The study conducted by Oliver Wyman is intended to provide regulators with insights into how key markets function as the Financial Stability Oversight Council (FSOC) begins implementation of Section 619.
“The Volcker Rule was meant to address the safety and soundness of banking entities, not interfere with the orderly functioning of capital markets for businesses, consumers and our economy,” said Tim Ryan, president and CEO of SIFMA. “As part of our ongoing efforts to provide regulators with the best information and data as they implement the Dodd-Frank Act, we’ve submitted this study for consideration in developing regulations that effectively implement the proprietary trading ban while not undermining the fundamental operations of key markets. In addition, restricting banking entities’ ability to provide necessary liquidity will harm companies and issuers and push transactions to firms not subject to the same regulatory protections and restrictions. ”
The study focused on the role market markers play in a sample of different markets, illustrating how liquidity and capital formation in such markets help support economic growth. The study focused on equities, US corporate bonds, interest rate derivatives, exchange traded funds (ETF) and commodities (particularly, natural gas).
Specifically, the study finds that:
- A key driver of the US edge in capital formation has been superior liquidity across the full range of financial products;
- Strong empirical evidence supports the relationship between liquidity, capital formation, and economic growth; and
- The level of liquidity and nature of risk varies widely among different markets and products. Market makers play a key role in capital formation by providing liquidity—the option to buy or sell at the market price—for a wide range of assets in nearly all market conditions. True market making generally requires a dealer to assume some level of principal risk on the underlying assets, whose value may rise for fall before the positions can be closed.
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