Hybrid Hearing – Capital Markets and Emergency Lending in the COVID-19 Era (EventID=110830)

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On Thursday, June 25, 2020, from 12:00 p.m. (ET)
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Witnesses for this one-panel hearing will be:

• The Honorable Jay Clayton, Chairman of the U.S. Securities and Exchange Commission


The Coronavirus Disease 2019 (COVID-19) pandemic has caused significant disruptions to the U.S. capital markets. In response, the Securities and Exchange Commission (SEC), the Board of Governors of the Federal Reserve System (Federal Reserve or Fed), and the Department of the Treasury (Treasury) have pursued a variety of significant actions to maintain liquidity and stability in financial markets. Congress has also passed the Coronavirus Aid, Relief, and Economic Security Act (CARES) Act which has supported these efforts in a number of ways. This memo summarizes recent regulatory activity that has affected the capital markets, as well as a number of issues associated with these actions.

Impact of COVID-19 on U.S. Capital Markets

Economic uncertainty arising from the COVID-19 pandemic has led to a significant increase in market volatility and trading activity. In equity markets, trading volumes have reached historic levels with the top ten days of number of shares traded all occurring in 2020.

Stock market volatility as measured by the VIX index reached an all-time high of 82.7 on March 16, up from an average of 12.5 in January 2020. Stock market volatility has declined since its peak in March but remains elevated with the VIX now at 33.93. Between February 19 and March 23 of this year, the value of the S&P 500 fell from its all-time high by over 30 percent. Though the index has begun to recover in recent weeks, the stock market has experienced renewed volatility in response to speculation that a second wave of COVID-19 may stifle the economy’s recovery.

Credit markets have experienced a similar increase in trading activity and volatility as investors tried to anticipate the economic impacts of COVID-19 on businesses, states, and local governments, particularly in the corporate and municipal bond markets. Daily municipal bond trades rose from approximately 34,000 in mid-February to an average of 50,000 in March with a peak of 75,000 per day on March 23.6 As of May 4, average daily transactions of publicly traded corporate bonds were 14 percent greater in 2020 as compared to 2019. Much of this increased trading activity represents a sell-off in assets by investors, especially in the weeks prior to the Fed announcing it would intervene to “backstop” credit markets. During the week of March 18, U.S. corporate investment-grade bond funds experienced a $35.6 billion selloff, the largest one-week decline in history. As credit market investors sold positions the cost of borrowing for corporate and municipal bond issuers increased significantly.

Securities and Exchange Commission

The SEC ’s mission is to (1) protect investors; (2) maintain fair, orderly, and efficient capital markets; and (3) facilitate capital formation. The SEC oversees $140 trillion a year in securities trading and more than 28,000 market participants that employ over one million people in the United States. For the past several years the SEC’s budget has remained flat despite being responsible for overseeing securities market trading and participants that have both increased in number and complexity. To manage cost increases over two fiscal years of flat funding, the SEC imposed a hiring freeze that the SEC estimates resulted in a 9 percent loss of its workforce by the end of FY 2018. The President’s Fiscal Year (FY) 2021 budget request for the SEC is $1.89 billion. The FY 2021 request also proposes to eliminate the Public Company Accounting Oversight Board (PCAOB), a self-regulatory organization created in the wake of the Enron scandal to oversee the audits of public companies, transfers its duties to the SEC, and requests an additional $55 million over FY 2020 for the SEC to carry out these functions.

Hearing page: https://financialservices.house.gov/calendar/eventsingle.aspx?EventID=406615