(Bloomberg) — Gary Gensler is midway through his tenure as head of the U.S. Securities and Exchange Commission and is witnessing a shakeup of financial markets and intermediaries, as well as historic shifts in who is involved and what gets traded. The SEC Chairman is just over halfway through his agenda. Here's what Gensler has in mind for the rest.
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In a Feb. 14 interview, the former Goldman Sachs Group Inc. executive and three-time financial regulator weighed in on financial stability, personal credit and why he's wary of mixing banks and cryptocurrencies. Some strict and controversial rules, particularly on corporate climate disclosure and overhauling the trading structure of stocks, are still pending. Gensler says he wants to reduce intermediary cuts in the deal between investors and issuers to make markets more competitive and efficient.
Gensler spoke to a group of Bloomberg editors and reporters in New York. The interview has been edited for length and clarity.
What is your plan to complete the remaining half of your agenda?
Three years ago we put together an agenda with 55 or 60 proposals. We completed 35 of them, generally with some deviations from the proposed form.
There have been four separate proposals in the stock market as of December 2022, and the direction of these proposals is forward. We are working on each of them. And this market was about volume discounts. As far as these five are concerned, I have a very good feeling about the work of the staff.
There are some rules for investment advisors, broker-dealers and something called system compliance and integrity. And even a customer alert if someone gains access to your broker account or gets hold of your private information. With this set of rules, too, the direction of travel is forward and it looks good.
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There is also the climate rule, which is a disclosure rule. Obviously, we are working on important rules in investment management: the Predictive Data Analytics rule, custody and liquidity.
Personally, I don't do this against time. I firmly believe that the staff will work on it and that we, the five commissioners, will definitely shape it – but it takes time from the proposed rule to adoption. You will see that the SEC runs between 12 and 24 months. We proposed the climate rule in March 2022. You could look at that and say she's onto Gensler's two-year thing. But it's not against the clock.
Given that and how long these things take, how do you prioritize which rules you prefer over the others? With such an extensive list, the criticism might be that you're trying to do too much. And in retrospect: Would you do everything the same or make it more compact?
Knowing everything we know, we probably would have set a similar agenda. Part of that is that there are five SEC commissioners and there is a consensus on priorities. So I think these are real needs to drive efficiency, competition and market resilience, and I'm pretty optimistic.
Does that mean we adopt every rule we propose? No, because sometimes we learn from commenters and we moderate and we change or we resuggest something so time runs out. But I'd rather finish what's finished rather than finish against time.
It's less about the chairman's priorities. It's really just a matter of how the SEC economists, these political lawyers, the general counsel, run things. If you have a file with 50 comments, it might go a little quicker than if you have one of these things thicker or sometimes if you have a file where you get five separate letters from the Managed Funds Association. They just keep coming.
They say the timeline for setting the rules has been consistent, but what has changed is the industry's volume against you. Were you surprised by the legal challenges?
I think it's part of our great democracy. People have rights, they can take their grievances to court. We are also a law enforcement agency. We handle 700 to 800 legal matters every year. We probably have 200 to 300 different lawsuits at any given time.
I would say that there may be shifts in the courts, not just the Supreme Court or various appeals courts.
The structural rules for the stock market are not yet as advanced as those of the Ministry of Finance. Will you finalize each proposal individually?
I don't think it needs to be done at the same time. They dealt with different topics. One of these was the revision of this framework in 2005 with regard to the national market structure and possibly the introduction of a narrower bid-ask spread on certain stocks. I think this is completely different than having a best execution rule as an agency.
When I got to the agency and asked for a copy of our best execution rule, people said, “We don't have one.” It's a Finra rule.” And I also learned that most of them were just written ones instructions. It is too important to simply leave it to a self-regulatory organization.
This little rule, 605, was first introduced 24 years ago. It just seemed like we should do that too. Essentially, execution quality reporting will be expanded to include broker-dealers and not just trading venues.
How concerned are you about the sheer growth of personal loans?
We have benefited greatly from credit intermediation in the banking and non-banking sectors.
If you look at the statistics on credit intermediation, companies and issuers that borrow money, the US share of the non-bank sector is around 70 to 80% and the banking sector is around 20 to 30%, as measured by dollar volume.
If you look at Europe, it's almost the exact opposite. It depends on the country. Japan and China are closer to Europe than we are, but a little different. So we have strong competition in the credit markets.
What are your concerns about risks to financial stability?
This is where the banking sector and the non-banking sector come together. It is the prime brokerage business where banks basically lend to the non-banking sector, especially in this secured financing market called repos and in the reverse repo market. About three-quarters of this market transacts on a zero or near-zero margin.
Well, what the banks would say is that this is the competitive landscape. The largest banks compete not only here in the US, but also with European and Japanese banks and provide this secured financing.
What the macro, relative value and strategic hedge funds might say is that the risk is exaggerated because you have to look at all of our net positions – and we have other positions in our prime brokerage business.
2023 saw a strong intermingling of traditional financial institutions and crypto-native companies. In 2024, we will start to see banks looking into tokenizing assets and setting up trial balloons wanting to hold crypto assets. Should crypto assets be available to financial institutions, whether in the form of tokenization, custody or otherwise?
It's pretty easy if they do it legally. But so much of the crypto space – I've been in finance for 45 years now – I've never seen anything like it. It's an entire field based on the principle of getting around the law when they want to, and then relying on the law when it's to their advantage. If they're in bankruptcy court, they're certainly going straight to court, relying on the law, and sometimes suing each other.
This is not a decentralized field like finance has been for thousands of years. It tends towards centralization. A lot of it is fundamentally based on a structure that we don't allow anywhere else in finance, on this mixing and these conflicts. Conflict and non-compliance abound.
Wall Street banks say we will do tokenization – and are very careful not to use the word “crypto” anywhere. They will nod towards blockchain, they are making an argument that is more akin to securitization. Is there a universe where these institutions are allowed to have more crypto neighborhoods if there are things that need to be adjusted for this to be true?
I can't anticipate anything. It depends on the product. You can tokenize X, Y and Z shares. It's still a security.
How do you trade it? How does the offer and sale of this security comply with securities regulations? If the securities stored on the ledger are securities, make sure you comply with securities laws. And if it's not a security but a commodity, they have to comply with Commodity Futures Trading Commission rules.
But this field isn't really based on that. You have 15,000 to 20,000 tokens and we are performance neutral, but economics will tell you that most of them will fail.
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