The Treasury Department has released a new report detailing its recommendations to streamline and reform the U.S. regulatory system for the capital markets. The evaluation of current capital market regulations concluded that “there are significant reforms that can be undertaken to promote growth and vibrant financial markets while maintaining strong investor protections”

The report, issued on Oct. 6, was in response to Executive Order 13772. Issued by President Trump on Feb. 3, it calls on Treasury to identify laws and regulations that are inconsistent with its stated principles of financial regulation.

In the report, Treasury identifies numerous ways to reduce the burden on companies that are looking to go public or stay public, while maintaining strong investor protections.

Supporting capital markets

The report focuses on supporting U.S. capital markets by:

Promoting access to capital for all types of companies, including small and growing businesses, through reduction of regulatory burdens and improved market access.

Fostering robust secondary markets in equity and debt.

Appropriately tailoring regulations on securitized products to encourage lending and risk transfer.

Recalibrating derivatives regulation to promote market efficiency and effective risk mitigation.

Enabling proper risk management for Central Counterparties (CCPs) and other financial market utilities (FMUs) in recognition of the critical role they play in the financial system.

Promoting access to capital and investment opportunities

To improve access to capital, the report recommends:

Reducing the regulatory burden on companies both going and staying public to address the nearly 50 percent decline in the number of public companies in the last 20 years.

Recalibrating regulations that weigh heavily on small businesses and comparatively benefit the largest companies better positioned to absorb the costs.

Opening private markets for more investors, such as by revisiting the “accredited investor” definition, and considering ways to facilitate pooled investments in private or less-liquid offerings where appropriate.  

Supporting America’s entrepreneurs by promoting innovative tools for capital formation, while maintaining important investor protections.

Identifying the need for regulators to keep pace with market developments to support economic growth and the needs of consumers and businesses.

Adjusting the current “one-size-fits-all” equity market structure for smaller companies that are currently experiencing limited liquidity for their shares.

Reducing market fragmentation to facilitate effective liquidity provision for the least liquid companies.

Encouraging lending through promotion of quality securitization

To encourage quality securitization, the report recommends:

Rationalizing the capital that a banking organization is required to hold against a securitization exposure when compared to the capital required to be held against the underlying assets.

Adjusting bank liquidity standards to consider inclusion of senior securitizations with a track record of performance as high-quality liquid assets (HQLA).

Revising and expanding the underwriting criteria for certain assets that back securitizations to exempt the sponsors from risk retention requirements.  

Reducing burdensome non-material disclosure requirements while maintaining transparency into the underlying assets of a securitization.

Recalibrating derivatives regulation

To recalibrate existing derivatives regulation, the report recommends:  

Harmonizing SEC and CFTC rules through more appropriate capital and margin treatment for derivatives, allowing for innovation and flexibility in execution processes, and improving market infrastructure.

Improving cross-border regulatory cooperation between the CFTC and the SEC with non-U.S. jurisdictions to minimize market fragmentation, redundancies, undue complexity, and conflicts of law.

Promoting a level playing field for market participants while enabling healthy, fair, and robust derivatives markets.

Ensuring appropriate oversight of clearinghouses and other financial market utilities

To improve oversight of clearinghouses and FMUs, the report recommends:

Addressing systemic risk management issues left unresolved by post-crisis regulation.

Improving oversight of FMUs, including finalizing an appropriate regulatory framework for FMU recovery or resolution to avoid taxpayer-funded bailouts.

Modernizing and rationalizing regulatory structure and process.

To better manage regulatory overlap and improve regulatory process, the report recommends that the SEC and CFTC:

Make their rulemaking processes more transparent and incorporate more robust economic analysis, greater consideration of the effects on small entities, and public input.

Limit imposing substantive new requirements through guidance or no-action letters rather than through notice and comment rulemaking, while preserving the authority to provide exemptions to facilitate market innovation.

Conduct comprehensive reviews of the roles, responsibilities, and capabilities of self-regulatory organizations (SROs) under their respective jurisdictions and make recommendations for operational, structural, and governance improvements of the SRO framework.

On June 12, the Treasury Department released its first report and recommendations for executive actions and regulatory changes “that can be immediately undertaken to provide much-needed relief” for businesses affected by a regulatory build-up.

The report focused on several trends, including: capital, liquidity and leverage rules can be simplified to increase the flow of credit; the U.S. must ensure that banks are globally competitive; and improving market liquidity is critical for the U.S. economy.

Subsequent reports will be issued over the coming months and will focus on markets, liquidity, central clearing, financial products, asset management, insurance, and innovation, among other key areas.