Dec. 16, 2022
Thank you, Secretary Yellen. I thank the staff across the agencies for their collaboration on this year’s Financial Stability Oversight Council (FSOC) annual report, which I am pleased to support.
This year’s report comes during uncertain times in the global economy and the financial markets: the ongoing war in Ukraine, continuing challenges related to the commodity markets, and central banks around the globe shifting from accommodating to tightening policy stances.
These challenges highlights the importance of the ongoing work—from the Council and each of our agencies—on financial stability. At the Securities and Exchange Commission, resiliency relates to all three parts of our mission on investors, issuers, and markets. As highlighted in this year’s annual report, the SEC—in collaboration with other agencies—has taken up a number of resiliency projects.
First, we have proposed rules with regard to money market funds and open-end funds. We have seen, particularly in times of stress, that these funds’ underlying structural liquidity mismatch can contribute to instability. The proposals intend to address these structural issues and enhance liquidity risk-management. As the report notes, there are similar funds—such as short-term investment funds and collective investment funds—that generally come under the rules of banking authorities, including the Office of the Comptroller of the Currency (OCC). That’s why I am pleased that we are in discussions with the OCC to consider similar reforms to mitigate possible regulatory arbitrage between these various funds.
Second, and another area discussed in the report, the private funds industry—with approximately $21 trillion in gross assets—is nearly the size of the approximately $23 trillion U.S. commercial banking sector. That why our work with the Commodity Futures Trading Commission (CFTC) to improve private funds’ transparency to the official sector, through updates to Form PF, is so important. As the report notes, hedge funds can create risks for financial stability through the use of leverage. Moreover, in the last few years, many hedge funds are receiving repo financing in the non-centrally cleared bilateral market, where haircuts or initial margin requirements are not necessarily applied.
Third is our work with the Department of the Treasury, the Federal Reserve System, and other agencies to enhance the efficiency and resiliency of the $24 trillion Treasury market. These projects include registering and regulating Treasury dealers and platforms, as well as facilitating greater clearing of treasuries in both cash and funding markets.
Fourth, we have a number of projects related to cybersecurity to enhance the financial sector’s resiliency to cyber-attacks. This pertains to exchanges, clearinghouses, and investment advisers, among others. Further, we also have a proposal to enhance issuers’ disclosures on cyber-related risks.
Finally, a few thoughts on crypto. Nothing about the crypto markets is incompatible with the securities laws. Yet risks from this speculative, volatile, and what I believe is a largely noncompliant market put investors at risk. This is why bringing intermediaries and issuers of crypto securities tokens into compliance is so important. While the risks from the crypto markets generally do not appear to date to have spread to the traditional financial sector, we must remain vigilant to guard against that possibility. As we work to bring these market participants into compliance, we also have to ensure that we not inadvertently undermine time-tested laws that protect investors and facilitate capital formation in our $100 trillion capital markets.
 The private fund valuation represents registered investment adviser (RIA) private fund gross asset value reported on Form ADV received through October2022. For the commercial banking sector: See Board of Governors of the Federal Reserve System, “Assets and Liabilities of Commercial Banks in the United States,” available at https://www.federalreserve.gov/releases/h8/current/default.htm. Total assets $22.7 trillion as of Nov. 30, 2022 (Table 2, Line 33).
 As a recent G30 report put it, “In principle, if all repos were centrally cleared, the minimum margin requirements established by FICC would apply marketwide, which would stop competitive pressures from driving haircuts down (sometimes to zero), which reportedly has been the case in recent years. ”See Group of 30 Working Group on Treasury Market Liquidity, “U.S. Treasury Markets: Steps Toward Increased Resilience” (2021),available at https://group30.org/publications/detail/4950. In addition, as a 2021 Federal Reserve Board report said, “Most of hedge fund repo is transacted bilaterally, with only 13.7% of the repo centrally cleared.” See Federal Reserve Board Division of Research & Statistics and Monetary Affairs, “Hedge Fund Treasury Trading and Funding Fragility: Evidence from the COVID-19 Crisis” (April 2021),available at https://www.federalreserve.gov/econres/feds/files/2021038pap.pdf.
 See Gary Gensler “Statement on the Further Definition of a Dealer-Trader” (March 28, 2022),available athttps://www.sec.gov/news/statement/gensler-statement-further-definition-dealer-trader-032822. See also Gary Gensler “Statement on Re-Proposed Amendments Regarding Exemption from National Securities Association Membership” (July 29, 2022), available at https://www.sec.gov/news/statement/gensler-proposed-amendments-exemptions-national-securities-association-072922 Seealso Gary Gensler, “Statement on Government Securities Alternative Trading Systems” (Jan. 26, 2022),available at https://www.sec.gov/news/statement/gensler-ats-20220126. See also Gary Gensler, “Statement on Proposed Rules Regarding Treasury Clearing” (Sept. 14, 2022),available athttps://www.sec.gov/news/statement/gensler-statement-treasury-clearing-0914222. See also Gary Gensler, “Statement on Proposal to Enhance Clearing Agency Governance” (Aug. 8, 2022),available at https://www.sec.gov/news/statement/gensler-statement-proposal-enhance-clearing-agency-governance-080822.