Remarks before the Bloomberg Global Regulatory Forum

October 22, 2024/US SEC

By Chair Gary Gensler

Thank you, Mary, for the kind introduction. As is customary, I’d like to note that my views are my own as Chair of the Securities and Exchange Commission, and I am not speaking on behalf of my fellow Commissioners or the staff.

I want to talk to you about the importance of capital markets and nonbank finance. The global regulatory community often debates this sector’s resiliency. Let me be clear: promoting financial resiliency is at the core of the SEC’s mission. In normal times, it helps promote trust in capital markets. In times of stress, it protects investors, issuers, and markets alike.[1]

Today, though, I’d like to focus on the important value of nonbank finance and to contextualize its risks. In summary, let me make three observations.

First, the U.S. economy and, importantly, the public—both investors and issuers—benefit from our large, vibrant $120 trillion capital markets. These markets are nearly five times larger than our $26 trillion banking and credit union sector.[2] Compared to other major economies, this ratio, and our significant reliance on the capital markets, is a distinguishing element of our economy. I believe this is a feature, not a bug.

Finance, at its core, is about the pricing and allocation of money and risk. The nonbank sector plays a critical role in that price discovery. Further, transparency and liquidity in the public capital markets provide a public good, leading to more efficient allocation and pricing of capital. Academic research has long documented that strong capital markets promote economic growth, and may even provide greater resilience in crises.[3]

Second, the nonbank sector provides important alternatives and competition to the banking sector. This competition benefits investors, savers, borrowers, and issuers, as well as banks themselves.

Third, when it comes to risk and fragility in finance, it’s important not to paint with a broad brush. Not every risk is the same. In fact, the financial sector is about allocating and pricing risk, not eliminating it. It’s important to focus on the activities that are more likely to contribute to fragility in the system.

For instance, money-like liabilities, particularly deposits, money market funds, and reverse repurchase agreements (repo), can raise systemic risks. Interconnectedness or significant leverage also can raise such risks. Entities providing material maturity or liquidity transformation also can raise such risks. But not all aspects of the nonbank sector have these particular, or other, risks that heighten financial fragility. It’s also important, while considering resiliency, not to discount the contribution that nonbank markets make to efficiency, liquidity, and transparency.

Though reports on nonbank finance may discuss it through the lens of entities,[4] I want to discuss it through the lens of five activities: money instruments, Treasury markets, credit markets, private funds, and equity markets. Since that is plenty, I won’t have time today to cover other important cross-cutting operational issues for banks and nonbanks, including: artificial intelligence, cyber resilience, and third-party service providers.[5] The SEC has taken up important projects in each of these areas.

Money Instruments

When people talk about money, most think about cash in your pocket or digital cash—which is actually bank deposits. There also are important capital markets cash-like instruments, including money market funds and the funding in reverse repo markets. All of these cash-like products have a similar attribute: they can be redeemed on demand or daily at par value.

Given that cash-like feature and ability to redeem on demand, they’ve been at the center of runs in times of stress.

We’ve seen bank runs, both in real life and in movies such as It’s a Wonderful Life. Bank instability is not just a matter of history or fictional characters, though, as we grappled with this as recently as last year, with several runs on regional banks here in the U.S. as well as the events that brought Credit Suisse to the brink.

We also have seen, in times of stress, rapid redemptions at some money market funds as investors feared dilution or illiquidity.

Money market funds were created 50 years ago to meet the needs of savers and investors looking for higher returns than bank deposits. The investing public also has confidence that they’re backed one-to-one by assets like Treasury bills and other short-term investments. At $6.7 trillion today, they generate higher returns on average and are more secure for savers and investors than bank deposits.[6]

Money market funds, though, share the potential structural liquidity mismatch faced by banks. Investors can redeem their money market fund holdings on a daily basis, even if those funds keep some of their holdings in securities with less liquidity.

Thus, after the 2008 financial crisis, the SEC adopted a series of reforms for money market funds. Given that we saw further stress in money market funds during the dash-for-cash in 2020, we took the matter up again, adopting further reforms to enhance these funds’ resiliency and protections against dilution, which were fully implemented earlier this month.[7]

I would note, though, there are other funds (over $2 trillion in aggregate) that have cash-like characteristics, such as Short-Term Investment Funds, Local Government Investment Pools, and offshore Money Market Funds, that are outside the SEC’s purview and the reforms I mentioned.[8] [9] I think it’s important that relevant authorities consider reforms to enhance resiliency and protect against regulatory gaps.

Another capital market activity with cash-like characteristics is the repo market. Market participants are able to exchange their cash with counterparties seeking funding for their Treasuries or other fixed-income securities. Nonbanks, including hedge funds, money market funds, broker-dealers, and others, as well as banks, all play significant roles in the more than $6 trillion repo markets.[10]

At times, we’ve seen stress in these markets, particularly in the Treasury funding markets in 2019. That’s part of why last December, we adopted rules to facilitate greater central clearing of U.S. Treasuries in both cash and funding markets.[11]

While on the topic of money instruments, I want to highlight an additional risk, though one in the banking, rather than nonbank, sector. As it relates to bank deposits, it’s not just the $20 trillion of deposits in the domestic commercial banking and credit union sector.[12] There’s another $13 trillion of dollar funding offshore in non-U.S. banks.[13] Many of these overseas dollar deposits are uninsured. We’ve seen stress in Eurodollar markets disrupt economies around the globe, such as during the ‘08 crisis. Though the Federal Reserve operates central bank liquidity swap lines with select central banks, I believe there may be more work for those of us in the global regulatory community to ensure resiliency in the offshore Eurodollar markets.[14]

Treasury Markets

That brings me to our $28 trillion Treasury markets. They are the base upon which our entire capital markets are built. They are integral to how the Federal Reserve conducts monetary policy. They are how we, as a government and taxpayers, raise money. We are the issuer.

These markets also have three relevant characteristics: deep participation of both bank and nonbank intermediaries, use of leverage, and repeated jitters over the decades.[15]

As I mentioned, market participants often fund their positions with Treasury repos. The resulting leverage often connects banks and broker-dealers to hedge funds and others to whom they are providing such funding. This interconnectedness can create systemic fragility. An independent study of non-centrally cleared bilateral repo data from June 2022 found that 74 percent of pilot volume was transacted at zero haircut.[16]

Further, this market has been characterized by repeated jitters over time, from the 1980s to the 2008 crisis, to the dash-for-cash in 2020, to the regional bank crisis in March 2023.

Given the importance, leverage, interconnectedness, and repeated jitters of the Treasury markets, we’ve embarked on key reforms with Secretary Yellen’s guidance and working with the Federal Reserve, Federal Reserve Bank of New York, and Commodity Futures Trading Commission.

First, we’ve broadened the scope of transactions required for central clearing. By March 2025, Treasury clearinghouses must separate proprietary margin from customer margin and further facilitate access to central clearing. Starting at the end of 2025, certain cash transactions will have to be cleared. Starting in June 2026, certain repo and reverse repo transactions must be cleared.[17] Second, we also now require firms that act as dealers to register as such with the Commission.[18]

Credit Markets

Let me now turn to the credit markets, including both commercial and consumer credit.

In the U.S., we benefit from robust competition between banks and nonbanks. A distinguishing and critical part of our financial sector is that debt capital markets facilitate 75 percent of debt financing of non-financial corporations. These markets are varied and deep, which benefits investors and borrowers. Compare this to Europe, the U.K., and Asia, where only 12-29 percent is raised in capital markets.[19]

Our various markets for commercial and consumer credit live and compete side-by-side. The greater reliance of the U.S. on capital markets leads to increased competition and efficient allocation and pricing of capital and risk. Such competition promotes efficiency, diversification, and flexibility, with significant benefits for borrowers and investors alike.

For context, the markets for dollar funding of commercial credit are approximately $30 trillion. This includes the $11 trillion corporate debt market,[20] the $1.4 trillion broadly syndicated loan market,[21] an estimated $1.7 trillion private credit market,[22] and commercial and industrial loans by U.S. banks of about $2.8 trillion.[23][24] There’s also a sizeable $13 trillion offshore market for U.S. dollar borrowing in Eurobonds and Euroloans.[25]

Americans looking to purchase a home, a car, or have a credit card, also have long benefitted from the development of the nearly $14 trillion mortgage and asset securitization markets.[26] Pooling mortgages and other assets into securities brings more investors into the markets. The majority of mortgages and consumer lending either directly access the capital markets, or at least indirectly benefit from referencing the pricing of the markets.

Everyday investors also participate in the credit markets through registered investment funds.[27] These funds play an important and growing role in the ownership of corporate bonds, mortgage-backed securities, and asset-backed securities.

Banks also benefit from vibrant nonbank credit markets. First, banks are able to reference the price discovery in the public markets and lower their risk. Second, banks are able to work with clients on their clients’ funding needs, while outsourcing the actual funding to other markets, such as through broadly syndicated loans. Third, banks also are significant borrowers in the capital markets, including to meet their requirements to issue loss-absorbing capital.[28]

All this said, we need to promote efficiency, integrity, and resiliency of these markets—and that is what our agency does day in and day out. First, robust disclosures, along with protecting against fraud and misconduct, are important to investors. They also promote fair, orderly, and efficient markets. That’s why, under the securities laws, we have robust disclosure requirements, including for corporate debt, mortgage-backed securities, and asset-backed securities.

Second, we’ve seen times when risks can spill out into the broader economy, such as from the mortgage and derivatives markets in the ‘08 crisis. That’s why Congress implemented reforms around mortgage underwriting and swaps.[29] As mandated by those reforms, the SEC adopted a rule last year prohibiting those who sell or facilitate the sale of an asset-backed security from engaging in transactions that involve or result in conflicts with investors.[30] Additionally, entities subject to rules creating a regime for the registration and regulation of security-based swap execution facilities were required to begin complying in August 2024.[31]

Earlier this year, the SEC also adopted amendments to make portfolio data of registered investment funds available more frequently to the public. The more frequent disclosure not only gives investors more regular access to how their funds are meeting their investment objectives, but also supports the Commission’s oversight of these funds.[32] To add to the aggregate public data regarding registered funds, this year we began publishing the new Registered Fund Statistics report.[33]

Before I turn to private funds, one area of the credit markets that has grown significantly in recent years is private credit. This growing field contributes to competition in our credit markets. As with any other emerging field in finance, though, it also bears monitoring for challenges and risks. For instance, is it raising some risks regarding regulatory arbitrage? What are the risks with regard to the intersection of private credit with the banking and insurance sectors? How are credit ratings being used in this field? Further, though private credit has existed in some form for years, given its size has increased significantly, how will it weather times of stress at today’s magnitude or greater?

Private Funds

Turning to private funds, the U.S. also benefits from robust competition between private and public capital markets. The $30 trillion private fund sector—private equity, private credit funds, hedge funds, venture capital—surpasses the size of the U.S. banking sector.[34]

Private funds and their advisers play an important role in nearly every sector of the capital markets. On one side are the funds’ investors, such as retirement plans or endowments. Standing behind those entities are millions of investors like municipal workers, teachers, firefighters, professors, students, and more. On the other side are issuers raising capital from private funds, ranging from startups to late-stage companies.

In the wake of the 2008 financial crisis and the events a decade earlier regarding Long-Term Capital Management, Congress understood that such funds could affect financial stability. Thus, Congress directed the SEC to collect information from private funds.[35] Given the significant growth and changes in this field, we recently updated Form PF, an important reporting tool for private fund advisers to provide transparency into funds.[36] In adding to the aggregate public data published by the SEC, we updated and enhanced public reporting of information about leverage, borrowing, and other activities regarding hedge funds, private equity funds, and other private funds from Form PF.[37]

An aspect of some private funds is significant leverage, particularly among certain large multi-strategy and macro hedge funds. Many hedge funds are receiving the vast majority of their repo financing in the non-centrally cleared market.[38] The rules we adopted last year regarding the Treasury markets will broaden the scope of transactions clearinghouse members must clear, which will bring greater efficiency and resiliency to this market. Under these rules, in June of 2026, clearinghouses will need to ensure their members clear all their repo and reverse repo transactions, including with hedge funds.[39]

Further, last year, we finalized rules to increase transparency to investors regarding fees, performance, and side letters.[40] This rule would have promoted greater competition and efficiency in this important part of the markets. In June, the U.S. Court of Appeals for the Fifth Circuit subsequently vacated the rule.[41]

Equity Markets

Before closing, I’ll mention the largest of the nonbank sectors. With more than half of all American households investing in our $55 trillion equity markets, they are critical to issuers and investors alike.[42]

Spoiler alert: we’re focused on increasing efficiency and resiliency, lowering cost and risk here, too.

Last month, the Commission unanimously approved the most important updates to the equity markets since 2005.[43] Earlier this year, the Commission also unanimously adopted final rules to enhance disclosure requirements for order execution quality.[44]

We reduced what’s known as the “tick size” for many stocks down to a new minimum of half a penny, allowing stocks to be priced more efficiently and competitively, reducing distortions, and lowering the costs of trading.[45]

We also have made our market plumbing more efficient. Back in May, the U.S. successfully shortened the clearing and settlement cycle to T+1 for equities, corporate bonds, and municipal securities.[46]

Conclusion

Let me conclude where I began. The U.S. economy and, importantly, the public—both investors and issuers—benefit from our large, vibrant $120 trillion capital markets. Second, the nonbank sector provides important alternatives and competition to the banking sector. Third, it’s important not to paint with a broad brush when considering systemic risk. We should focus on the activities that are more likely to contribute to fragility in the system.

That’s what we do at the SEC in fulfilling our three-part mission: to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation. We’ve taken on numerous projects to ensure efficiency, integrity, and resiliency in our capital markets.

While nonbank intermediation is not without risk, on balance, our entire economy benefits from the breadth, depth, and liquidity of our capital markets.