Regulatory reforms have had limited impact on markets, SEC finds

Access to capital and market liquidity have not been negatively affected by post-financial crisis regulatory reforms, Securities and Exchange Commission analysts said in a report issued late Tuesday.


Ordered by Congress to assess the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and related measures like Basel III, officials with the SEC’s division of economic and risk analysis looked at the issuance of debt, equity and asset-backed securities, and found $20.2 trillion in total capital formation from the signing of the law on July 21, 2010, through Dec. 31, 2016. Of that, $8.8 trillion was through registered offerings, and $11.4 trillion though unregistered offerings.

“We do not find that total primary market security issuance is lower after the enactment of the Dodd-Frank Act,” the report said, noting that the results “are also generally consistent with active issuance in strong macroeconomic conditions and a low-interest-rate environment.”

DERA officials also studied market liquidity in U.S. Treasuries, corporate bonds, single-name credit default swaps and bond funds, and found mixed evidence of an impact of regulatory reforms, “with different measures of market liquidity showing different trends,” the report said, noting other factors such as the electronification of markets, changes in macroeconomic conditions, and changing dealer risk preferences.

“In U.S. Treasury markets, we find no empirical evidence consistent with the hypothesis that liquidity has deteriorated after regulatory reforms. … In corporate bond markets, trading activity and average transaction costs have generally improved or remained flat. More corporate bond issues traded after regulatory changes than in any prior sample period,” the report said. In recent years, DERA found that transaction costs have decreased by 31 to 55 basis points for smaller trade sizes and remain low for larger trade sizes, at 5.7 basis points, compared to 5.8 basis points before the financial crisis.

The report also identified trends for unregistered offerings, such as those under Regulation D and Regulation Crowdfunding to help small companies raise money. Private market issuance of debt and equity increased substantially to $1.68 trillion in 2016 from $1.87 trillion in 2015 and $1.16 trillion in 2009. “Amounts raised through exempt securities offerings of debt and equity for 2012 through 2016 combined exceeded amounts raised through registered offerings,” the report found.

Noting that capital raised through initial public offerings “ebbs and flows over time,” DERA analysts said it was difficult to disentangle the many contributing factors. They found small company IPOs increasing in recent years, with those under $30 million accounting for 17% of the total number from 2007 to 2011, and rising to more than 75% classified as emerging growth companies after passage of the JOBS Act in 2012.

DERA officials noted the challenges of quantifying the effects of the regulatory reforms, including the lack of a clear baseline, overlapping implementation of rules, the possibility of market participants changing behavior in anticipation of future rules, and post-reform macroeconomic conditions. “Therefore, it is difficult to quantify the benchmark levels of primary issuance and market liquidity that would have been observed following the financial crisis and absent the ensuing reforms,” the report said.

The 315-page report, which includes a survey, academic research and analyses based on publicly available databases and non-public regulatory filings, also highlights areas where future analysis could be warranted, said Scott W. Bauguess, acting chief economist and acting director of DERA, in a statement.

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