Friday, May 15, 2020

Clayton assures FSOC that market infrastructure, ETFs have functioned as expected during volatile stretch

By John Filar Atwood

In an update on the SEC’s actions and observations since the onset of the COVID-19 crisis, SEC Chairman Jay Clayton said that clearing agencies, exchanges, ATSs, securities information processors and other key pieces of the securities markets have functioned as designed. In remarks to the Financial Stability Oversight Council (FSOC), he emphasized that during a time of unprecedented stress, the Commission has seen no systemic problems with respect to the markets’ key infrastructure.

In his speech, Clayton said that the agency has received specific questions about exchange-traded funds (ETFs), and he indicated that they have performed as expected. Specifically, he noted that there currently are relatively few significant differences in prices between the ETF and the underlying basket and that only $4.1 billion of the $4 trillion ETF market had an absolute value premium or discount greater than 2 percent.

Unprecedented volume. To emphasize how the markets have functioned, he pointed out that in the equities markets the 10 highest days by notional volume or trade count of all time have occurred in 2020. In 2019, the average volume was seven billion shares per day, he said, while in May 2020 the daily average has been 10.5 billion shares. He added that on the last day of February, 19.3 billion shares were traded—the second highest daily total ever recorded.

Recent statistics also speak to the market’s exceptional volatility so far in 2020, Clayton said. He noted that the VIX Index, which provides an options market-based measure of expected future volatility, was valued at 12.5 at the beginning of January 2020, rose to an all-tie high of 82.7 on March 16, and currently is in the 33 range. Similarly, the average number of daily municipal bond transactions rose from 34,000 in mid-February to 50,000 in March, peaking at 75,000 on March 23.

The SEC has been trying to facilitate the orderly and fair functioning of the markets, according to Clayton, by providing guidance, assistance, and relief to market participants where appropriate. The Commission has focused on assisting exchanges, central clearing parties, and other key market infrastructure participants with implementing business continuity measures, including shifting to remote work environments, while preserving investor protections.

Market monitoring. Clayton said that another agency priority has been to monitor the markets, including prices and price movements, capital flows, and credit availability. He noted that in April the SEC formalized this approach by creating the COVID-19 Market Monitoring Group to monitor and respond to the effects of COVID-19 on markets and their participants and to assist other regulators and public sector officials.

The SEC is working with foreign securities regulators and international prudential banking authorities on crisis-related matters, Clayton said. The Commission is discussing with the Financial Stability Board and IOSCO, among others, linkages, interconnections, and the evolving dynamics between global banking, housing finance, commodities, and other markets, he noted. The objective is to identify areas of stress and vulnerability and to consider potential mitigating actions.

He mentioned two particular initiatives that are underway, one of which is to identify, analyze, and clarify interconnections across key segments of financial markets with increased specificity. The other is an analysis of the potential risks and downstream effects of investment strategies and mandates that include or are subject to mechanistic rules, guidelines, or restrictions on holdings of assets, such as by reference to ratings and downgrades. The two initiatives will support work being done by the FSB, IOSCO, and other organizations, he noted.

Disclosure. Clayton also briefly touched on the SEC’s efforts to ensure that companies provide clear, high-quality disclosure to investors about the impact of the crisis. There is a thirst for information from investors and the marketplace on the operational status of companies, as well as their future prospects, he noted.

In his opinion, timely disclosure of high-quality information increases credibility and has a generally calming value that contributes to market function and reduces the potential for system risk. To that end, the Commission has been providing guidance, including two recent public statements on the importance of corporate and municipal disclosures and urging issuers to provide investors with as much information as practicable regarding their current financial and operating status.