Transcripts For CSPAN3 Key Capitol Hill Hearings 20240622

Security issue which has the Great Potential for souring the overall strategic discussion. I think it makes it hard. I think its essential for us to try to explore these ideas, but it becomes more of an academic or think tank exercise and less of a practical exercise if these sorts of perceptions create is much distrust. Last comments before i go out to the audience . Let me go out. We have a lot of hands and we have 10, 12 minutes. Im going to start with the gentleman way back on the left. Yes, you. Yes ill bill jones from executive intelligence review. Id like to just focus on this issue of the one road and one belt. Because it seems to me that the way the u. S. The attitude toward the one road, one belt will determine the course of human history. If it is willing to join this and to work in this, i think were going to have a flourishing of Economic Growth the likes which of we havent seen. We saw at the ufa conference nearly 50 of the World Population has said, we have to move in a different direction towards this infrastructural investment, road development, highway development. This is what the world wants to do. The United States has been invited to this. President xi personally has extended an invitation to the United States to be a part of this. But the attitude we get from the u. S. Mainly is either critical or even kind of paranoid about it. Because its china thats pushing this proposal. The new silk road as it has been put forward is largely a myth at the present moment. There is nothing being built. Theres nothing being developed. But it was used i think as a ploy to try and show that we have our silk road and you have your silk road. I dont think thats going to get it. I think the idea is that if the United States is willing to participate in this, the hand of the of president xi is open to that type of participation. But i dont think weve really got our act together in understanding the significance of this. Because were mired presently in a debt crisis in europe and the United States, and here we see asia moving ahead. We dont know how to deal with this and i think until we can get our act together, move in that direction, we ourselves will not develop. Look at infrastructural development. How much of that do we need ourselves . Our roads, our highways our railroads. We havent done that in a long time. I think if the u. S. Policy were oriented toward that, i think we could take that extended hand and work with china in trying to develop the world and to realize the common names of mankind. I think we have to somehow reexamine our own attitudes towards this the and understand the significance of this project. Let me take two more questions and then come back to the panel. So the gentleman up here in the front. I just want to continue from where you started. Could china and the u. S. Actually reconcile on this different approach . I think starkly different approach. The intervention, nonintervention. For example, china sea, very different. The arab spring compares with the u. S. Or when china sea and nato views over Security Council resolution on libya for regime change. China is very mindful of any Security Council bill on syria for example. The other is actually according to pew center survey, china actually is more popular in the middle east than ups. Very starkly different policy. So how you the chinese scholar and u. S. Scholar how you interpret this . Does that mean they like chinas approach or dislike the u. S. Approach . Thank you. One more. Lets go to the middle gentleman, second in there. My name is mr. Ruben assistant director for asia of the americanjewish community. China and india have had a very traditional close ties with the palestinians. People. And also since 91 have had growing ties with israel. How could both countries join the p5 1 . I agree with you, excluding china china. In trying to help forging a the middle east Peace Process, as well as ensure israels security with the kind of threats that iran makes . Thank you. Three really simple questions. The first is on the belt and road. Is the United States welcoming or not welcoming . And should it . Second sort of on how do you reconcile these deep differences . I think the key there is the different approaches and perceptions about the arab spring between the United States and china. And the third is could china and india help with the Israeli Palestinian Peace Process . Which i think is quite interesting. Im going to go down the row and you can pick and choose what you want to answer of those questions. Weve only got about five minutes. You want me to start . Just briefly its very good questions on the difference of perceptions of the u. S. And china at the popular level. Let me start with your second question first. Ive looked at the data a bit. And i think part of it may be this issue of familiarity breeding some contempt. If you recall in turkey, 2010, 2011, 2012 especially after the first year of the arab spring, there was opinion surveys that said turkey was sort of the more positive and favorable country in the middle east compared to all others. Thats changed substantially. I think turkeys very active in its role in certain conflicts. This is i think a cautionary tale for china as it thinks about its deeper engagement possibly in the middle east. Again, i dont think weve seen it just yet. Theres this issue of the more you get involved in a region of the world that is deeply fractious, then you get these scenarios where in the case of egypt United States still remains deeply engaged there but we probably have one of the lowest favorabilities at the popular levels. Because people who supported the Muslim Brotherhood think we sold them out. People who were against the Muslim Brotherhood think we actually were with the Muslim Brotherhood. The more you get involved in societies that i think are fragmented and fractured, the less dividend it pays in terms of popular perceptions. Your question on the sort of dilemma of resolving u. S. And china, which are the issues in terms of the different approaches, i think again the p5 1 test case of iran not just whether we get a deal today or this week, but what does that deal mean how can we actually extend it, is one of the best test cases whether it proves its value. I think the easier test case, like tunisia i would say even today, egypt is much easier than, say, libya yemen certainly iraq, syria. That in the short run figuring out if theres a practical way for the two countries to actually resolve its stated interests and then its stated program for the region i would apply it to those countries like tunisia, like egypt where theres a greater sense of basic stability. And not to those tough cases like libya or yemen. I think its really hard on iraq and syria, as we saw. Many people put forward including china a peace plan for syria. It just hasnt worked. The u. S. I think has a the difference of approaches of interventionism versus noninterventionism i think are easier to apply in those societies that have at least a foothold on stability. I would start in those places. First and foremost i would start with finishing the work thats been started on the iran front. I would just make some additional remarks. Number one the belt and the Road Initiative i think china certainly welcomes the participation and the endorsement of the United States. The silk road existed almost 2,000 years ago. But the name of silk road was not created by the chinese, but by the germans, 100 years ago. And now we take this as a new way of thinking. And we believe it will take about 30 to 50 or almost a half century to realize. And secondly, it is natural and be expected. We will have different concepts understandings, especially when the notion is just being brought up. For instance china and mongolia had different perceptions and understandings of this silk road proposal. Then after rounds and rounds of communications, then the mongolia president has said, we had the grassland vote you have the belt and the road, they can be integrated. And chinas proposition was doubted by the russians because of the socalled youre asianeurasian, but now we understood that we could be complementary each other. And india still does not endorse it officially. And when i visited the bay bridge in San Francisco area 30 years ago, i was overwhelmed by the United States capabilities on the infrastructure of these things. But now you are way ahead. Let us chinese do the infrastructure. You do more on the superstructure, finance, science, technology, planning, et cetera. So different nation has different strengths and weaknesses. And the last but not least about the surveys. These surveys you should not believe it totally. But you should not discard it totally. So in between. I think china and the United States reconciled on very difficult questions of vietnam war. And china and the United States had reconciled on these socalled tibetan issue human rights issue. Now we agree, these issues should not be damaging the overall china u. S. Relations. But it takes long time that we can come together. I will leave more time to my colleagues. Thank you. Lets take the infrastructure issue head on. First, does the United States need to improve its domestic Infrastructure Infrastructure . Absolutely. Could congress get off the dime and meet the president halfway and make a constructive step . Absolutely. Weve seen the impact on some of the economic post2008 economic packages in terms of highways and offramps. We only need to go to Fairfax County or you can go to the 405 and sunset boulevard in los angeles and you can see where the Infrastructure Improvements are made. But it is only a beginning. Now, in afghanistan the lack of infrastructure has prevented the development of the Strategic Mineral reserves that are there. That would certainly be for a country that is isolated and backward. The development of those minerals would certainly be a progressive step forward. The challenge will be not to find government money to fund that infrastructure but instead to create enough stability, enough moving forward so that the private sector will invest in commodities that it will have a longterm interest in developing economically. But to do that youve got to create a better environment for investment. I think thats the vulnerability of afghanistan today which desperately needs that infrastructure. So bring it into larger architecture for the region and suddenly you might have that stability. Infrastructure at home and Infrastructure Overseas are both necessary for this 21st century. I would say a little bit about china india cooperation in middle east. I think china now is more actively in Global International affairs. India actually is always very active in international affairs. And the china india can strengthen their cooperation. But comparing with a country like United States or developed countries, European Countries actually china india pay more attention to economic development. So, i mean, the driving force for china to push it forward the china india, how to say, proposals in global affairs, Regional Affairs are from the economic front. So as to that kind of middle east political dialogues i dont think actually the governments will have very strong driving force behind them. So it will be better for them to consider more about that kind of economic, social cooperation, that kind of thing in middle east. I think you might have the ingredients for a future report on u. S. china india cooperation. I want to thank everyone for joining us i want to that i can our panelists. Thank you for traveling from shanghai. I really welcome this report. Thank you all for being here. On the next washington journal the latest development in the Iran Nuclear Negotiations and an update on how the how select committee on benghazi plans to proceed with its investigation. Well hear from a couple of members of congress. First, representative Jan Schakowsky of illinois a member of the energy and commerce committee. Then later, republican congressman miami pompeo of kansas is a member of both the select intelligence and select benghazi committees. Washington journal live every morning at 7 00 eastern on cspan. You can contribute to the program by phone and on facebook and twitter. Homeland security secretary jeh johnson testifies tuesday at the House Judiciary Committee oversight hearing on immigration and enforcement live at 10 00 a. M. Eastern on cspan3. The city span cities country travels across the country. Lexington, kentucky. Edward pritchard was a state hero who had a tumultuous political career. In the mid1940s if you had asked who is a bright shining star in american politics on a National Scale someone whos going to be governor, senator perhaps president , a lot of people Katherine Graham arthur she is sin jer, would have said ed pritchard of kentucky. He was one of those people who worked in the white house in his early 20s seemed destined for great things, then came back to kentucky in the mid1940s was indicted for stuffing a ballot box. Went to prison. And so that incredible promise just flamed out. We also visit ashland the former home of speaker of the house, senator, and secretary of state henry clay. The mansion at ashland is a unique situation. Clays original home had to be torn down and rebuilt. It fell into disrepair. His son found that it could not be saved. He rebuilt on the original foundation. So what we have is a home that is essentially a fivepart federal style home, as henry clay had, with italian days architectural elements et cetera, and an added layer of esthettic details added by henry clays granddaughter and great granddaughter and so on. See all our programs from lexning to lexning to saturday evening at 6 30 eastern and sunday afternoon at 2 00 on American History tv on cspan3. Next, a roundtable discussion on fixed income markets and liquidity. Representatives from the securities and exchange commission, the Commodity Futures Trading Commission and several wall street firms, spoke at this event hosted by the House Financial Services subcommittee on Financial Institutions. Its two hours. Good afternoon. Im congressman randy naugabauer from the 19th Congressional District in texas. And i am the chairman of the Financial Institution subcommittee on financial services. And first of all, i want to welcome our distinguished panel today and thank them personally for coming and sharing i think some very important subjects that if youve picked up a paper lately or watched a news account or seen a speech or heard a speech, that is very timely subject. So i appreciate our panelists participating in that. Also thank our guests for coming. I think youre in for a real treat. A lot of folks said why dont you have a hearing . And i said we dont want to have a hearing, we want to have a discussion. And this is a panel discussion. And really im going to get to do the very same thing that youre doing, those of you in the audience, those watching on cspan is get to hear these folks have a very important dialogue about a very important subject. One of the things, other than the fact that it seems to be out in the news and a topic for discussion, people said why have a panel . One of the thins that kind of came to my mind was that we focused a lot about whats going on with the individual entities out there . As the markets have changed, Market Structures change, regulatory structures change, a lot of changes to the entities themselves. That i think one of the things that we think is important is also to determine what kind of changes are going on in the marketplace . Because ultimately, thats important to every american citizen. Because in some way or the other, these markets touch america in a lot of different ways. Whether were buying houses, buying cars, financing a business, whatever. And so these Financial Markets are extremely important. And so one of the things i think is important that we all do is that we have an ongoing dialogue about whats going on in the marketplace. Today obviously were going to talk about whats going on in the fixed income space. Particularly as it relates to liquidity. I was going to quote chairman bernanke. He kind of summed it up i think what were talking about today. Says, anybody done a comprehensive analysis of the impact of all of these changes weve seen and he says i cant pretend that anybody really has. You know its very complicated. We really dont necessarily have the quantitative tools to do that. So i think its important for us to have a discussion. And so were going to have that discussion. And youre in for a treat because weve got, as i said, a really great panel. To kick us off, our panel today is s. E. C. Commissioner dan gallagher. As many of you know commissioner gallagher has worked at the s. E. C. In several capacities throughout his career. He was on the front line of the agencys response to the financial crisis. And since returning to the agency as commissioner, mr. Gallagher is focused on issues strength. Ing our Capital Markets and has been an outspoken advocate for increasing the commissions focus on fixed income marketedsmarkets. Commissioner gallagher. Thank you very much mr. Chairman. Its a real honor to be here. It as little nicer than testifying, i must confess. Not that i dont want to do that. No time soon, please. First i have to say as you well expect, my views are my own dont reflect those necessarily of the commission, much to your chagrin, mr. Chairman. Put but i think this is a hugely important subject. Its a hugely important time to talk about it. Three years ago i gave a speech about fixed income markets, muni and corporate marketed talking about some data with respect to the retail participation in those markets to some concerns we were hearing about liquidity at the time. And really putting out a call to action for the commission to spend more time thinking about the structure of the fixed income markets, the lack of transparency. Especially in the corporate debt markets. A joke ive been using lately is that since Michael Lewis came out with his flash boys book last year, weve been spending a lot of time thinking about highfrequency trading. Id like to say if were going to prioritize based on Michael Lewis books i go back to liars poker. The fixed income markets are largely the same they were in 1989. I think we have Unfinished Business there to attend to. Its easy for us to ignore these markets because generally speaking, theyve been operating very well for 30 years. Theres been a bull market. In this current Interest Rate environment, u. S. Corporations for the last several years have hit the debt markets with much success. Its been great for our markets. Its allowed them to grow and exup and down and hire. Thats a good thing but thats of course because of Monetary Policy. We have to get used to an environment and prepare for an environment in which that incentive is no longer in place and we have to worry about the potential for a liquidity crisis in the event that Interest Rates rise and we dont have the inventories that we used to we dont have the buyers to be on the other side of the sale transactions. Im hoping and expecting the commission will continue to spend more time on these issues. Weve traditionally not spent our resources, our staff resources, looking at these issues. And we only get good policymaking when we resource our staff thinking on these issues. Right now we have one half of one fulltime employee thinking about these issues and thats no good. We need to up our game in that space. I hope to continue calling for that as i depart as a commissioner. I know my friend and colleague mike pelavar kill continue as he has done to call for the same. I appreciate your efforts in bringing light on these issues and i look forward to taking part in the panel. Thank you. Next im pleased to introduce the ftc commissioner sharon bowen. Commission bowen was sworn in commission of cftc in june of 2014 for a fiveyear term. And important to our discussion here today, commissioner bowen is the sponsor of the cftcs Market Risk Advisory Committee which has the purpose of providing the commission with Market Intelligence and recommendations from the industry about market risk and structure issues. Commissioner bowen, please. Yes, good afternoon. Its a pleasure to be here today to talk about a subject that i think is fascinating in finance. That topic is about liquidity. I serve as a commissioner of the Commodity Futures Trading Commission which has jurisdictions over more than 400 trillion of futures and swaps. Let me preface my remarks by also stating that my comments are my own and do not reflect the viewpoints of my fellow commissioner or cftc staff. You may be asking why my here on a panel discussing fixed income liquidity which the cftc does not regulate fixed Income Securities . Well, the short answer is the line between the markets are breaking down and increasingly interconnected. What affects the futures marketed affects the equities markets. What happens in the bond market doesnt stay in the pond market. The swaps market is integrally connected to pretty much everything that happens in every other market. And given the Global Nature of our Financial Markets and the challenge of harmonizing our rules and regulations, im more mindful of the need to address the issues of liquidity through an even broader lens. As for the longer answer, the truth is while the s. E. C. Does regulate and is the final regulator, we are the primary regulator for swaps based on underlying fixed Income Securities. Joint rule making from 2012 defined the word swap. As many of you know, that was not easy. Certain products are duly registered by both the cftc and s. E. C. As a commissioner i hear a great deal about liquidity for Market Participants including concerns that we have insufficient liquidity in our markets. The cftcs Market Risk Advisory Committee devoted half our meeting last month to discussing the subject. One of the make major takeaways from that meeting for me was that before we can do anything to address liquidity we first need to find a way to craft a generally accepted definition of liquidity. At the very least we need to make sure that Market Participants define what they mean by liquidity before they Start Talking about how it is growing or shrinking. At present liquidity is basically in the eye of the beholder. Some people view the concept drastically differently from others, even in the abstract. Let alone were talking about liquidity in specific markets. We need to define liquidity and then measure changes in liquidity if we hope to enchance or protect liquidity in our markets. Additionally it became clear to me during the meeting that we regulators need to further engage with the industry and other stakeholders in our discussions regarding liquidity. To that end im happying to here today and i look forward to hearing the perspectives of my fellow panelists. Thank you commissioner. Now nelly lang is the director of the office of Financial Stability policy and research at the Federal Reserve board. She is responsible for conducting and coordinating work at the board relating to the analyzing, emerging, and structural ricks to Financial Stability and developing a macro policy to mitigate Systemic Risks. Thank you very much. Appreciate the invitation to participate. This is an interesting topic for discussion. I will start with saying these are my own views and not those of the Federal Reserve board. Im going to start with a little definition of market liquidity as weve expressed it. Market participants have been expressing quite a bit of concern about reduced Bond Market Liquidity which we have interpreted to be, they are not able to buy or sell securities in reasonable quantities at relatively low cost without materially affecting market prices. So at the Federal Reserve weve been listening to these concerns and weve been monitoring a wide range of liquidity indicators, though no single measure appears able to capture the multiple dimensions. Many available measures including bid as spreads, mark depth, price impact, trading volumes, do not indicate a notable distribution in market functioning although we have seen a decline in average trade size. But there have been some recent events, including the flash rally in treasury markets on october 15th 2014, which suggests its important to continue to evaluate the resilience of liquidity in cash and future markets to stress events. There are a number of possible reasons for why market liquidity may have change the which are related to demand and the provision of liquidity. There are fewer active trading participants and an increase in buy and hold investors which may have reduced the demand for daytoday services. At the same time broker dealers may now be less willing to buy and sell weekends at the request of their clients. Because of new regulatory requirements or changes to Risk Management practices they have made on their own. Technological changes may also be affecting the provision of liquid liquidity. Increased reporting requirements for Corporate Bond transactions have reduced trading costs but may also have reduced trading sizes. In treasury markets greater algorithmic and higher frequency trading may be leading to fundamental changes and also may reduce the profits that dealers can earn by providing liquidity. The interagency staff report on the u. S. Treasury market on october 15th which was released just this morning, highlights that on typical days, principal trading firms that employ proprietary proprietary, automated trading strategies proprietary automated trading strategies account for more than half the transactions in the treasury Securities Markets and traditional broker dealers account for about onethird of the transactions. Some degree of Liquidity Risk will always be present in Capital Markets financing. In terms of whether current perceptions of create Liquidity Risk are unnecessary cost to the economy, a key issue is which sectors of the Financial System are bearing that risk. Looking back to the fall of 2008, which was the greatest market ill liquidity event in recent times due to fears of fire sales from deleveraging, the Liquidity Risk was held by the highly leveraged financial sector, the banks and broker dealers. With hindsight the regulatory structure for this sector was inadequate and much has been done to increase the strength and resilience of the core of the Financial System. More recently Liquidity Risks appear to have shifted towards less leveraged entities such as mutual funds. In principle Financial Stability is enhanced when risks shift from firms that are more levered to firms that are less levered and have more stable funding. If these less levered entities are sufficiently prepared for bearing greater Liquidity Risk, the Financial System and the economy may be better off with these changes. In summary, credit from bond markets has been very strong in recent years and is supported by stable, more stable and less complex funding than before the crisis. To maintain robust credit markets, it is important that investors maintain confidence that they can transact officially in these Capital Markets. In our view while most of the quantitative to date indicates that markets are quite effectively, we will continue to track changes in the market liquidity. Thank you. Thank you. Next panelist is sandy oconnor, shes held several key executive positions at jpmorgan. Most recently she was treasurer and the liquidity. Thank you to all of you sharing a bit of time this afternoon to discuss this important issue. Why does it matter . Well, it matters because in our country marketbased lending through the Corporate Bond issuance funds about 50 of the growth of american businesses with direct lending from banks making up the rest. Our Financial Market as you are well aware have long been a competitive advantage for our country. With benefits for businesses of all types and sizes and the people who work for them and the economy as a whole. So too it provides appropriate support for consumers who are seeking mortgages, auto financing, card financing and things of that nature. Our Capital Markets and the strength of them and their durability have led to the u. S. Economy recovering more quickly than those in europe. And in fact European Union is looking the European Union is looking to put in place a Capital Markets initiative to reduce their reliance and concentration on direct bank lending. So again, much like dr. Lang has said, as we discuss liquidity, i think its very important to define what we mean. And having traded fixed income products myself and as former treasurer of jpmorgan, trade when i want to and the size i want to and with reasonably predictable pricing. It is under that definition that i think we can agree that general market liquidity has in fact been declining and we have hit some air pockets as market depth has been tested. As already noted the 2013 taper tantrum, the treasury flash rally on october 15th and the recent euro tantrum. All of this has been during relatively benign times. And in the most liquid markets in the world, which is what gives us pause. These are the last places that you would expect the level of pricing volatility or for example a six sigma move on treasury pricing we saw on october 15th. Markets have not yet been tested under more severe circumstances. And therefore its important for us to contemplate because we dont know whether liquidity or the depth of liquidity as it presents currently will be an issue or not. But it does need to be carefully considered. It is important to note that markets, the financial industry and the economy are all in transition right now. And as a result there are multiple drivers of this change in liquidity. And again, some already have been mentioned but just to reemphasize, Market Structure has in fact adjusted. Its different today than it had been. Theres an increased reliance on algorithmic and hft trading dont hold a high level of capital and therefore dont hold high levels of inventory. And in fact as part of normal market practice as volatility increases the depth typically declines and pricing widens out. Additionally the share of fixed income instruments owned by mutual funds and etfs has grown significantly. And Central Banks are playing an increased role as Market Participants as part of their role in quantitative easing and implementing Monetary Policy. Market participants have changed their business behavior. Banks have went back to the more sophisticated Risk Management and control frameworks which have resulted in a lower Risk Appetite. Investor Decision Making has become more homogeneous as become central to an investment thesis. And finally, regulatory changes clearly have contributed to lower dealer liquidity. For example, capital and liquidity rules have increased the cost of holding and financing dealer inventory with the leverage ratio weighing heaviest on the highest quality, most liquid assets like treasuries and high grade corporates. Liquidity rules have required banks to hold high quality liquid assets for their own purposes and not for Market Making. And post trade Disclosure Requirements are reducing banks appetite for underwriting large trades for customers. New regulations, both domestically and internationally within that frame work have led banks to rethink which businesses they are in and which they will stay in in that price. This is an appropriate and intended consequence of regulation. However, markets and economy suffers when multiple rules attempt to reduce the same risk. Increasing regulatory costs without improving safety and soundness. Or rules may mischaracterize a risk. Looking forward market depth is on course for further decline. Upcoming regulations are proposed and implemented. These will include the fundamental review of the trading book, and the feds propose surcharges as an example. Further more, just as the supply of secondary liquidity declines the demand may in fact increase with changes in Monetary Policy and the reversal of quantitative easing. I think its very important as we sit and look forward, given the new base that we are at. Capitol is nearly two times the level it had been at. We had more than a trillion more since 2011, our focus needs to be on resilience, and resilience being define ed as the safety and soundness of the Banking Institutions as well as the resilience of the Capital Markets. Thank you, chairman. Next, we have managing director at black rock where he focuses within the fixed income group. He has previously worked with jpmorgans team for fixed income clients . Thank you. Its my pleasure to attend on behalf of black rock, and i look forward to the discussion. Most fixed markets have adapted to changes intended to have safety and soundness of the global Financial System. Looking back, the conditions leading into the 2008 crisis were healthy and more sustainable. Participants need to accept the changes occurred post crisis. In many cases, intentionally due to regulation. In many cases, intentionally due to regulation. And adapted to achieve their objectives in a fundamentally different market. Black rock has been considering these issues and has been adapting for several years by making changes in our creating platform capabilities, portfolio construction methods and Risk Management. Bond markets are changing as a result of a number of different factors. Central banks have been employing extraordinary measures to maintain low Interest Rates for an extended period of time. Bond issue answer has increased as issuers take advantage of historically low rates. At the same time, deleveraging across the Financial Systems ongoing and broker dealers have been markedly reduced. Broker dealers continue to make markets and fixed income, however, the Market Making activities are more constrained than they were before. The result is, the number of bonds outstanding is significantly outpaced increases in trading volumes. Therefore, reducing lower available secondary liquidity. Primary assurance on the other hand has remained strong and an increase in the size of average issuance. In contrast, secondary markets have been thinner post crisis. In particular, theres more pricing impact for larger transactions in the secondary market. With greater regulation is a cause for concern, we view the shift as an actual evolution. Policy has created conditions including low levels of volatility which continue to change as Interest Rates evolve. We should expect an increase in volatility goingforward. Further, some policy makers have raised concerns regarding the impact of rising rates given the current environment. We believe there is a need to separate concerns about market losses by investors, versus Systemic Risk. The environment will likely lead to gains by some investors and losses by others. This reflects a properly functioning market. Where investment results with capital and the risk of different investors. Losses experienced by investors are not the same as Systemic Risk, nor does this continuous pricing mean that Systemic Risks will arise. The markts has observed and functioned properly in the past. The market and Market Participants need to adjust to changes and find a new equilibrium. We believe that its time to move forward on market practices. The issue of liquidity is not new, and there are many ways that Market Participants can adapt. In part, this requires open mindedness and a willingness to change behavior, investors like ourselves need to update their Technology Tools and practices, banks and broker dealers need to accept greater adoption of agency like structures and fixed income markets compared to the traditional over the counter Market Structure. Issuers need to think through the imply kagts the cycle beyond todays accommodative environment. Regulators play an Important Role in their ability to require Market Participants to change behavior. We also recommend that all Market Participants and regulators invest in and embrace new and innovative selections. Based on the challenges facing Market Participants and the concerns raised by policy makers, black rock has outlined in several publications several recommendations to move the market forward using a threepronged approach. One, a focus on Market Structure modernization. Two enhanced disclosure and regulation of a the fund level using a tool kit, and three, evolution of new and existing products that are taking advantage of market technologies. We look forward to sharing the ideas with the group in the round table. Thank you. Thank you. Our next panelist is dan leland, he joined the southwest securities in 1995 as the executive Vice President where he was responsible for the Capital Markets division. Hes a former vice chairman of the business committee, national associations. And the bond leaders of america. Mr. Leland . For the old timers around, nasd is now funra. Im head of Capital Markets for south west securities in dallas. I want to thank you for putting this roundtable together. Its a full service Securities Firm based in dallas, and id like to say were a Regional Firm and probably more main street than we are wall street. Regional firms typically are involved in new issuance for municipal debt. When it comes to the taxable side of the arena, theyre not involved in the new issue and trade in the secondary market. That will give us a little different perspective on the market and liquidity than some of the larger markets that are around. Its easy to see that the marketplace is concerned about the conditions in the fixed income markets, that is important, and im glad to be here to offer southwest securities on the markets. Regulation and contribute to discussion. A couple topics i want to make sure we hit. Finra markup rules, the u. S. Fixed income market is a volatile marketplace. The risk dealers accept liquidity for aaa is vastly different. And assets such as high yield. Funeral markup rules are explicitly designed to account for changes in volatility and risk. The enforcement of the markup rules does not reflect the real risks of providing liquidity. And holds credits and time. Market transparency rules should be optimized to allow dealers for larger tran actions. Hedge those positions and then provide liquiddy in smaller trade sizes to Retail Investors. Current trace reporting would better balance the benefits of transparency versus the benefits of dealers being able to provide liquidity. Retail investors would be able to repair pricing of same day priced trades and would benefit from the liquidity and less volatility. Finra and msrb matched trade proposals. The retail price reference and the riskless principle is designed to provide confirmation which is on the confirmation disclosures on retail sized trades on the same principle trades. The purpose of the rule is to inform the Retail Investor about the dealer compensation. However, the proposals do not exclude sophisticated investors from the rule proposal so it may apply to institutional accounts. There are no riskless trades that bring inventory on the Balance Sheet. Basal three, which affects us more so that weve been bought by a holding company. The level of complexity to come ply with basal three. To exit the market completely. The requirement that we i think with those two individuals already exiting, and the additional expense of transacting business in that market, you can see other participants exit and cause less liquidity. Theres a lot of topics to go over, and i know my perspective is going to be from a regional platform and more granular than some of the other perspectives youll hear here today. Thank you. Our next panelist is kathleen yo, joined ge capital in 1990. Is currently the deputy of funding. The courts of ge capital. One of the largest private sector issuers and contributes to the fixed Income Investor relations efforts. Thank you. I add my thanks to you putting together the session. A great deal of interest to ge capital, and i think to any issuer who makes regular use of the bond markets. The whole question of liquidity and if it doesnt function as it should, means the bond markets do not function efficiently. Representing issuers or the viewpoint, which is what im most familiar with, to the extent that the bond markets cease to be effective, more important, a source of capitol, which can be flexible in its form, and allows issuers like ge capitol to hedge its Balance Sheet risk. The reason i say that is concerns about liquidity, having impact on secondary Market Pricing and also on the new issue premium, which investors quite rightly and logically demand to take on in order to buy a new bond transaction. To the extent there is a disconnect in the market, and those issues are elevated. It translates directly into a higher cost of funds for directors and impacts investments that are made. And by further extension, it can affect what business is chosen to go into or not, and ultimately job creation at its very end. The other aspect which i touched upon, the u. S. Debt markets have the most flexibility in terms of the type of securities that they in maturities, in optionality of calls and puts, occasionally in currency denomination. That same flexibility, which can, you know, raise challenges in terms of how you monitor the market is also one which would allow a Corporation Like us to be able to immunize our Balance Sheet from Interest Rate and currency risk. To the extent that the market ceases to behave in a way which is efficient, then that means that you could argue, we have greater risk on our Balance Sheet, by virtue of the fact that its more difficult for us to hedge it, that translate potentially into more Systematic Risk into the market itself for Smaller Companies, its probably even a more crucial issue. Ge capital can probably always get a quote on the new issue. For Smaller Companies that dont come that often. It may not be merely a matter of cost, it could be a matter of access which is of greater concern if you think about the greater economic picture. I think as all the panelists have shown, the liquidity question is a complicated one, i dont think there is a Single Source you could point to as being a cause of the concerns here, and as a result of that, i dont think theres a Silver Bullet thats going to solve everything. Whether its bond market standards, electronic trading platforms, putting securities on exchanges, none of them by themselves is going to fully address the situation that were discussing today. For all of us who have benefited from the markets, whether its as an issuer whos been able to raise money, as the investor whos earned returns, and frankly the broker Dealer Community who has acted as intermediaries in the marketplace, we probably need to look at a full scale view of what has gone on, including recognizing the structural changes that have happened in the market and need to be recognized because you cannot go back to pre2007. Its a fundamentally different world. And all of those have to be taken into consideration with a view frankly for what in the future is going to make this market continue to provide the value it always has to all of us. Thank you. And next dr. Larry harris. Larry harris holding the chair in the Marshall School of business. In the teaching department. Professor harris served as the secs chief economist from 2002 to 2004. Dr. Harris . Thank you, mr. Chairman. This is a great opportunity to participate in what i expect will be an interesting discussion. Several of my co panelists have already identified definitions of liquidity which i completely concur. Its the ability to trade when you want to trade without too much impact and in reasonable sizes. Now, the question is, where does liquidity come from. The ability to trade is provided by other people who are willing to trade with you. And its really important to think about, who are the other people who might be willing to trade with you . Traditionally, we think about dealers as intermediaries, who are willing to do those trades, you want to trade, the dealer will come and provide you with that service. And i expect that dealers will always be very important in fixed income markets and to a lesser extent in equity markets as well. The equity markets is extremely cheap to trade an awful lot of risk. The credit risk associated with equities is much greater than the Corporate Bonds or treasuries. And yet, these securities trade with very small spreads. Measured in single digit basis points. In contrast, the spreads say in corporate debt are on the order of 135 basis points. To put things in perspective, if you applied that spread to a 40 dollar stock, you would be trading a 40 stock at a one half dollar spread. One half dollar spread is really wide. Not unprecedented, though, we used to see spreads like that in the equity markets. We saw those spreads before order handling rules were adopted that allowed the public to offer liquidity to the public. When i say the public offers liquidity to the public, i feen mean that retail or institutional can be the other side that we spoke about a few moments ago about the liquidity is the ability to trade when you want to trade. Who do you want to trade with . If there are people who are willing to trade with you, who arent dealers, thats another set of people who can do trades. The order handling rules in the equity markets converted those markets from 25 cents to 50 cent spreads. The current spreads we see on the order more the more actively traded securities and still 5, 10 cents than the actively traded securities. Much smaller than what we see in the fixed income markets. So what we need among many things is the ability to allow the public to supply liquidity to the public. If were looking for liquidity, we have to look somewhere. So i want to close with just a couple quick observations about what are some absolute truths. Not everyone can be a buyer or a seller at the same time. We think what happens if Everyone Wants to trade, and the bottom line is, that simply cant happen, and people can try to do it, they wont be able to do their trades, thats where the extreme volatility comes from that were worried about with Systemic Risk. The answer to that is a couple fold, when lots and lots of people want to trade, that theres some procedure that will allow people to step up and profit from those opportunities. All of these liquidity events that scare us create enormous opportunities for profit. These are just like god given the religious experiences for people who are interested in profit, we need to make sure that people can step up when those opportunities arise we have to ensure that information about the economy is widely distributed that not everybody wants to trade at the same time, if everyone thinks they can trade at the same time without having an impact then they may very well do so. And if they did so that would be a problem, how do we get people to not think foolishly . That could be the hardest problem weve ever encountered, right . One way we do that, we inform them about liquidity conditions, we ensure that they understand what costs are likely to be, and we also ensure that they have full information about the economy and about events that potentially might scare them. A couple things i want to mejs. There are a few things that havent been mentioned. We think about the changes in the market. The credit default swap market has grown tremendously in the last 15, 20 years. And to some extent its become a substitute for the discovery of the value of default risk. Of credits of the types that we see in bond markets. A substitute for the normal price discovery we see in the Corporate Bond markets. A lot of that liquidity we fear has gone away from the Corporate Bond market and has ended up in the credit default market. Part of the reason is that people, especially not for Profit Institutions that want to own Interest Rate risk. They dont want to if theyre only interested in pure risk, they will buy treasuries, the problem is, they have to pay a lot because theres a tax advantage to treasuries. They offset it with credit default swap and it never goes away. If it never goes away, it doesnt matter, does it . Well be talking about aging populations, thats why peoples opinions are so important surely theres going to be a shift in dealing in banks to other structures, possibly quite sensible. Because we want to protect the public from exemployeeation of deposit insurance streas. And then finally, the fact that Interest Rates are so low is very important. In part, because if youre paying 1. 25 in trade and bonds are only paying 4 , you end up losing almost 4 months of interest to do a round trip trade in the bond. Who wants to buy a bond when theres four months interest lost just by stepping in and anticipating that some day youre going to have to go out. And as a consequence bonds end up being discounted and corporations cant offer them as the prices that they should. Thank you very much. You mentioned that your recent roundtable you had, it was not necessarily a consensus on the definition of market liquidity. We heard a few folks talk about that issue, what was the consensus that you heard at your roundtable of what is the definition of market lick witty . I wish i could say there was a consensus, i would like to address professor harris comment about the religious experience. One of my comments was that liquidity is not a god given right. It comes at a price one of the things that was great about my committee, we had academics, end users, traders, pretty much every stakeholder at the table, and it was an opportunity for them to talk to each other about liquidity and what that meant. I think the one consensus was that we all need to be working together, thinking about this a little bit more, in a much more serious way. The market clearly has changed. The players are different, the structure is different, we have to be even more mindful to make sure their incentives, to make sure we have more liquidity providers, as opposed to fewer ones. And to make sure that we understand that some of the evolution that was mentioned earlier today means that we may need new tools in place as well. Mr. Gallagher, have you all been talking about that at the s. E. C. . No. No, unfortunately we havent. Ever since larry left at least, in 2004, its obviously a critical regulatory construct beyond being a concept of Market Forces in play right now, liquidity is built in holding rools. Liquidity is something we look at at the broker dealer level, even though we dont have liquidity prescriptions for broker dealers. We have not sought as an agency to seek common definition with folks. I too, like you have heard sandys definition, you hear a bunch. At core theyre very similar, it was a little harder when you tried to define High Frequency trading, that one will really get you. Hopefully liquidity we can get our heads around but it doesnt mean its any less of an issue. For the commission as i pointed out my intro ductry remarks where weve seen as has been pointed out by some of the panelists. Year after year after year, were at 11 trillion plus, if you include asset backed securities, with a Market Structure thats circa 1950, are we okay with that . Its okay when the markets are running. In the panics when theres need for emergency liquidity provision, its not coming out of the s. E. C. s 1. 6 billion budget. No checkbook, no Balance Sheet, im looking at you, dr. Lang, were all going to be looking at you, if theres a dislocation and thats the real problem, thats when bad policy gets made and you have heard me time and again implore the industry to get together, by that i mean the market makers, the buy side, the sell side, the issuer communities. Im glad to see ge here get together and come up with some common private Market Solutions and point out to us the regulatory fixes we need to employ. One of the things you need is proactive regulatory thinking, to stem off something before it happens. Because god forbid in a major dislocated event, they have to provide and we are going to have title seven for cop rate debt. Thats something no one should want. It is a pressing matter even though youve heard me say this until im blue in the face. Weve spent significantly more time addressing this than we have looking at this issue of liquidity. If it wasnt mandated by a 5yearold, were not paying attention to it, and thats a real problem. You know, mr. Harris, dr. Harris brought up the fact that, you know, what happens in the marketplace, when the plays over, and everyones looking for a cab, weve seen a lot of demand for the fixed income product and a lot of it has been produced is the definition then of a functioning liquid market when its just the daily trading or is it when a market has the capacity to respond to anomalies or to in the marketplace. And if thats the case, then what is the right amount of that . I mean, should it be able to respond to a really sudden movement where people may have to wait a few days to move that position, or should they be able to move that position on that day. So as everybody here present recognized, liquidity is a multidimensional concept, it has lots of different characteristics, youre asking now, the day to day liquidity as opposed to deeper liquidity. The bottom line remains that liquidity is the ability to trade when you want to trade, someone has to supply that ability. And so the people who supply liquidity on a day to day basis may be different than the people who supply liquiddy on a deeper basis. And it may be that the Federal Reserve supplies it, what we dont want to see. What we need are mechanisms that allow us to seamlessly transition between the day to day demands for liquidity, and extreme demands for liquidity about the people who are willing to respond on a day to day basis they may get blown by when there are huge demands for liquidity. But those people who would normally not respond can easily step in, when there are big opportunities. For that, we have to think carefully about the structure markets, how we can allow large people to participate easily. And make sure that theyre not inhibited by regulatory problems or structural problems in the design of the markets. Is there anyway to measure what the depth of a market is in that environment . Again i think theres a couple ways to think about market depth. I think that is one of the most critical measures, right . The way we think about it is, what is the abundance of available transactions that could occur in that moment of time. And just to give folks a frame of reference. You know, precrisis, the u. S. Treasury market, for example, back to that definition, you are typically able to trade a block of 500 million without having a Material Impact to the price. The long term average is about 190 million, year to date in 2015, that number is now at 120 million. The real question is, what are the expectations that the marketplace has of liquidity in the u. S. Treasury market. Thats really what the fundamental issue is here, when we think about treasuries, do we expect to move the market at 120 million either side transaction . Probably not, thats why many are having conversations around this, because, you know, i will tell you, it makes the discussion even more complicated than it has been so far, is that in fact liquidity is in the eye of the beholder, right . With regard to certain Asset Classes and certain investors who are likely to buy long term holders, they dont expect deep market depth, they manage their positions accordingly, and in fact they value earning the liquidity premium that they are paid by the marketplace by holding less liquid positions. On the other hand, back to our u. S. Treasury market, if you are a holder of the u. S. Treasury, you may very well be holding it for Cash Management purposes as a high quality liquid asset, if under market stress or just managing cashflows, youre looking to sell it, youre not going to have an expectation to move price. I think measuring market death is important. Theres no single metric, there needs to be a fundamental understanding of what the variety of metrics look like. They are fine, right . Especially in the u. S. Treasury market. Theyre as tight as they were precrisis. Theyre probably a little narrower than they have been. Offers widen when you put too much pressure on the trading you want to do. And thats one of the items we saw on october 15th, a bit surprising. To this list of characteristics, we may add that liquidity varies according to whether you want to trade quickly or whether youre willing to be patient. We have people who are more patient theyre usually able to find liquidity, theres a time dimension as well. Just to interject on that a little bit. I agree to some extent because liquidity is really about the durability and that expectation of it being available. So clearly you manage liquidity youre going to get from your asset base based on market value and market depth, roit . If you have more time, you dont have to see pricing volatility. If you have less time, youre probably going to see some level of pricing volatility. Depending on what youre doing with those assets, you should have a very full understanding of what your expectation is going to be and if your market place is going to be there. Durability matters. Versus just transacting that could occur. Let me illustrate this point as i fully agree with it, the stock market crash of 87 was caused because too many people expected that their portfolio Insurance Strategies would work, in particular, they didnt recognize that if everybody ran for the exits at the same time, there would be insufficient liquidity to meet their needs. And yet the crash ultimately stopped because when prices were reduced enough, people stepped in and they made a lot of money. And we havent seen crashes like that since. In part because people havent had the foolish expectations. And also in part, because there are people waiting in the wings who say, if i see Something Like this again, im going to jump. How is liquidity important to black rock . First of all, i would echo the comments by many of my fellow panelists regarding, there are many different definitions of liquidity, and i think its constructive for the purpose of this discussion, we can largely unite on the definition that liquidity is the ability to trade at a certain size without materially impacting price. Liquidity is important to us as an asset manager because we have we manage investments for many different types of clients. Some of them, for example, a public pension fund, liquidity is not particularly important, those are looking to buy fixed income assets to match long liabilities and they will generally mature the bonds they hold. In other cases we may be managing money that our clients are holding as essentially short term cash Asset Managements, and they maze need their money for other corporate purposes. Liquidity, the importance varies with the client type. End investor type, the importance of liquidity very much varies with the asset class in question. As mentioned liquidity is incredibly important in the treasury market. Given the profile of holders and their transactions. Liquidity is less important in say long term infrastructure debt funding. Mlg are Insurance Companies and investment firms. So the question then, i think we agree primary on a definition of liquidity, and so one of the purposes of this conference was to talk about the question that everybodys asking. So is there a liquidity problem in the fixed income space today. Before we move to folks who would know that, because they do it for a living, you know, just to touch on one point of that definition, that it becomes apparent as we talk this all out together. The import of the definition of liquidity, based on the end investor or the Business Model for a dealer, a bank or a broker, holding positions on their own book for charges associated with that, whether they be capital liquidity charges, the definition is different than i think in an agency structure, and i was pleased to hear dr. Langen say that Asset Management actually provides stability to the system, which i think is hugely important point that can be lost especially in the fsoc debates on systemic importance. But for them the definition of liquidity, if its one i hear economists use, the price at which you can execute a transaction, youre able to do it, its just at what price. In the agency construct, that is a more relevant definition. Youre going to get the deal done, youre doing if on behalf of somebody else, theyre going to get more or less back based on the price. In the context of regulated entities. And capital leverage, the charges. Its wholly separate, avoiding the concentrations, the type of definition that has driven the inventories down, which i guess is a good segue to your next question that you pose to me, is there less liquidity in the markets, as a policy maker, not a trader, nothing somebody on the street, the data that weve seen is what caused me three years ago to give my first speech. Issuance is up, inventorys down, its just basic math. As bad as i was at math, i was able to get that one with some assistance from my council, it wreaks says to you, you have to address it, you have to look at it, it doesnt mean theres a lack of liquidity, and, of course, its asset class by asset class, it means its something we need to Pay Attention to. And so i guess, maybe dan would be in the best position from the trading desk perspective to answer that question certainly on the muni side. From my perspective, im going to assume theres a lack of liquidity until proven otherwise, i have yet to see anything to dispel that notion. I think when liquidity, when it comes to actual securities, by asset class theres going to be a difference in liquidity, in the muni arena, its because of qsep. Youre not going to have tremendous liquidity in that 50,000. Price discovery could be difficult. Because an arated water sewer rev in california may trade differently than an arated water sewer rev in oklahoma. We dont trade treasuries, we use them for hedges. Not that well lately by the way. The other areas where we see liquidity issues happens to be in the mortgage arena. You Start Talking about abs, like a sub prime home ek, youre working with a customer to show them sub prime home ek, you take down x number of bonds, you think its attractive. Youve been watching what is going on with the deal, structure, and you think its Getting Better over time. You show that to an institution to make an acquisition, those folks may look at that piece of paper for a short turn around would be a week, sometimes its two and three weeks before they get their work done and decide to come back. One of the concerns we have from a regional standpoint is, how long can we own that piece of paper in our inventory until we are told its a piece of paper and you have to get out. If im going to do my work on it, and a lot of times, its out for the bid. So my work has to be done relatively quickly because its going to trade that day or the next day. We do our work, we take it down. We start offering the bond out to institutions who are going to take two, three, four weeks to look at it. If i have a regulator who says you cant own it for two, three, four weeks all of a sudden, now, i cant transact in that asset class any more. That was one of the things i mentioned earlier about several dealers stepping out of the nonagency abs arena. So, you know, curious is one thing. Liquidity from the security is one thing, and the amount of time you need to hold it, and the new pressing regulations coming down saying you cant hold it for that period of time, makes you step away from the product. I think we should also think about some of the micro effects. Low Interest Rate environment. Which has an allowed to issue Corporate Bonds. The ten largest u. S. And european issuers have 18,000 bonds. Thats a lot of little bonds out there to trade. Theyre very much a counter market. By definition means its going to be a less liquid market. Were about to leave a period of low volatility. Those two pressures are likely to go up, and greater volatility, thats whats speering the new fear in the market, in terms of, what will liquidity be when Interest Rates go up. If i could add to that. I think sort of saying the same thing, the panel is in agreement generally, all of us are expressing it in different ways. It seems to me that the key issue is whether investors are sort of anticipating what the liquidity in their transactions are, thats more important than whether current market depth is high or low or bid spreads are high or low over time, we had large depth in treasuries before the crisis. And much larger depth in other Asset Classes before the crisis. Which didnt hold up during the crisis. So i think precrisis liquidity was not a predictor of what would hold up. Currently if measures are somewhat less, im not sure that its going to predict how it would react under a stress event. And so was the key one of the key issues is what how are investors anticipating this . Is this part of their Investment Strategy . And do prices reflect it, and do practice Risk Management practices reflect that . I think that there are two issues we have to separate as we address the questions you offered. Is there a liquidity crisis . The first is are we in the midst of a transition from one type of market to over. If over night, we say that ever bond dealer who works in a bank can no longer deal bonds, the next day it will be a little harder to buy bounds. No question about it, and sell them as well. But what will happen afterwards, the banks will sell their operations to hedge funds to other companies, to the employees themselves and theyll get reorganized to find the capital and make money, because there are opportunities to make money when people demand liquidity, by the way, theres no such thing anywhere of free liquidity. Liquidity always has some price, sometimes its low and wed like it to be low, its always, always priced. The first issue, is there a question of transition . And if theres a question of transition, how do we get through the transition quickly . Maybe we dont want to have banks dealing bonds. The second question is the Systemic Risk thats in front of us. I think its worthwhile if we spend a few moments talking about the scenario that people are afraid of. Scenario is this. The public has now purchased a massive amount of fixed income. At fairly low rates, and the prices are fairly high, theyll be happy if they stay there, that was their expectation. But if it looks like rates will rise and, therefore, bonds will drop, or there might be inflation in the future. Then we all know that these Corporate Bonds are going to drop in value, those people who know better than others and earlier than others are going to race for the exit. Because they want to get out quickly. The question is, will they be able to get out. And how many will they be able to get out. And more importantly, the question, they will push prices down as they should, because those conditions suggest that bond prices should be lower. Will they push them down beyond where they should be . Will they overreact . Of course, if they over react, there will be plenty of opportunity for those people to step in, but they may not step in quick enough. And these are our fears that we face, as we address those fears, lets also recognize that when the bond prices drop, their yields rise. Everybody who was interested in fixed income, because theyre concerned about their retirements, looks at it and says, i wasnt so interested in buying it when my perception of bonds, they were return free risk, just the opposite of what were looking for, right. These high prices are called return free risk. Now all of a sudden, bonds are actually giving me a return that is respectful, maybe i will step in at this point. The question is, how quickly will they go in. Is there a potential for volatility . Absolutely. Wherever there are large correlated behaviors, that are significant fractions of the economy, theres potential for Systemic Risk. And there will be changes in the future, the question is, can we create systems that are robust enough that when they happen, people respond quickly that we dont get an over reaction that we hurt us all. Its my opinion, and i think others have expressed this, the cumulative effects of the series of regulations that have made it essentially more difficult and expensive for certain dealers to act as market makers. These rules, including others, supplemental leverage ratio under the rules. Changes to the cap a tall rules around basal. Since the crisis, to what extent have banks imposed stricter internal limits on their business units. Not from a regulatory standpoint, but in reaction to a regular tear environment and the market changes. Have banks changed their risk profiles . Lets start with some of the changes banks have imposed on themselves. Clearly, as everyone here did, so did our franchise live through the 2008 financial crisis. And the pricing activity and the changing liquidity dynamics actually informed our perspectives and views on price activity. As a result, our Risk Appetite for certain types of trading activities and certain types of risks changed. For example, even if you peeled back all regulation, chances are, there would be less liquidity being provided into the marketplace, because learning has occurred in some aspects. Thats important. That said, regulation and much of it, i would say, the largest portion of it coming out of basal on behalf of the g20, which focuses on liquidity charges, capital charges and things of that nature, firstly, its absolutely important that minimum standards were created to create a level of resiliency and reliability into the marketplace, so thats really a good thing. But as you mentioned chairman, one, more work probably needs to be done on what is the cumulative impact of all of those regulations added up. I would also posit, that in many cases each rule is almost written so it wouldnt comply with the rule before it. So, for example, when we think about lcr, which is an extreme stress test that assumes a run on liquidity for your banking institution. It assures youre holding the right amount of liquid assets and cash to meet those outflows right . For example, precrisis, if you were engaged in short term wholesale financing, that might have been an open position. If you are compliant with lcr, you are not using short term wholesale funding for your inventory management. Its not creating a Liquidity Risk if you will. That said, the fact that youve raised that cash, youre carrying in liquidity and to give you some perspective, jpmorgan is holding about 600 billion at the end of the first quarter, last reported results. Thats an enormous amount. Balance sheets are the largest Banking Institutions are about holding 25 in liquid assets. In addition to holding that in liquid assets, the supplementary leverage ratio which was created in basal, and implemented here in the u. S. , because its trying to create a consistency around concerns related to risk weighted assets, its risk agnostic in charge of the 6 capital charge on all assets, including cash, including treasury and it weighs extremely heavy. When you get to u. S. Gsib, for example, it assumes you may not be compliant with lcr, so once again, taxes, any activity you might be doing to accommodate client flow in the retail market. Right . So as a result if we step back, market liquidity in the u. S. Treasury market. We clearly are holding more treasury securities as high quality liquid assets. We are not putting those into the marketplace, because we need to hold them unincumbered on the Balance Sheet. We also are not putting out vast amounts that were holding in excess, why . If we put them out, because were already compliant with lcr, we would actually be adding to our cash, which would draw an incremental 6 capital charge. And if we transacted in that way under the proposal, it would be charged an incremental gsib surcharge. So i think its not just about cumulative impact. Its about how the rules work together. And if youre compliant with those that are addressing the Systemic Risks, there might be room to sharpen our pencils and allow more liquidity to flow back into the system, because i think theres more that could be in fact accommodated in that context. Thank you. In view of the changes in the profile of people that have in the past made markets in those securities, those who have changed, as an issuer and a major player in the marketplace, have you seen the risk profile that some of those players are willing to take . In other words, maybe people have taken more of your issuance in the past, maybe having a diminished appetite in some ways. Well, i think the answer to that is after what happened in 2007, 2008 and you would probably know this better than me, i think every asset manager did look at the credit allocations they would give to every single name and also a cross product. And really make an assessment of whether those were at appropriate levels or not. And certainly as first of all, what ge capital tends to issue is the security. It is typically bullet securities, carrying a fixed coupon or floating rate coupon. We do issue more in the retail market, securities that have calls in them. Those are in some sizes what theyre interested is earning that coupon rate, and theyre not really looking to trade or anything like that. But even having said that, i think that we do see more smaller ticket sizes when i look at the benchmark securities that we put out there. And those are dollar globals, which we do once a quarter in terms of, you know, thats the benchmark issuance for that period. The ticket sizes are smaller, i think its a function of single name exposure, i think its a function of a lot of the other considerations that every asset manager is dealing with on their side. Now, we have also adjusted in the sense that we are actively shrinking our Balance Sheet, so that where as before on an annual basis we were putting out internationally on a Global Internationally on a total of debt, we went down to 25 billion to 25 billion and have even a northeast need to, you know, a strategy which we announced on the 10th of april that were not going to be putting any debt in the market, longterm debt, that is, for five years as we bring down the size of the Balance Sheet. Now, thats an extreme reaction. I think every intention to adjust the size of whats able to put out the frequent issuers. I think whats an interesting phenomenon the issue is you dont tend to see as frequently this is a historical chance to put off 30year funding at absolutely levels that we havent seen now 1960s. As well as the m a driven issuance which of course has a very different impetus to it than the ones, people like ge capital who are in there on a regular basis. The ge experience is probably worth talking about just a bit because its a tremendous lesson weve learned from ge about liquidity. In the run up to the financial crisis. Ge, as you may recall financed a substantial number of its acquisition using paper for many years and they did this because the commercial paper was carried low Interest Rate, so the cost of funding was very low. They had associated with it that they had to refinance every year or so. Within that, ge had an enormous liquidity problem and would have failed if it hadnt been for the government stepping in. So now, its interesting to think about how we should think about this problem. Ge, perhaps knew that it was so large that they could get away. Perhaps they were just ignorant and they went and did this. But had they funded their operations longer term before, they would have paid perhaps more interest. Their ability to fund shortterm and get away with it gave them quite an advantage in the market visavis their competitors. And so if there is no penalty for this type of behavior, then well see a lot of people doing it leading to Systemic Risks. So i think it was right what we did in resolving these problems in the financial crisis. But as we now think about what types of instruments issuers not just ge but anybody else should be issuing, they have to do it in a way thats responsible so that they dont run into their own liquidity crisis which is associated with the refunding. The only way to keep them responsible, though, ultimately is for there to be a serious penalty when they make a mistake. Now the problem is, are we willing, as a society, to bear those penalties if it has an ultimate impact on employment. If we are willing to do that, then we dont regulate them. But if were too concerned about the employment issue, then we have to regulate them otherwise were going to end up holding the bill. We did have sufficient blinds to cover the ct program and, you know, one of the things which maybe not everybody is familiar with is that back then, in u. S. Dollars, euro and sterling we were our we placed our own paper. We actually did not use dealers and we continued not to use dealers in the dollar market. What was very interesting was that we were rolling the paper, but other people who were having redemptions on them actually couldnt sell asset backed commercial paper issued by frankly other vehicles and all of that. And they were actually coming to us asking to sell us back our commercial paper and we always did buy back. You know that was the standard policy so that they could create liquidity because, quite frankly, the Dealer Community wasnt able to accommodate the flood of requests. And that, i think ultimately created the difficulty for us because while we could handle our own program, we certainly werent in a pog to be providing liquidity for, you know, the greater system. That was just not something that we could do. You know were we maybe a little bit too much in cp or not we could debate that. That is certainly an open question. But i think at that particular time, there was a nuance to it and we did learn from that in the sense that we ultimately reduced the size of the cp program to about 25 billion and then were going to take it down to five by yearend. And the other issue is that ever since 08, weve been running a liability portfolio where the average life is around seven years on a blended basis versus an asset portfolio where the average life is, say, three to four years, so much longer liability. But it is at a cost right . And we also have a liquidity buffer and Everything Else like that. And the decision made in april to shrink down the size of the Balance Sheet and ultimately just focus on, you know, three core businesses rather than many of the others is based on an assessment of ultimately can you meet the hurdle rates that you would like . And the answer was probably no, other than he knows business. So where were pulling out is middle market lending where, you know, weve been there for many, many years. Its a, you know, business decision. Theres no valuable judgment of is it right or wrong, but it is a logical next step implication of many of the policies that came before. Larry summers recently said that, you know, we might not have been such a good idea to go out there and shrink all the Financial Institutions a little bit because when you shrink all of them a little bit then, you know, who is going to make up the difference . I guess my question to you is with the fact that weve seen in the banking space a reduction in the dealer space a reduction in capacity how does that impact, you know, your thoughts on liquidity, both on the buy and the sell side . Absolutely. So when we think about the cumulative impact both the regulation but also of the learnings from Market Participants that sandy alluded to earlier and the Business Model thats resulted from that we look at the the new status quo where there are less dealer inventories and less available liquidity, less market depth as the new environment in which we need to collectively adapt. For us at blackrock what thats meant is looking deeply at the Market Structure and fixed income. And one of our observations is that the infrastructure of the market overthecounter market based on firms taking Principal Risk and keeping securities and inventory and finding the other side at a later time feels what dated. Freshly in the context of the rapid growth of the fixed income market. We talked about the issuance over the past several years. So what weve then done is look at many other Securities Markets and ultimately we believe that better use of emerging technologies such as electronic trading, such as broadening the types of trading protocols that are used in fixed income allowing all market liquidity where buyers and sellers can create more points of potential transactions rather than the traditional client to broker dealer single attraction collectively, we believe that all of those depths can incrementally enhance liquidity. I would echo earlier what was said each of those are incremental. One of these single steps is very easy to be a little bit dismissive of it and say, that wont help that much. Market participants recognize that. There is a great amount of realtime development in the electronic trading space, both being undertaken by new emerging firms as well as the large income bunt Global Investment banks investing heavily in technologies and thinking of the next stage of evolution of their businesses. Chairman, can i jump in on that before we lose the train of thought . I think a critical point we need to debate or at least get out on the record is what i view as a recent push by some policymakers in washington certainly within some constituent members of the fsoc if not the fsoc itself is to attempt to vilify in this context electronic trading specifically as the cause of the lack of liquidity, which to me is turning the world on its head. I listened to dr. Harris and im intryinged by his notions when ive been following for while, maybe a thousand chutes will grow from the chaos of all these rules that have decreased liquidity. Maybe it will be a hedge fund or maybe it will be a broker dealer that trades fixed income. But employing new technology, new Business Models, electronic trading is happening in the aftermath of all of these other changes yet being pointed at, blamed for this lack of liquidity. And we cant let this narrative go unchallenged. Youve seen it in the fsoc annual report. There was a drive by of it in the multi Agency Report that came out last october. And ive been around this town long enough there always has to be a boogeyman somewhere when youre trying to misdirect. I think this is an area that we need to encourage and not run away from and not vilify, not accept the standard pushback that were getting. And the second point, too which is this notion of the aggregate impact of regulation. And your question, which i think is a good one, how much of it is standard post crisis and how much of it is regulation. I was listening closely to sandy. I think weve reached a point where weve seen historically 2008 to maybe into 11 where there was a lot of prudent Risk Management undertaken in response to a crisis. I dont think you can parse them out any longer. You cant say its basul, its dodd frank, you go down the road and then its prudent Risk Management because what risk is there to manage when youve been told to derisk everything . So there is this burning need, i think, and i know dr. Langston hash doing some work, i know the new york fed has been looking at this. But it goes back to your introductory remarks which i think you politely didnt call out jamie dimon for asking that question of ben bernanke and he was the one that did it. It inspired me to look at this exchange where he said no one is looking at the aggregate impact. Ive identified after committing my own staff resources, 300 or so regulations that apply to a hypothetical u. S. Financial Services Holding Company Since dodd frank. Not only related to dodd frank, some international measures too, but since. And if you look at this chart, it just reeks you know, impossibility. How do you do it . If youre not too big to fail how do you pay for the Compliance Costs . How do you provide liquidity in a situation where you have all of these rules and if youre lucky, the cost benefit has been analyzed rule by rule. Its something we policymakers have to look into. Can i quickly Say Something about the hft question. The hft has a really bad name and theyre not the boogeyman in the room if you will. In fact i think the report that was just released today will show that the hfts provided liquidity during the window when there was increased volatility. But i do think the report does say we need to look at the issue a lot more closely in terms of that trading strategy and whether it creates unintended consequences. I just want to put that out there. So i appreciate going back to, you know, not just regulations being a factor for changes in market liquidity. There really are a number of factors. They deal in Risk Management and coming back to electronic trading. I dont think and im not going to speak for fsoc. I can only speak for myself through the fed on electronic trading. Its not viewed as a not meant to be vilified i dont think so. I think it is an unknown. Its very new. And theres not as much information about it to Market Participants or to regulators about it as much as perhaps, and i think the inner agency study, staff study on october 15th was actually a nice step forward. On this issue. It doesnt try to identify a cause, a single i mean it certainly was looking for whether there is an error or something. It does not find an error. And so it took a step of, lets provide as much information to the public about what happened during that window. And theres an enormous amount of information in that report that i think people will now be able to look and evaluate and each individual participant may be a little part of that whole piece and by seeing it altogether they may learn something more about it. But i think it was quite careful to not vilify. But a couple of interesting things is it is a very big part of the treasury market. And an even bigger part of the treasury futures market. Are all investors and Market Participants and banks and ccps, are they managing this risk add a adequately. So it may be adding liquidity. Theyre probably all unique firms just like banks are. But when markets are transactioning at milliseconds within its important that we look at the questions around that. So i think that is one of the key take aways from the study. Recently, Federal Reserve governor Jerome Powell said theres no doubt that liquidity has been reduced in certainly markets, but he also indicated he was not too worried that a decreased market liquidity would cause big problems when the fed starts lifting Interest Rates saying im not particularly concerned that a return to higher volatility will leave much of a market on the u. S. Economy. Whats your response to that . A return to higher rate . I dont know if thats going to happen anytime soon. Weve heard them talking about it for a while. But if there is an exit by, you know, the music fund group, the insurance group, the foreign investors, the three investor groups that have issued the majority of the corporate debt that has been issued over the last decade, if they all decide to exit at one time, which we all flow were going to see a dramatic drop in prices. Id rather go back and talk about a minute about electronic trading, if i might. Talking about their global issues and how theyve seen the size of the orders for global issues go down. I saw a presentation by will rose of the rhodes group about a year and a half, two years ago, and it was specific to specific trading. He likened it back to how we saw the number of transactions and equities go up and the size of the transaction go down. And he put a graph up of what was going on with global issues in the fixed income world. And we saw the same thing happening. The volume of transactions was going up dramatically and the size of the transactions was goc down. And when you talk about electronic trading in the treasury market, you know i suppose the High Frequency traders can take place. We dont trade in the treasury market. When you get off into the corporate world, theres a number of global issues that could be traded in that fashion but the majority of the those in the fixed income world are so limited in scope to their size that you cant have a high volume of transactions. If youre on a particular platform and theres a million bonds being offered at a particular price and you lift a million bonds, thats what you get. You cant go out and do 100 million worth of that bond because theres only a million bonds there. So i think the adoption of electronic trading over the last number of years has been tremendous. I think it lends itself well to the treasury market and global issues. But when you start to get off the majority of the fixed income market, it works but the fear of high frequently trading on that type of security which is the majority of the market just doesnt exist. Just to add, weve been spending a lot of time talking about liquidity as we perceive it today. More importantly, we need to look at what our expectations are for market depth and the demand for liquidity in the future. And i think we look towards the horizon its probably important to know and not pick on regulations and i agree completely there are lots of other factors. In our control is about 40 of the rule writing is still yet to happen. It will further decrease the level of market liquidity. And i would ask that is it the opportunity right now to take a pause from the base that we are at higher capital, higher liquidity, reinforcing testing, Higher Standards broadly to determine dmrts condition text of what i mentioned earlier. The balance of safety and soundless in the balancing of functioning markets. Our goal collectively should be the resiliency of the u. S. Financial economy and its comprised of those two items. So i think here might be the opportunities, again, not about rolling back what has occurred not about being concerned because i agree with governor powell to the extent that we have a marketplace and i believe markets are resilient. They will eevolve, theres no doubt. But we see further market decline and we are at the precipice of the potential for changing Monetary Policy and the unwind of quantitative easing which will very likely present an skresed demand for that same liquidity. That is really great. That kind of queues up the last segment of our time together. The last segment was designed as we talked to the panelist, about the road forward for ensuring that we do have market liquidity. And if there are if we say some space is shrinking, then where is the space that we can increase and embracing technology and embracing some of these ideas because one of the things particularly from my perspective is the last thing you want to do is let congress stick its foot in. Who needs to fix liquidity is the marketplace and we need a robust marketplace and we need a marketplace that has some space to be innovative. And if we tend to try to fix the activities of the marketplace, so what are some of the ideas that people have out there in let me go to you. Sure. When we look at the market and think about ways to improve the liquidity situation from the status quo i touched on some of them. One of our set of ideas falls under the broad category of modernizing the Market Structure. What we mean by that more specifically is in fixed income the evolution in certain products were appropriate. The more fixed income products, the treasuries and large investment Corporate Bond we believe those could very suitably be traded on platforms and exchanges over time rather than the overthecounter contegs. What that means is the finite Balance Sheet capacity that there is would then be freed up for less liquid products that are never going to be suitable for exchange trading. Secondly we believe that a construct called open trading or ultra all trading where rather than looking for bilateral connections between firms and broker dealers, you have a broader pool where those connections can be made and essentially increase the network. Well uncover some latent liquidity, some latent buying and selling demand. In addition, we think those previous two steps are logistically and practically only scalable in an electronic trading context. So already weve seen in the u. S. Credit markets over the past decade go from zero percent to about 15 to 20 market share right now. And we do think there is ram for significant growth. To state, electronic trading has been an efficiency and productivity tool. It hasnt change the infrastructure of the market. We do think that electronic trading and the adoption of new hybrid trading protocols can actually help to uncover liquidity thats not currently being tapped. And all of these have in common that collectively they would reduce the capital intensity of the Market Making business. One of the constraints to new strands in the market is that its a capital intensive business to buy and hold Balance Sheets waiting for the other side of the trade. By making it more information intensive rather than capital intensive, we do think that will allow new providers to emerge and just make it a more heterogeneous market. As a large user of liquidity and a Large Customer of broker dealers, its in our interest, obviously, to have a Broader Network of providers. So we think that helps posture that growth. Does that shift the risk then to the broker dealer . One of the comments made earlier is that in a way, one of the impacts of regulation has been to shift investment risk from the Leverage Bank ss whether thats an intended or unintended consequence, i think that could bear some of the more transaction risks. Moving from a principal to an Agency Market would de facto occur in changes over time. Exchanges collect, buy, orders and sellers and match them together. They will work and they already do work in treasuries and they work in many equities not all. But theyre not going to work in some of the bonds that these panelists have talked about where they really only trade by appointment. But that said, theres still room for electronic markets or electronic facility toes help the trading of those bonds. So in particular the development of an order displaced facility a facility that would allow people to say i have this bond, id like to say it and here is the price at which id like to sell this bond. We already sort of have systems like this, but the problem is people regularly trade through those prices. By trade through, i mean if the market is offered in one of these systems, said 101, people would be arranging a trade at 102. So the buyer would have preferred the 102 price. Thats not necessarily an evil thing. Its possible the broebler didnt even know about the 101 price. And finally, we have to make sure that people dont violate their Agency Obligations to their clients and trade through when they do know about these prices. So just to give you an interesting statistic, inter active brokers gave me a lot of data. They collect the bit bids and offers. Some of them are firm, some of them are just indications of the prices at which people have indicated theyre willing to trade at all sorts of different venues. And they combine it into a single series. And i ask the question given the report of all trades that took place in the id during the time i had this data, how much do we see trade throughs . And the trade through rate was 21 . There was a buyer or a seller who could have done better presumably if they could have accessed the prices. If they could have accessed the prices, maybe they wouldnt have been there but still, this