The SEC’s Division of Economic and Risk Analysis has fulfilled a request by Congress that it publish a report on both registered and unregistered securities offerings, including issuances of debt, equity, asset-backed securities, and U.S. Treasuries. The report was requested as part of the fiscal 2016 appropriations process in which Congress directed the staff to report on the impact of the Dodd-Frank Act with a particular focus on the Volcker Rule, and other financial regulations such as Basel III. DERA explained that a number of factors limited its ability to analyze whether specific reforms causes particular changes, but it was able to provide a review of capital raising through primary issuance and secondary market liquidity over time in a way that allows an assessment of whether the trends could be consistent with the effects of regulatory reforms.
Since the Dodd-Frank Act was signed into law, DERA reported that from 2010 through 2016 approximately $20.2 trillion was raised, $8.8 trillion of which was raised through registered offerings and $11.38 trillion of which was raised through unregistered offerings. DERA did not find that the total primary market security issuance was lower after the enactment of the Act, including during the implementation of the Volcker Rule and during the implementation of Basel III, and it may have increased around the implementation of the JOBS Act.
Increase in smaller offerings. While capital raised through initial public offerings increases and decreases over time, DERA reported that recent years have seen an increase in the number of small IPOs, including those classified as emerging growth companies. Offerings in the private markets between 2012 and 2016 increased substantially and exceeded the amounts raised through registered offerings by approximately 26 percent. Amounts raised in reliance on the general solicitation rules under Title II of the JOBS Act, which were implemented in September 2013, represented only 3 percent of the total amounts raised under Rule 506.
Following the amendments to Regulation A, there was a large increase in offering activity over the first 18 months, with 97 qualified offerings seeking to raise $1.8 billion. DERA noted by comparison that in a typical year between 2005 and 2016, there were about 14 qualified offerings seeking to raise $163.3 million. Some small pre-revenue growth firms are also beginning to use crowdfunding for their securities offerings.
Impact of reforms. DERA reported mixed evidence with respect to the impact of regulatory reforms on market liquidity. It found no empirical evidence that the liquidity in the U.S. Treasury markets had deteriorated following regulatory reforms. There is no support for a causal link between the Volcker Rule and U.S. Treasury market liquidity conditions, according to DERA, and changes in Treasury market liquidity are unlikely to be directly attributable to the Volcker Rule since cash Treasuries are exempt from the rule’s prohibitions on proprietary trading.
Corporate bond markets. Trading activity and average transaction costs in the corporate bond markets have generally improved or remained flat. More corporate bond issues traded after regulatory changes than in any prior sample period. Dealers in the corporate bond markets reduced their capital commitment since the peak in 2007, which DERA said is consistent with the Volcker Rule and other reforms potentially reducing the liquidity provision in corporate bonds. However, DERA said it is also consistent with alternative explanations and distinguishing among them from the data is not possible.
While capital commitments have fallen, DERA did not find a decrease in the number of dealers participating in the market. It found no notable changes in the number of dealers providing liquidity per corporate bond issue over time and found no notable changes in trade sizes related to regulatory reforms.
DERA reported mixed evidence with regard to dealer activities during times of stress and said it varied with the definition of stress. It found that trading of corporate bonds on alternative trading systems may partly account for the lower estimated average transaction costs for small trades and reductions in dealer capital commitments. DERA also noted that trading in single-name credit default swaps provides an alternative for investors to gain exposure to corporate bond credit risk.
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