SEC Delves Into High-Frequency Trading Restrictions

In a speech that comes just before the SEC's report on the "flash crash," the regulator's chairman provided an early indication of how her agency wants to construct a more scrutinized derivatives market.

(September 22, 2010) — Securities and Exchange Commission (SEC) Chairwoman Mary Schapiro has said her agency is considering a number of major changes to equity markets and will look into whether market participants who buy and sell thousands of shares in milliseconds could face restrictions on their trading strategies.

The investigation into high-frequency trading started last July, when a former Goldman Sachs computer programmer was arrested for allegedly stealing proprietary high-frequency computer code. Subsequently, during the “flash crash” on May 6, the Dow Jones Industrial Average dropped nearly 1,000 points before closing with a 348-point loss.

The top securities regulator said the new market for swaps trading would benefit from “competition, access, liquidity and transparency” already established in the cash equities market, according to Reuters. “As it takes shape over time, we will be working to embed into the security-based swap market the broad principles that have brought important benefits to the equities market,” Schapiro said at a Security Traders Association conference in Washington. She added that because high-frequency trading firms are subject to minimum obligations, the regulator will consider carefully whether these firms should be subject to an appropriate regulatory structure governing key aspects of their market behavior, including quoting and trading strategies, TheStreet.com reported.

In the wake of the financial reform legislation passed by Congress in July, the SEC is additionally considering expanding market circuit breakers that thwart trading, as well as curbs on algorithmic trading programs that execute electronic orders automatically. Finally, the SEC will review the role of market “fragmentation” and the impact of dark pools of liquidity that fall outside the traditional market structure.

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Both the SEC and the Commodity Futures Trading Commission (CFTC) are responsible for implementing new rules for the derivatives market that emerged from the Dodd-Frank Wall Street reform bill, passed this summer. A report on the causes of the flash crash is due by the end of September.

To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742

The consultancy group Mercer has revealed that accounting measures of the liabilities of defined benefit (DB) schemes in most developed economies have seen marked increases in liabilities due to declining corporate bond yields.

(September 22, 2010) — New research by Mercer has warned that defined benefit (DB) liabilities around the world are likely to have increased to record levels this year.

The consultancy said this trend is likely to continue, as falling corporate bond yields and volatile equity markets have contributed to a widening deficit among DB plans in most developing economies. In some markets, bond yields have fallen by more than a quarter. Since the end of June 2008, AA corporate bond yields in the US had fallen from 6.97% to just under 5% at the end of August 2010.

“A 50-basis-points fall in discount rates roughly results in a 10% increase in liabilities for a pension scheme,” said Frank Oldham, Mercer’s global head of pension risk consulting, in a release. “As a result, measures of pension scheme liabilities have increased faster than the value of the assets held across numerous markets. The result is even larger deficits on company balance sheets.”

Mercer’s research additionally indicated that regional differences will affect the liabilities recorded. In the UK, benefits are inflation-linked, resulting in slightly greater stability even though deficits stand at historically high levels. In Germany, accounting rules allow companies to average bond yields over seven years, so the impact can appear “more muted”. The story in Canada is more nuanced, Mercer said, as poor investment performance, flat markets in the first half of 2010, and declining AA corporate bond yields drove up liabilities. And in the Netherlands, pension accounting liabilities are based on AA corporate bond yields drawn from the wider European Monetary Union market, where there has been a “significant fall,” Mercer’s research showed.

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To contact the <em>aiCIO</em> editor of this story: Paula Vasan at <a href='mailto:pvasan@assetinternational.com'>pvasan@assetinternational.com</a>; 646-308-2742