U.S. DEPARTMENT OF THE TREASURY A Financial System That Creates Economic Opportunities Capital Markets OCTOBER 2017 U.S. DEPARTMENT OF THE TREASURY A Financial System That Creates Economic Opportunities Capital Markets Report to President Donald J. Trump Executive Order 13772 on Core Principles for Regulating the United States Financial System Steven T. Mnuchin Secretary Craig S. Phillips Counselor to the Secretary Staff Acknowledgments Secretary Mnuchin and Counselor Phillips would like to thank Treasury staff members for their contributions to this report. The staff’s work on the report was led by Brian Smith and Amyn Moolji, and included contributions from Chloe Cabot, John Dolan, Rebekah Goshorn, Alexander Jackson, W. Moses Kim, John McGrail, Mark Nelson, Peter Nickoloff, Bill Pelton, Fred Pietrangeli, Frank Ragusa, Jessica Renier, Lori Santamorena, Christopher Siderys, James Sonne, Nicholas Steele, Mark Uyeda, and Darren Vieira. iii A Financial System That Creates Economic Opportunities • Capital Markets Table of Contents Executive Summary 1 Introduction 3 Scope of This Report 3 Review of the Process for This Report 4 The U.S. Capital Markets 4 Summary of Issues and Recommendations 6 Capital Markets Overview 11 Introduction 13 Key Asset Classes 13 Key Regulators 18 Access to Capital 19 Overview and Regulatory Landscape 21 Issues and Recommendations 25 Equity Market Structure 47 Overview and Regulatory Landscape 49 Issues and Recommendations 59 The Treasury Market 69 Overview and Regulatory Landscape 71 Issues and Recommendations 79 Corporate Bond Liquidity 83 Overview and Regulatory Landscape 85 Issues and Recommendations 87 Securitization 89 Overview 91 Regulatory Landscape 96 Issues and Recommendations 97 A Financial System That Creates Economic Opportunities • Capital Markets iv Derivatives 107 Overview 109 Regulatory Landscape 116 Issues and Recommendations 126 Financial Market Utilities 149 Overview and Regulatory Landscape 151 Issues and Recommendations 164 Regulatory Structure and Process 169 Overview 171 Issues and Recommendations 179 International Aspects of Capital Markets Regulation 187 Overview 189 Issues and Recommendations 190 Appendices 193 Appendix A: Participants in the Executive Order Engagement Process 193 Appendix B: Table of Recommendations 203 v A Financial System That Creates Economic Opportunities • Capital Markets Acronyms and Abbreviations Acronym/Abbreviation Term ABS Asset-Backed Securities Agency MBS Agency Mortgage-Backed Securities ANE Arrange, Negotiate, or Execute ARRC Alternative Reference Rates Committee ATR Ability to Repay ATS Alternative Trading System BCBS Basel Committee on Banking Supervision BDC Business Development Company BNY Mellon Bank of New York Mellon CCAR Comprehensive Capital Analysis and Review CCP Central Counterparty CDO Collateralized Debt Obligation CDS Credit Default Swap CEA Commodity Exchange Act CEM Current Exposure Method CFTC U.S. Commodity Futures Trading Commission CFMA Commodity Futures Modernization Act CHIPS Clearing House Interbank Payments System CLO Collateralized Loan Obligation CLOB Central Limit Order Book CMBS Commercial Mortgage-Backed Securities CME, Inc. Chicago Mercantile Exchange, Inc. CMG Crisis Management Groups CPO Commodity Pool Operator CPMI-IOSCO Committee on Payments and Market Infrastructures and the Board of the International Organization of Securities Commissions CTU Central Treasury Unit DCM Designated Contract Market DCO Derivatives Clearing Organization A Financial System That Creates Economic Opportunities • Capital Markets vi DERA SEC Division of Economic and Risk Analysis DFAST Dodd-Frank Act Stress Test Dodd-Frank Dodd-Frank Wall Street Reform and Consumer Protection Act DtC Dealer-to-Client DTC Depository Trust Company DTCC Depository Trust and Clearing Corporation EC European Commission EGC Emerging Growth Company eSLR Enhanced Supplementary Leverage Ratio ETFs Exchange-Traded Funds EU European Union Exchange Act Securities Exchange Act of 1934 FCM Futures Commission Merchant FDIC Federal Deposit Insurance Corporation FHFA Federal Housing Finance Agency FIA Futures Industry Association FICC Fixed Income Clearing Corporation FINRA Financial Industry Regulatory Authority FMU Financial Market Utility FRB Federal Reserve Board of Governors FRBNY Federal Reserve Bank of New York FRTB Fundamental Review of the Trading Book FSB Financial Stability Board FSOC Financial Stability Oversight Council FTE Full-Time Equivalent (Personnel) FX Foreign Exchange FY Fiscal Year GAO U.S. Government Accountability Office GSA Government Securities Act of 1986 GSD Government Securities Division (of FICC) GSE Government Sponsored Enterprise vii A Financial System That Creates Economic Opportunities • Capital Markets HFT High Frequency Trading HQLA High-Quality Liquid Assets HUD U.S. Department of Housing and Urban Development IDB Interdealer Broker IOSCO International Organization of Securities Commissions IPO Initial Public Offering IRS Interest Rate Swap ISDA International Swaps and Derivatives Association IT Information Technology JOBS Act Jumpstart Our Business Startups Act JP Morgan JPMorgan Chase & Co. JSR Joint Staff Report LCR Liquidity Coverage Ratio LIBOR London Interbank Offered Rate LPR Large Position Reporting LSEG London Stock Exchange Group MAT Made Available to Trade MBS Mortgage-Backed Securities MBSD Mortgage Backed Securities Division (of FICC) MiFID Markets in Financial Instruments Directive MSRB Municipal Securities Rulemaking Board NBBO National Best Bid or Offer NFA National Futures Association NMS National Market System NMS Stock ATSs Alternative Trading Systems that trade NMS stocks NRSRO Nationally Recognized Statistical Rating Organization NSCC National Securities Clearing Corporation NSFR Net Stable Funding Ratio NYSE New York Stock Exchange OCC Options Clearing Corporation (FMU) OCC Office of the Comptroller of the Currency (Regulator) OLA Orderly Liquidation Authority A Financial System That Creates Economic Opportunities • Capital Markets viii OTC Over-the-Counter PLS Private-Label Securities PTF Principal Trading Firm QIBs Qualified Institutional Buyers QM Qualified Mortgage QRM Qualified Residential Mortgage RFA Regulatory Flexibility Act RFQ Request for Quote SA-CCR Standardized Approach for Counterparty Credit Risk SDR Swap Data Repository SEC U.S. Securities and Exchange Commission SEF Swap Execution Facility SFA Supervisory Formula Approach SIP Securities Information Processor SIFMA Securities Industry and Financial Markets Association SIFMUs Systemically Important Financial Market Utilities SLR Supplementary Leverage Ratio SPV Special Purpose Vehicle SRC Smaller Reporting Company SRO Self-Regulatory Organization SSB Standard Setting Body SSFA Simplified Supervisory Formula Approach TBA To-Be-Announced Market TCH The Clearing House Payments Company, L.L.C. Title VII Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act Title VIII Title VIII of the Dodd-Frank Wall Street Reform and Consumer Protection Act TRACE Trade Reporting and Compliance Engine Treasury U.S. Department of the Treasury USD U.S. Dollar UTP Unlisted Trading Privileges ix A Financial System That Creates Economic Opportunities • Capital Markets Executive Summary Executive Summary • Introduction Introduction President Donald J. Trump established the policy of his Administration to regulate the U.S. finan- cial system in a manner consistent with a set of Core Principles. These principles were set forth in Executive Order 13772 on February 3, 2017. The U.S. Department of the Treasury (Treasury), under the direction of Secretary Steven T. Mnuchin, prepared this report in response to that Executive Order. The reports issued pursuant to the Executive Order identify laws, treaties, regula- tions, guidance, reporting and record keeping requirements, and other Government policies that promote or inhibit Federal regulation of the U.S. financial system in a manner consistent with the Core Principles. The Core Principles are: A. Empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth; B. Prevent taxpayer-funded bailouts; C. Foster economic growth and vibrant financial markets through more rigorous regulatory impact analysis that addresses systemic risk and market failures, such as moral hazard and information asymmetry; D. Enable American companies to be competitive with foreign firms in domestic and foreign markets; E. Advance American interests in international financial regulatory negotiations and meetings; F. Make regulation efficient, effective, and appropriately tailored; and G. Restore public accountability within Federal financial regulatory agencies and rationalize the Federal financial regulatory framework. Scope of This Report The financial system encompasses a wide variety of institutions and services, and accordingly, Treasury is delivering a series of four reports related to the Executive Order covering: • The depository system, covering banks, savings associations, and credit unions of all sizes, types and regulatory charters (the Banking Report,1 which was publicly released on June 12, 2017); • Capital markets: debt, equity, commodities and derivatives markets, central clearing and other operational functions (this report); 1. U.S. Department of the Treasury, A Financial System That Creates Economic Opportunities: Banks and Credit Unions (June 2017). A Financial System That Creates Economic Opportunities • Capital Markets 3