SIFMA, the Securities Industry and Financial Markets Association, is a trade group of securities industry professionals. “SIFMA represents the broker-dealers, investment banks and asset managers who provide access to the capital markets”,according to its website.
SIFMA recently put out its outlook for 2019 entitled: “2019 Outlook: Trends in the Capital Markets”; among the findings, the US the global equity markets.
“U.S. equity markets represent 38% of the $85 trillion in global equity market cap, or $32 trillion; this is 3.5 times the next largest market, the EU (excluding the U.K.). On average (through September 2018), around 6.9 billion shares are traded on U.S. equity markets every day. Investors continue to enjoy narrow spreads, low transaction costs and fast execution speeds. There is also plenty of opportunity for price improvement, especially for retail investors.” SIFMA said in the paper.
For 2019, SIFMA said one trend to watch was the move away from the London Interbank Offer Rate (LIBOR) and the transition to the Standard Overnight Financing Rate (SOFR).
“Another significant change impacting markets is the transition away from the London Interbank Offered Rate (LIBOR) as the standard reference rate. It is estimated $200 trillion of financial contracts and securities ($190 trillion in derivatives; $10 trillion in corporate bonds, mortgages, securitized products, credit card receivables, etc.) are tied to LIBOR, being used by small businesses, corporations, banks, broker- dealers, consumers and investors as a benchmark for short-term interest rates. In response to concerns regarding the reliability and robustness of LIBOR and other reference rates across the globe, the Financial Stability Board (FSB), as established by the G20, and Financial Stability Oversight Council (FSOC) called for the development of alternative risk-free benchmark interest rates supported by liquid, observable markets.
“In the U.S. in 2014, the Board of Governors of the Federal Reserve System and the New York Fed established the Alternative Reference Rates Committee (ARRC), which eventually selected the Secured Overnight Financing Rate (SOFR) as the recommended alternative reference rate for the U.S. LIBOR is based on thinner markets and is not fully transaction based – the most active tenor (three months) posts less than $1 billion transactions per day – and submitted rates typically include expert judgement from market participants when determining the rate. SOFR, however, is based on the overnight repo markets, with over $700 billion of transactions per day. It is fully transaction based and therefore regarded as more robust than LIBOR.”
SIFMA also warned that the transformation of debt markets because of things like the Volcker rule will also continue in 2019.
“We have seen a transformation in fixed income markets since the crisis, historically bilateral and performed by dealers. Post-crisis regulatory constraints on balance sheets, such as the Volcker Rule, have resulted in many bank-affiliated dealers dramatically reducing inventory and market making capabilities, to the detriment of some fixed income activities. This is coupled with volatility at sustained lows across multiple asset classes and a divergence in central bank policy, as rates begin to rise in the U.S. yet remain low in most other developed nations.
“To continue servicing clients’ needs, markets had to be innovative and leverage product innovation and technology. This led to growth in ETFs and other passive investments as a way for investors to achieve their financial goals. The market landscape has also enabled the development and adoption of electronic market makers, albeit gradual and varying by type of security. We highlight two additional transformational aspects of fixed income markets.”
The Volcker rule, which is a part of the Dodd/Frank bill, forbids banks for engaging in proprietary trading, but as The Industry Spread has documented, that definition has been difficult to apply and many critics believe regulators identify legitimate market making activity, especially in the corporate debt market, by banks as proprietary trading.