OIC 2021: SEC’s Lee Weighs In On 2020’s Challenges, 2021’s Regulatory Agenda

Allison Lee - OIC 2021
Suzanne Cosgrove

Suzanne Cosgrove

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“I doubt that we will return to business as usual,” SEC commissioner says.

COVID-related issues triggered record volume and volatility in 2020 that presented challenges for exchanges and regulators, from both a market and an operational standpoint, said U.S. Securities and Exchange Commissioner Allison Herren Lee. 

In a Tuesday keynote address to the 2021 Options Industry Conference conducted as an interview with John Davidson, OCC’s chief executive officer, Lee said 2020’s jump in volume and volatility “really tested our financial system.” The surge also tested trading and message infrastructures and some funds’ capital reserves, Lee said.

She noted that circuit breakers were triggered several times in response to rapid declines in the S&P 500, as well as limit-up and limit-down trading halts. 

But on the whole, the equity markets responded quite well, “and demonstrated integrity and resilience,”  Lee said. “The volatility control measures, in particular, worked as intended, I think, giving the markets time to pause and catch up during the severe declines,” she said.

Lee, who served as acting chairwoman of the SEC for several months before Gary Gensler was sworn in as chairman on April 17, noted that 2020 was a year of transition — from moving into a work-from-home environment, to a shift from the floor to all-electronic trading, “with lots of exchange rule filings to make those transitions as seamless as possible.

“I doubt that we will return to business as usual” in a post-pandemic world, Lee added. “One final lesson is that we can run our markets virtually, almost every component of them. I think it works much better than even one would have expected.”

Lee said another “lesson learned” was how market issues involve multiple jurisdictions. “Recent events, in particular, show the importance of a dialogue with domestic and international regulators to share information and try to manage risks,” she said.

Davidson asked Lee about her work with the Financial Stability Oversight Council (FSOC), a collaborative group of regulators chaired by the Secretary of the Treasury, and what she thought FSOC’s top priorities were this year. “The agenda will be to examine U.S. Treasury market structure, as well as hedge funds, money market funds and open-end mutual funds,” she said. “All of those have similar work streams.”

She added: “The work we are doing domestically and internationally involving fixed-income markets is really critical. We need to study and think through what we can do to make those markets more resilient, to address risks that I think may have contributed to some risky debt-financing practices.    

“Climate change also is a key priority for FSOC,” Lee said. “In all of this, FSOC gives regulators a place to come together and make sure there are not regulatory gaps on critical issues and help facilitate a coordinated approach, because so many of these issues have been across jurisdictional boundaries, she said. “Between the pandemic and climate change, FSOC is more important than ever.”

Davidson pushed that topic further, asking Lee for her perspective on international coordination, noting talks earlier this year between the SEC and the EU resulted in the EU’s determination that the SEC’s regulatory framework for central counterparties (CCPs) is equivalent to that of the European Union.

“I am encouraged,” Lee said. “I think progress is being made. I am glad you think so as well,” Lee told Davidson.

Returning to a discussion of domestic market activity, Lee said the recent events that included “meme” stock trading and the “gamification” and increase of retail trading highlighted a number of retail trading issues and potential changes that might be needed to market structure.

One of the most important is the possible need for a shortened settlement cycle, or T+1 (shortening the settlement cycle for U.S. equities to one business day after the execution of a trade). “There has been a lot of discussion about shortening the settlement cycle a second time,” she said, noting that the market went from T+3 to T+2 in 2017. “I think it’s important to look at all the issues, though, before shortening the cycle,” she added.

Moving to a shorter cycle is “going to require industry input and coordination from a wide variety of market participants to fully understand what the operational issues are,” Lee said. But having moved from T+3 relatively recently, “we have some idea of its implications.” A shorter settlement cycle would provide benefits by reducing risks in the market and lowering margin costs and creating capital and operating efficiencies, “so it is something I am supportive of moving forward,” she said.

But changing the settlement cycle also involves examining the entire lifecycle of a trade execution and its reporting, she said.  We need to look at other issues at the same time, including data identifiers as they are used by market investors and regulators, as well as open, freely available alternatives to proprietary data, Lee said. 

Growth in retail trading also compels regulators to take a closer look at disclosures of retail order flows, as well as payments for order routing, Lee said. Amid the retail growth, it’s important to ensure broker-dealers give investors appropriate knowledge to trade, she said.  

 

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