel for their view on what the impact would be of eliminating the tax exemption for municipal bonds. Snook said that if Congress took away the tax exemption on municipal bonds the impact, especially on small issuers, could be “devastating.” Snook noted that there is a strong amount of demand for municipal bonds, even small bonds, due to their tax exemption, and its elimination would hurt liquidity in the market and put new costs on municipalities.


Market Transparency

Huizenga noted that several witnesses called for increased transparency in fixed-income trading, and asked how increased disclosure of trades would be helpful to market participants and regulators. Shay said that a lack of centralized trading data meant that it took regulators over a year to diagnose the events of the “Flash Crash” of 2014. Sedgwick said that transparency will help firms identify relative value opportunities and improve liquidity in the market.


Public Reporting of Treasury Security Transactions

Maloney asked the panel for their thoughts on requiring public disclosure of Treasuries transactions in addition to requiring disclosure to regulators. Crane said that the official reporting of Treasuries transactions through TRACE is an important step forward for the industry, and that public reporting of these transactions constitutes “an important next step.”


For more information on this hearing, please click here.