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Bloomberg Markets: Too Much on the System Too Quickly

Ken Bentsen, SIFMA’s president and CEO, joined Romaine Bostick on “Bloomberg Markets: The Close” during SIFMA’s 2023 Annual Meeting to discuss the need for careful consideration when implementing new rules and regulations within the financial industry. “We have to be careful we don’t put too much on the system too quickly,” said Bentsen.

Transcript

Romaine Bostick: A little bit earlier at your annual meeting, we had a chance to hear from Gary Gensler, the chairman of the SEC. And I think the entire world, our country right now is still awaiting to hear the formal rulemaking that he has put out there here. And he kind of gave you a taste of that today. And what did you make of some of his comments, particularly when it comes to leverage in the Treasury market?

Ken Bentsen: Well, first of all, thank you for having me. Always great to be with you at Bloomberg. Chair Gensler’s put out a proposal for clearing of cash and repo treasury, which is already moving in that direction to a large extent. But this would be a mandate for members of the clearing house. Our concern is we need to think about how this is going to be on who’s going to incur the costs because clearance is not free. Making sure that FICC is prepared. The central clearing house is prepared for this and the counterparties are prepared to do it. So it goes back to the point at the lead, we have so many different rules that are coming in and we’re moving through the shortened settlement cycle right now, that’s a foundational rule, we have to be careful. We don’t put too much on the system too quickly.

Romaine Bostick: Why do you think, though, that we’re seeing so much being put on the system right now? I mean, we’ve heard from some of the regulators who basically said there has been a dearth, in their words, of regulation over some of the issues that we’ve confronted here, and that’s why you’re seeing so much rulemaking now.

Ken Bentsen: I think it’ll be hard to say there’s been a dearth of regulation over the last decade since the Dodd-Frank Act. There’s been a tremendous amount of regulation that’s been going on. I think in this in the Treasury market, obviously, there’s been concerns among the official sector around resiliency in that market and there are a lot of reasons for that. Number one is we’ve seen, the number of primary dealers has been relatively constant and the balance sheet of the primary dealers has also been constant. At the same time, we’ve seen an exponential growth in the amount of Treasury debt outstanding. So that obviously impacts issues. There are areas where we agree that in terms of certain firms that should be registered as broker-dealers in the Treasury market. But again, we have to be careful how how we how we implement these rules.

Romaine Bostick: But why do you think there has been so much focus on the basis trade? I know there were some disruptions we had earlier in the pandemic regarding that trade, and it seems to be that’s the place that Gary Gensler and some of the other regulators are coming from right now.

Ken Bentsen: I think they’re concerned that there may be excess leverage, that in a tight period could have knock-on effects in the market. We haven’t necessarily seen that. But I think they’re worried where the markets get brittle, liquidity gets brittle in the market, that the basis trade could be a component of that. So I think that’s what they’re looking for.

Romaine Bostick: You mentioned the shortening of settlement. Well, we’re now basically at T+2 we’re trying to get it down to T+1. A few years ago we went from T+3. I mean, what’s the holdup now that gets us from two days to one?

Ken Bentsen: When we did this back in 2017, we were taking, a third out and now we’re talking about taking 50% of the period out. That gets tighter when you go cross-border. We’re going to get it done. We’ve been working on this since 2020 with our colleagues at the Investment Company Institute and DTCC. But there are a lot of moving parts, and so we put together playbooks. We have 203 days until we get to the date that we have to get this done, but there’s still a lot of work to be done.

Romaine Bostick: Well, and there’s a lot of, I guess, lack of overlap, too. I mean, there are some date issues here that I know some of the ETF providers have raised some concerns here that they’re going to be subject to T+1, yet some of their underlying assets will still be subject to T+2. And basically, that leaves them holding the bag for twenty-four hours. 

Ken Bentsen: We will have a differential and cross-border differential because Europe, the U.K., the rest of the world except India, and Mexico and Canada and the U.S. will still be at T+2. We were behind Europe and the U.K. at T+3 before we went to T+2. So we’ve had that differentiation before. We’re trying to work through those issues. There are some that are not easy, but I’m confident that we can get it done.

Romaine Bostick: Another big issue for the firms that you represent has been what’s been going on with ESG and I guess the freedom, I guess, to make a decision about how you want to structure portfolios surrounding some of those issues here. I know SIFMA has been part of at least one big lawsuit in the state of Missouri, a pushing back there on the attorney general’s restrictions on using ESG policies in investment decisions.

Ken Bentsen: Well, our complaint with the state of Missouri is really not about ESG as much as it is about the state imposing a standard, whether it’s ESG, or faith-based funds, whatever it may be, that’s contrary to federal law. Congress passed something the National Securities Market Improvement Act in 1995 that preempts the states, including the state of Missouri, from imposing their own books and records requirement. And that’s what the state’s rule from the secretary of state has put into place. So, we appreciate the state wanting to have their views, but they can’t be contrary to federal law. So that’s why we brought that suit.

Romaine Bostick: But you’ve probably seen the trend. It’s not just Missouri, it’s Texas, it’s Florida, a lot of states are moving in this direction. There is certainly a constitutional issue that I guess the folks behind us will have to sort out at some point, or maybe the folks at the Supreme Court will have to sort it out here. But can the firms that you represent, can they operate in an environment where we do have that fragmentation on a state-by-state basis?

Ken Bentsen: No. That’s why Congress, going back to really 80 years, 90 years ago, the national market system we have today, and that’s when in 1995, they updated that with NSMIA, National Security Market Improvement Act. So we don’t have a patchwork, but we do have a federal market system, which is why we have such a strong market system in the U.S. that we don’t have 50 different states and the District of Columbia and Puerto Rico and others having their rules. Our members just want to serve their clients. If their clients want certain products and those are legal, they want to be able to provide those products with them, The client gets to choose what they want. And by the way, under things like Reg BI, fiduciary duty at the federal center, we have to oblige to what our clients want. So we’re not making choices for them, they’re telling us what they want.

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