Gensler cites risks where banks and non-banks meet

Gary Gensler is midway through his tenure leading the Securities and Exchange Commission through a shakeup of financial markets and middlemen, and amid historic changes in the players and what’s being traded. The SEC chair has completed just over half of his agenda. Here’s what Gensler has in mind for the rest.

In a Feb. 14 interview, the former Goldman Sachs Group Inc. executive and three-time financial regulator commented on financial stability, private credit and why he’s wary of mixing banks and crypto. Some hefty and contentious rules, notably on corporate climate disclosures and reworking the trading structure of equities, are still pending. Gensler said he’s looking to lower the cut taken by intermediaries in dealings between investors and issuers to make markets more competitive and efficient.

Gensler spoke with a panel of Bloomberg editors and reporters in New York. The interview has been edited for length and clarity. 

Bloomberg: What’s your plan for completing the remaining half of your agenda? 

Gary Gensler: Three years ago, we laid out an agenda that included 55 or 60 proposals. We’ve finalized 35 of them, generally with some moderation from their proposed form.

On the equity markets, there were the four separate proposals from December 2022, and the direction of travel on those is forward. We’re working on each of those. And there was one about volume-based discounts in that market. So on those five, I feel very good about the staff work. 

There are some rules around investment advisers, broker-dealers and something called systems compliance and integrity. And even customer notification, if somebody gets into your brokerage account or gets your private information. That suite of rules, again, the direction of travel is forward and it looks good.

There’s also the climate rule, which is a disclosure rule. Obviously we’re working on important rules in investment management: the predictive data analytics rule, custody and liquidity.  

I’m not personally doing this against a clock. I have a deep belief, the staff is going to work on this and we, the five commissioners, mold it for sure — but it takes time from a proposed rule to adoption. You’ll see that the SEC runs somewhere between 12 to 24 months. We proposed the climate rule in March 2022. You might look at that and say it’s coming up on Gensler’s two-year thing. But it’s not against the clock. 

Bloomberg: So taking that into account, and how long these things take, how do you prioritize which rules you put in front of the others? With such a massive list, the critique might be that you’re trying to do too much. And in hindsight, would you do it all exactly the same or would you make it more compact? 

GG: Knowing everything we know, we would probably have laid out a similar agenda. Part of it is there’s five SEC commissioners, and it’s coming to a consensus as to priorities. So I think these are real needs, of driving efficiency and competition and resiliency in the market, and I feel pretty optimistic.

Does it mean that we adopt every rule that we propose? No, because sometimes we learn from commenters, and we moderate and we change or we re-propose something, so the clock does run out. But I’d rather finalize that which is ready, instead of finalizing against the clock. 

It’s less about the chair’s priorities. It’s really just about how the SEC’s economists, those policy lawyers, the general counsels, sort through things. If you’ve got a docket with 50 comments in it, it might go a little faster than when you’ve got one of these things that’s thicker or sometimes you have a docket where you get five separate letters from the Managed Funds Association. They just keep coming. 

Bloomberg: You say the timeline for finalizing rules has been consistent, but what has changed is the vociferousness of the industry against you. Have the legal challenges surprised you? 

GG: I think it’s part of our great democracy. People have rights, they can take their grievances to court. We’re also a law enforcement agency. We bring 700 to 800 legal matters a year. We probably have 200 to 300 different litigated matters at any given time.

I would say that the courts may be shifting, not just at the Supreme Court or various appellate courts. 

Bloomberg: The equity market structure rules aren’t as far along as the Treasury ones. Will you finalize each of the proposals individually? 

GG: I don’t think it needs to be done at the same time. They were addressing separate issues. One was the revision of this 2005 set of rules around the national market structure, and maybe going to a narrower bid-ask spread with certain stocks. I think that’s very different than, as an agency, having a best execution rule.

I got to the agency and I asked to see a copy of our best-execution rule and people said, “We don’t have one. It’s a Finra rule.” And I also learned it was just written guidance, a lot of it. It’s too important that it’s just left to a self-regulatory organization. 

This little smallish rule, 605 — that was first put in place 24 years ago. It just seemed like we should do that as well. It basically broadens out who reports on execution quality to include broker-dealers, rather than just the trading venues. 

Bloomberg: How concerned are you about the sheer growth in private credit? 

GG: We’ve greatly benefitted by credit intermediation happening in the bank and non-bank sector. 

If you look at the statistics for credit intermediation, meaning corporations and issuers borrowing money, the US is at about 70% to 80% in the non-bank sector, 20% to 30% in the bank sector, by dollar volumes. 

If you look at Europe, it’s almost the exact opposite. It depends by the country. Japan and China are closer to Europe than us, but a little different. So we have robust competition in credit markets. 

Bloomberg: Where are your concerns about risks to financial stability? 

GG: It’s where the banking sector and the non-banking sector come together. It’s in the prime brokerage, where banks are basically lending to the non-bank sector, particularly in this secured funding market called repos, and in the reverse repo market. Something like three-quarters of that market is done at zero or near-zero margin.

Now, what the banks would say is, that’s the competitive landscape. The biggest banks that are competing not just here in the US, but also the European and Japanese banks, providing that secured funding. 

What the macro and relative-value and strategic hedge funds might say is that the risk is exaggerated, because you’ve got to look at all our net positions — and we have other positions in our prime brokerage.  

Bloomberg: 2023 saw a lot of mixing of traditional financial entities and crypto-native firms. In 2024, we’re starting to see banks looking at asset tokenization, putting up trial balloons about wanting to custody crypto assets. Should crypto assets be available for financial institutions to engage in, whether in the form of tokenization, custody or otherwise? 

It’s pretty straightforward if they do it legally. But so much of the crypto space — I’ve been around finance for 45 years now — I’ve never quite seen something like this. It’s a whole field built on a predicate of sidestepping the law when they choose to, and then relying on the laws when it’s to their advantage. When they’re in bankruptcy court, they’re certainly right there in court, relying on the laws, suing each other sometimes. 

This is not a decentralized field, just like finance has been for thousands of years. It tends toward centralization. A lot of it is fundamentally built on a structure that we don’t allow anywhere else in finance, this co-mingling and conflicts. It’s just rife with conflicts and noncompliance. 

Bloomberg: Wall Street banks are saying we’re going to do tokenization — and being very careful not to say the word ‘crypto’ anywhere. They will nod in the direction of blockchain, they’re making an argument that is more akin to securitization. Is there a universe where those institutions will be allowed to have more crypto adjacencies, if there are things that need to be adjusted for that to be true?

GG: I can’t prejudge anything. It depends on the product. You can tokenize X, Y, Z stock. It’s still a security. 

How do you trade it? How do the offer and sale of that security comply with securities rules? If what’s being stored on the ledger is a security, then make sure you comply with the securities laws. And if it’s not a security and it’s a commodity, then they need to comply with the Commodity Futures Trading Commission’s rules.

But that’s not really what this field is built upon. You’ve got 15,000 to 20,000 tokens and we’re merit-neutral, but economics will tell you that most of these are going to fail.