Access to Capital and Market Liquidity

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Report to Congress

Access to Capital and Market Liquidity

As Directed by the Explanatory Statement to the

Consolidated Appropriations Act, 2016 (P.L. 114-113)

This is a report by the Staff of the Division of Economic and Risk Analysis of the

U.S. Securities and Exchange Commission. The Commission has expressed no view

regarding the analysis, findings, or conclusions contained herein.

August 2017

Executive Summary

In December 2015,1 Congress directed the Commission’s Division of Economic and Risk

Analysis (DERA or we) to report on the impacts of the Dodd-Frank Act,2 especially the Volcker

Rule, as well as other financial regulations, such as Basel III,3 on: (1) access to capital for

consumers, investors, and businesses; and (2) market liquidity, including U.S. Treasury and

corporate debt markets.4 The Report responds to the Congressional directive.

Quantifying the effects of the regulatory reforms is challenging for several reasons. Most

notably, overlapping implementations make it difficult to isolate the effect of any single rule or

requirement. When the post-implementation period of one reform coincides with a preimplementation period of another, there is no clear baseline against which to separately measure

the potential economic impacts. This issue is particularly acute when market participants change

their behaviors in anticipation of future rules, the content of which is frequently signaled in

advance by the notice and comment rulemaking process. Thus, compliance may occur in

advance of the effective dates.

It is also possible that many of the observed changes in market participant behaviors

would have occurred absent the reforms. In particular, the immediate effects of the financial

crisis—including the failures of many institutions and business models—provided strong

Consolidated Appropriations Act, Pub. L. 114–113, H.R. 2029.

The Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub.L. 111–203, H.R. 4173 (Dodd–Frank

Act).

Basel Committee on Banking Supervision “Basel III: A global regulatory framework for more resilient banks and

banking systems,” Dec 2010, (Rev Jun 2011); “Basel III: The Liquidity Coverage Ratio and liquidity risk

monitoring tools,” Jan 2013; “Basel III: the net stable funding ratio,” Oct 2014. For more, see

http://www.bis.org/bcbs/basel3.htm

Because the markets for single-name credit default swaps and investment funds may interact with the U.S.

Treasury and corporate debt markets, this report also analyzes those two markets.

incentives to change market practices in ways that may have simultaneously shaped the ensuing

reforms.

Finally, post reform macroeconomic conditions, such as the economic recovery and the

low interest rate environment, are different from those leading up to and right after the financial

crisis. Therefore, it is difficult to quantify the benchmark levels of primary issuance and market

liquidity that would have been observed following the financial crisis and absent the ensuing

reforms. For example, some market participants have noted that evidence of liquidity

deterioration can be found in the number of trades that have not occurred. However, such data

are not available, so we are not able to explore this metric.

Although the above factors significantly limit our ability to analyze whether specific

regulatory reforms caused any particular changes, DERA’s analysis provides a comprehensive

and detailed review of capital raising through primary issuance and secondary market liquidity

over time and in ways that allow an assessment of whether observed trends could be consistent

with the effects of regulatory reforms, or with one or more of the other potential explanations.

Where possible, we highlight when multiple factors could be impacting trends in issuance and/or

market liquidity in either amplifying or offsetting ways. We recognize that liquidity may interact

with other market characteristics, such as informational efficiency and market stability. In the

Report, we do not estimate the optimal amount of liquidity for corporate bond or Treasury

markets, but document the evolution of different dimensions of liquidity over time and consider

whether observed changes are consistent with a variety of proposed explanations.

A distinguishing feature of DERA’s Report is that it includes a comprehensive

assessment of a large body of recent research in addition to original analysis performed by

DERA staff. To this end, the Report’s scope differs from other existing studies, and we focus on

primary securities issuance and secondary market liquidity across fixed income markets. For

example, the U.S. Department of the Treasury recently issued a report that included policy

recommendations, based on certain conclusions regarding secondary market liquidity.5 As this

report uses a different methodology than that considered in the Treasury Report, the conclusions

reached in this Report may differ from those stated in the Treasury Report.

We note, however, that because some Basel III requirements are still being implemented,

most available evidence on potential regulatory effects centers on the Dodd-Frank Act, including

the Volcker Rule, and the JOBS Act. There is comparatively little research on the impacts of

Basel III reforms. We nevertheless consider the regulatory timeline for Basel III reforms in

addition to the implementation of the Dodd-Frank Act and JOBS Act, and document changes in

issuance and market liquidity metrics over time, including all relevant dates. However, due to

the lack of available evidence, we do not specifically address the effects of Basel III reforms in

Part A and Part B.VI.

Main Results

Part A. Primary Issuance

DERA analyzed primary issuance of debt, equity, and asset-backed securities (ABS).

The total capital formation from the signing of the Dodd-Frank Act into law in 2010 through the

end of 2016 is approximately $20.20 trillion, of which $8.8 trillion was raised through registered

offerings, and $11.38 trillion was raised through unregistered offerings.6 We do not find that

total primary market security issuance is lower after the enactment of the Dodd-Frank Act

See U.S. Department of the Treasury, “A Financial System that Creates Economic Opportunities: Banks and Credit

Unions” (June 2017) (hereinafter “Treasury Report”).

See Part A.II and Part A.III of the Report for the analysis of registered and unregistered offerings.

(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.7 DERA has

not attempted to establish a counterfactual level of primary securities issuance that would have

been attained in the absence of the Dodd-Frank Act, Basel III, and other regulatory reforms.

These results are also generally consistent with active issuance in strong macroeconomic

conditions and a low interest rate environment. Some of the findings we discuss in the Report

are as follows:



Capital raised through initial public offerings (IPOs) ebbs and flows over time, reaching

highs in 1999, 2007 and 2014, and lows in 2003, 2008, and 2016.8 It is difficult to

disentangle the many contributing factors that influence IPO dynamics.



Recent years have seen an increase in the number of small company IPOs. IPOs with

proceeds up to $30 million accounted for approximately 17% of the total number of IPOs

in the period 2007-2011 and 22% in the period 2012-2016, following the passage of the

JOBS Act in 2012.9 In 2016, more than 75% of IPOs were classified as Emerging

Growth Companies (EGCs) under Title I of the JOBS Act (Title I).10



Private market issuance of debt and equity (unregistered offering activity) has increased

substantially from $1.16 trillion in 2009 to $1.87 trillion in 2015, amounting to $1.68

trillion in 2016.11 Amounts raised through exempt securities offerings of debt and equity

for 2012 through 2016 combined exceeded amounts raised through registered offerings of

The Jumpstart Our Business Startups Act, Pub. L. 112-106, H.R. 3606 (JOBS Act).

See Part A.II. of the Report for the analysis of registered offerings.

We note that IPO activity has experienced significant declines in 2015 and 2016, and explore this development in

Part A.II.

See Proskauer (2017).

See Part A.III of the Report for the analysis of exempt offering activity.

debt and equity over the same time period by approximately 26%. In comparison, the

same figure for 2009 through 2011 was 21.6%. Amounts raised in reliance on the

general solicitation rules under Title II of the JOBS Act, which were implemented in

September 2013, remain low, representing only 3% of total amounts raised pursuant to

Rule 506.



Amendments to Regulation A12 initiated by Title IV of the JOBS Act were followed by a

large increase in Regulation A offering activity over the initial 18 months post

effectiveness, with 97 qualified offerings seeking to raise $1.8 billion (compared with

about 14 qualified offerings seeking to raise approximately $163.3 million in a typical

year during 2005-2016). Based on issuer reports of amounts raised filed during 20052016, 56 issuers reported positive proceeds in Regulation A offerings, totaling

approximately $314.6 million. Initial evidence on JOBS Act Title III crowdfunding

activity suggests that some small pre-revenue growth firms are beginning to use

crowdfunding as a securities offering method.13

Part B. Market Liquidity

Evidence for the impact of regulatory reforms on market liquidity is mixed, with different

measures of market liquidity showing different trends. Moreover, many of the observed changes

in these measures are consistent with the combined impacts of several factors besides new rules

and regulations, including, among others, electronification of markets, changes in

macroeconomic conditions, and post-crisis changes in dealer risk preferences that pre-date the

Rel. No. 33-9741, Amendments to Regulation A (Mar. 25, 2015) 80 FR 21805 (Regulation A+ Adopting

Release)

See Part A.III.G of the Report for initial evidence on crowdfunding activity.

passage of either the Dodd-Frank Act or Basel III. As noted above with respect to primary

securities issuance, DERA has not attempted to estimate a counterfactual level of trading activity

or average transaction costs in the absence of the recent regulatory reforms.



In U.S. Treasury markets, we find no empirical evidence consistent with the hypothesis

that liquidity has deteriorated after regulatory reforms. More specifically, there is no

support for a causal link between the Volcker Rule and U.S. Treasury market liquidity

conditions. Changes in Treasury market liquidity are unlikely to be directly attributable

to the Volcker Rule because U.S. cash Treasuries are exempt from the Volcker Rule’s

prohibitions on proprietary trading.



In corporate bond markets, trading activity and average transaction costs have generally

improved or remained flat. More corporate bond issues traded after regulatory changes

than in any prior sample period. 14 In the post-regulatory period, we estimate that

transaction costs have decreased (by 31 basis points (bps), to 55.4 bps round-trip) for

smaller trade sizes ($20,000) and remain low for larger trade sizes relative to the precrisis period (estimated at 5.7 bps round-trip for trades of $5,000,000, compared to 5.8

bps pre-crisis).

See Table D.4, Panel B, which reports estimated half spreads for transactions of 5,000,000 (round-trip costs are

double half-spreads). For the purposes of our transaction cost analysis, we split the sample into 6 sub-periods. We

define January 2006 through June 2007 as the “Pre-crisis” sub-period. We designate July 2012 through May 2014

as the “Regulatory” sub-period, and June 2014 through September 2016 as the “Post-regulatory” sub-period. As

discussed in Part B.IV.C, our sample period cutoffs are aligned with existing research, such as Bessembinder et al.

(2016) and Bao et al. (2016). See Part B.IV.C of the Report for a more detailed analysis.

Although estimated transaction costs have decreased, corporate bond trading activity

in recent years has also become somewhat more concentrated in less complex bonds

and bonds with larger issue sizes.15

For some subgroups of corporate bonds, such as larger bonds (i.e., issue size greater

than $500 million), certain investment grade bonds, younger bonds (i.e., less than 2

years since issuance), and longer maturity bonds (i.e., original maturity longer than 20

years), the estimated transaction costs for large trades are slightly higher than those in

the pre-crisis period.16



Dealers in the corporate bond markets have, in aggregate, reduced their capital

commitment since the 2007 peak.17 This is consistent with the Volcker Rule and other

reforms potentially reducing the liquidity provision in corporate bonds. It is also

consistent with alternative explanations, such as an enhanced ability of dealers to manage

corporate bond inventory, shorter dealer intermediation chains associated with

electronification of bond markets, crisis-induced changes in dealer assessment of risks

and returns of traditional market making, and the effects of a low interest rate

environment. These alternative explanations are not mutually exclusive or necessarily

fully independent of regulatory reforms, so distinguishing between these potential

explanations from the market trends data is not possible.



Although capital commitments have fallen, there has not been a commensurate decrease

in the number of dealers participating in the market. We observe no notable changes in

See Part B.IV.B.1a) and Part B.IV.C.1 for the analysis of trends in trading activity over time and for bonds with

different characteristics.

See Part B.IV.B, Part B.IV.C.1 and Part B.IV.C.2 for more analysis of trends in trading activity and transaction

costs.

See Part B.IV.B and Part B.IV.C.3 for more analysis of trends in dealer activity.

the number of dealers providing liquidity per corporate bond issue over time, and we do

not detect notable changes in trade sizes around regulatory reforms.



The evidence on dealer activity in times of stress is mixed and varies with the definition

of stress.

Some existing research suggests that during times of localized market stress under

strong macroeconomic conditions there may be greater adverse price impacts

from trading activity (a sign of deteriorating liquidity) associated with the decline

in dealer capital commitments for a small subset of bonds. Other evidence on

localized stress selling does not support the finding of a deterioration in liquidity

around firm specific events.

Evidence from the crisis suggests that during times of severe market stress,

dealers may not lean into the wind, but instead make larger cuts in inventory of

bonds that are aggressively sold by their customers.18 Such evidence supports a

finding that dealers decrease liquidity provision in times of severe market stress.



Trading of corporate bonds on alternative trading systems (ATS) may partly account for

the lower estimated average transaction costs for small trades and observed reductions in

dealer capital commitments.19

Electronic trading may facilitate efficient management of dealer inventory and

reduce counterparty search costs. In addition, electronic trading could enable

customers to seek liquidity directly from other customers.

See Part B.IV.B.2 and Part B.IV.B.3a) for a further discussion of liquidity conditions and dealer activity in times

of stress.

See Part B.IV.C.4 for our data analysis of ATS activity.

The majority of interdealer trades enjoy positive price improvement, whereas

small customer trades experience negative price improvement, on average.



Trading in single-name credit-default swaps (CDS) provides an alternative channel for

investors to gain exposure to corporate bond credit risk. Some measures of CDS market

liquidity—total number of participants transacting in a given reference entity and various

trading activity metrics—have remained stable or point to improvements. Other

measures show a reduction in activity: trade sizes have decreased, quoting activity has

declined, and quoted spreads for the least liquid high yield underliers have risen.

Interdealer trade activity has declined after 2010, but dealer-customer activity has

remained stable.20

See Part B.V.D for our analysis of activity in single-name CDS.

Table of Contents

EXECUTIVE SUMMARY ........................................................................................................................... 2

INTRODUCTION ....................................................................................................................................... 13

CONGRESSIONAL DIRECTIVE ..................................................................................................................... 13

BROAD ECONOMIC CONSIDERATIONS ....................................................................................................... 14

SUMMARY OF RESULTS ............................................................................................................................. 17

METHODOLOGICAL CONSIDERATIONS ...................................................................................................... 24

PART A. ACCESS TO CAPITAL: PRIMARY ISSUANCE .................................................................. 28

INTRODUCTION ................................................................................................................................ 28

II.

CAPITAL MARKETS FOR REGISTERED OFFERINGS ........................................................................... 31

III.

CAPITAL MARKETS FOR EXEMPT OFFERINGS .................................................................................. 35

Introduction ................................................................................................................................ 35

General data on Regulation D and Rule 144A offerings ............................................................ 38

Rule 506(c) of Regulation D ....................................................................................................... 39

Investors in Regulation D Offerings ........................................................................................... 42

Regulation D Offering Fees ....................................................................................................... 44

Regulation A Activity Overview ................................................................................................. 47

Regulation Crowdfunding Activity Overview ............................................................................. 54

IV.

THE ABS MARKET .......................................................................................................................... 60

TABLES ON PRIMARY ISSUANCE ...................................................................................................... 64

PART B. MARKET LIQUIDITY .............................................................................................................. 69

I. INTRODUCTION ...................................................................................................................................... 69

II. EMPIRICAL MEASURES OF MARKET LIQUIDITY .................................................................................... 70

Trading Activity ................................................................................................................................... 70

Transaction Costs ................................................................................................................................ 71

Liquidity Supply ................................................................................................................................... 72

Composite Measures ............................................................................................................................ 73

III.

TREASURIES ..................................................................................................................................... 74

Introduction ................................................................................................................................ 74

Determinants of Liquidity Changes ............................................................................................ 77

Empirical Measures ................................................................................................................... 81

Funding Liquidity............................................................................................................................................ 82

IV.

Recent Evidence ......................................................................................................................... 83

Summary..................................................................................................................................... 92

CORPORATE BONDS ......................................................................................................................... 93

Introduction ................................................................................................................................ 93

Existing Research ....................................................................................................................... 95

Dimensions of Liquidity ....................................................................................................................... 96

Liquidity Provision in Times of Stress ............................................................................................... 105

Drivers of Changes in Liquidity ......................................................................................................... 109

Data Analysis and Results ........................................................................................................ 126

1. Trading Activity ........................................................................................................................................ 128

2. Transaction Costs ...................................................................................................................................... 142

3. Dealer Activity .......................................................................................................................................... 161

4. Electronic Venues ..................................................................................................................................... 178

Summary................................................................................................................................... 190

Tables on Corporate Bond Liquidity ........................................................................................ 191

SINGLE-NAME CREDIT DEFAULT SWAPS (CDS) ............................................................................ 207

Introduction .............................................................................................................................. 207

Limitations on Analysis of Causal Impacts .............................................................................. 212

Spillovers between Bonds and Single-Name CDS .................................................................... 214

Exposures, Participants and Liquidity ..................................................................................... 220

VI.

Volume of Activity ............................................................................................................................. 220

Market Participants ............................................................................................................................. 229

Transaction Activity ........................................................................................................................... 230

Quotes and Quoted Spreads ................................................................................................................ 242

Summary................................................................................................................................... 247

Tables on Single-name CDS ..................................................................................................... 249

FUNDS............................................................................................................................................ 253

Introduction .............................................................................................................................. 253

Evidence on Bond Liquidity from Bond Ownership ................................................................. 253

Limitations in Interpreting the Data......................................................................................... 261

Summary................................................................................................................................... 263

REFERENCES .......................................................................................................................................... 265

APPENDICES ........................................................................................................................................... 274

Appendix A. Regulatory Reform Timeline......................................................................................... 274

Appendix B. Regulatory Reform Timeline: Security-Based Swap Markets ...................................... 278

Appendix C. Appendix to Access to Capital Analysis ....................................................................... 281

Regulation D Sample .................................................................................................................................... 281

Other Offerings ............................................................................................................................................. 283

Total Capital Raised In Registered and Unregistered Offerings.................................................................... 284

Appendix D. Appendix to Market Liquidity Analysis: Corporate Bonds ......................................... 285

Data Filters and Estimation ........................................................................................................................... 285

Sample Composition ..................................................................................................................................... 292

Transaction Costs .......................................................................................................................................... 295

Dealer Activity .............................................................................................................................................. 302

Introduction

Congressional Directive

The Consolidated Appropriations Act, 2016 was signed into law on December 18,

2015.21 The Explanatory Statement to the Appropriations Act22 directed the Division of

Economic and Risk Analysis (DERA or we) of the U.S. Securities and Exchange Commission

(Commission or SEC) to report to the Committees on Appropriations of the House and Senate,

the Committee on Financial Services in the House and the Committee on Banking, Housing, and

Urban Affairs in the Senate, on:

the combined impacts that the Dodd-Frank Act--especially Section 619--and other

financial regulations, such as Basel III, have had on: (1) access to capital for

consumers, investors, and businesses, and (2) market liquidity, to include U.S.

Treasury markets and corporate debt. DERA shall provide an update to the

Committees on their work no later than August 1, 2016.

This Report represents the considered views of staff in DERA, as informed by the

processes described below, but the views expressed in this Report do not necessarily reflect those

of the Commission or the individual Commissioners, or of staff of other Commission Offices or

Divisions.

To effectuate Congress’s direction, DERA studied (1) capital raising in the primary

markets, and (2) secondary market liquidity. With regard to the first topic, DERA analyzed

evidence on the evolution of the issuance of debt, equity, and ABS across registered and exempt

offerings. With regard to the second topic, DERA analyzed market activity and liquidity in U.S.

Government obligations (U.S. Treasuries or Treasuries) and corporate bonds, but also singlename CDS and investment companies, such as open-end mutual funds and exchange-traded

Consolidated Appropriations Act, Pub. L. 114–113, H.R. 2029.

161 Cong. Rec. H9693 (Dec. 17, 2015) (statement of Chairman of the House Committee on Appropriations)

https://www.congress.gov/crec/2015/12/17/CREC-2015-12-17-pt2-PgH9693.pdf

funds (ETF), that invest in corporate bonds and Treasuries, for reasons we describe below.

DERA considered the hypothesis that regulatory reform efforts, including the Volcker Rule and

Basel III, as well as other regulations including those adopted by the Commission pursuant to the

JOBS Act mandates, were impacting primary market activity, or secondary market liquidity, or

both. DERA also considered whether factors other than regulatory reforms, including market

structure changes,23 evolution of market participants’ preferences after the financial crisis, or

aggregate macroeconomic conditions could be contributing to observed changes in the primary

and secondary markets.

Because DERA is not the first to analyze and assess these economic issues, the Report

begins with a critical review of the results of the body of research to date. The Report then

complements the findings from existing research with original analysis by DERA staff using

market information obtained from SEC filings and other public data, subscription databases, and

regulatory data feeds.

Broad Economic Considerations

DERA has examined the evolution of the volume and structure of primary market

issuances and secondary liquidity over time. The availability of different types and channels of

primary issuance, such as registered and exempt issues of debt, equity, and ABS, impact how

businesses access capital and influence the scope and riskiness of securities available to

consumers, businesses, and investors. Five broad considerations inform our analysis.

We recognize that these and other confounding phenomena are not necessarily mutually exclusive or fully

exogenous. For instance, we cannot distinguish between bond market electronification arising out of technological

advances, market response to the financial crisis, or market response to the regulations in the immediate aftermath of

the financial crisis.

First, capital raising in primary markets and liquidity in secondary markets are

inextricably intertwined. For example, liquid secondary markets that enable investors to exit

large positions quickly and at low cost can facilitate primary market issuance and placement. At

the same time, if high-risk issuers select into certain forms of issuance or if primary issuance

becomes split across many different forms of issuance, secondary market liquidity can decrease.

Most studies focus on either the issuance of new securities or the secondary market trading and

liquidity. One of the distinguishing features of DERA’s analysis is a comprehensive and

simultaneous exploration of both primary issuance and secondary liquidity issues across markets.

Second, the existence of substitutes for exposure to credit risk may impact activity and

liquidity in bond markets. Market participants seeking exposure to the credit risk of bond issuers

can choose to transact directly in the market for corporate bonds or to trade in alternative credit

risk products. The existence of single-name CDS and bond funds as alternative instruments for

capital allocation and cross-market arbitrage may spill over into activity and liquidity in bond

markets. As a result, it is important to consider how single-name CDS and fund liquidity may

interact with activity in markets for Treasuries and corporate bonds.

Third, liquidity is an important characteristic of a capital market and affects the ability of

investors to execute trades of different sizes, quickly, and at low cost. We recognize that

liquidity may interact with other market characteristics, such as informational efficiency of

capital markets and market stability. The Dodd-Frank Act was intended, among others, to

promote the financial stability of the United States.24 In the Report, we do not perform a costbenefit analysis of various regulatory changes, and do not estimate the optimal amount of

securities issuance or liquidity in corporate bond or Treasury markets. Instead, we document the

See Pub. L. No. 111-203, Preamble.

evolution in different dimensions of capital raising and market liquidity over time and consider

whether observed changes are consistent with a variety of proposed explanations.

Fourth, large sample evidence enables us to examine the issuance and trading activity of

large groups of market participants using thousands, millions, and billions of observations. We

explore cross-sectional heterogeneity in capital raising and trading activity by analyzing various

subgroups of issuers and transactions, and report different distributional parameters (e.g.,

median, 25th, 75th, 99th percentiles, etc.). Statistics produced from large sample analysis may

not always reflect the behaviors and experiences of market participants in smaller segments of

the markets. Therefore, where we observe improvements in issuance or liquidity metrics, the

findings do not necessarily imply that all market participants experienced such improvements,

and vice versa.

Finally, we recognize that the regulations that serve as the focus for this Report impose

costs on certain groups of market participants. To the extent that such costs have a significant

impact on the behavior of affected market participants, they may result in changes to issuance

and liquidity. However, affected market participants may alter their business practices in

response to regulatory impacts and unaffected market participants may change their activity in

compensating ways, even as the regulations have their intended effect. These responses to

regulation, along with other factors such as changing macroeconomic conditions may dampen

observed changes in market indicators and weaken our ability to link changes in issuance and

liquidity with regulatory reforms.

The Report endeavors to analyze relevant research and data through the fourth quarter of

2016, where available. Our analysis focuses on evidence to date, and we recognize various

related studies may be ongoing. Evidence on the impacts of the implementation of Basel III on

bond liquidity is relatively scarce, possibly because elements of the Basel III regime are still

being implemented in the United States, and this remains a fruitful area for future research. We

also note that many of the studies discussed below are working papers, representing preliminary

work that has not been fully vetted by the peer review process.

Summary of Results

As a result of this analysis, DERA observes that the evidence as to the direction and

magnitude of changes in primary issuance and secondary market liquidity after the financial

crisis and ensuing regulatory reforms is mixed. The observed changes are consistent with a

number of explanations, including the combined effect of various regulations, non-regulatory

market structure changes, crisis-related changes to market participants’ preferences that pre-date

the passage of regulatory reforms, and aggregate macroeconomic conditions (such as a low

interest rate environment), among others. We also note that these explanations need not be

mutually exclusive or independent. For instance, to the extent that market structure changes may

have contributed to observed changes in liquidity metrics, we cannot assess whether such market

structure developments occurred because of technological advances, as a result of the crisis,

regulatory reforms, or some combination thereof.

DERA’s analysis is focused on areas within the scope of the Commission’s jurisdiction

as the primary securities regulator in the United States, i.e. having regulatory responsibilities that

span both primary and secondary securities markets.

Our analysis of primary issuance considers changes in the volume and structure of

issuance of equity, debt, and ABS. This includes changes in IPOs, seasoned offerings, and

exempt offerings of debt and equity, including offerings under Regulation D and Regulation A.25

We also present preliminary evidence on offerings pursuant to Regulation Crowdfunding,26

which the Commission adopted as part of its implementation of the JOBS Act. In addition, ABS

issuance supports a large volume of primary issuance, and we consider the evolution and

structure of ABS issuance activity over time.

We do not find that total primary market security issuance is lower after the enactment of

the Dodd-Frank 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.27 DERA has not attempted to establish a counterfactual level of primary securities issuance

that would have attained in the absence of the Dodd-Frank Act, Basel III, and other regulatory

reforms. These observed increases are also generally consistent with active issuance in strong

macroeconomic conditions and a low interest rate environment.

With respect to primary issuance, capital raised through initial public offerings (IPOs)

during the period of 1996 through 2016 reached highs in 1999, 2007 and 2014, and lows in 2003,

2008, and 2016.28 The post-crisis dynamics of IPO issuance are consistent with several IPO

waves observed during this time period. Capital raised through secondary equity offerings

(SEOs) during the 1996-2016 sample period peaked in 2009, and in recent years has been

exceeding pre-crisis issuance volume. Registered debt issuance has been growing during the

sample period (1996 through 2016), reaching a peak in 2016. Regulation D offerings have more

than doubled since 2009, the time for which data is available. Rule 144A offerings remaining

See 17 CFR 230.500 through 230.508; Rel. No. 33-9415 (Jul. 10, 2013), Eliminating the Prohibition Against

General Solicitation and General Advertising in Rule 506 and Rule 144A Offerings, 78 FR 44771; Rel. No. 339741, Amendments to Regulation A (Mar. 25, 2015) (Regulation A+ Adopting Release) 80 FR 21805.

Rel. No. 33-9974, Crowdfunding (Oct. 30, 2015) 80 FR 71387 (Crowdfunding Adopting Release).

The Jumpstart Our Business Startups Act, Pub. L. 112-106, H.R. 3606 (JOBS Act).

See Part A.II. for further analysis of registered offerings.

stable post-crisis and comparable to pre-crisis levels. Although the volume of ABS issuance

declined dramatically during the financial crisis and has been on the rise since, it is still a fraction

of pre-crisis levels (our ABS sample spans 2005 through 2016). Further, we do not find

evidence that costs of various types of offerings have changed notably during our sample period.

Our study of liquidity in secondary markets emphasizes Treasury and corporate bond

market liquidity. Following a large body of research that points to the importance of different

measures of liquidity, we construct and examine a number of measures reflecting various facets

of liquidity, provide a critical analysis of existing findings, and perform additional data analysis

to supplement prior work. The analysis below explores different potential drivers of changes in

liquidity, many of which may not be mutually exclusive or fully independent of regulatory

effects. Our data analysis examines changes in secondary market liquidity metrics around

regulatory reforms, the evolving role of some dealers from principal to agency trading,29 and

evidence from electronic trading.

With respect to Treasury markets, as we discuss below, U.S. cash Treasuries are exempt

from the Volcker Rule’s prohibitions on proprietary trading. Therefore, changes in Treasury

market liquidity are unlikely to be directly attributable to the Volcker Rule. Instead, the Volcker

Rule may indirectly affect this market as a result of spillover effects from other markets.30 An

analysis of evidence on a wide range of liquidity measures quantifying different dimensions of

liquidity does not allow us to conclude that post-crisis regulations caused a reduction in Treasury

market liquidity. None of the existing studies provides empirical support for a causal link

Generally, dealers can trade as agents, matching customer buys to customer sells, or as principals, absorbing

customer buys and customer sells into inventory and committing the requisite capital. See Li and Li (2017).

For instance, Treasury futures are not exempt, and the Volcker Rule could indirectly impact cash Treasuries

through intermarket cash-futures basis trading.

between various regulations, and in particular the Volcker Rule, and changing Treasury market

liquidity conditions.

In our analysis of market liquidity in corporate bonds, we evaluate the evidence from

existing research on the evolution of corporate bond market liquidity and find that some liquidity

metrics have been reported to have improved, others have remained flat, and yet others have

worsened after various regulations.31 While there is little consensus in existing work concerning

the direction, causal attribution, and mechanisms behind observed changes, evidence suggests

that in recent years dealers have been less likely to engage in risky principal transactions. In

addition, dealers generally decrease liquidity provision in times of severe market stress, such as

during the financial crisis.32

With respect to the potential regulatory factors behind observed liquidity changes, there

is a lack of agreement in research regarding the direction and magnitude of regulatory impacts.

Moreover, studies with different measurement and empirical design often present different or

conflicting conclusions.33 Most research does not find that post-trade transparency leads to a

deterioration in bond market liquidity.34 Existing research on the role of electronic trading is

limited,35 and there is competing evidence on the interplay between CDS and corporate bond

market liquidity.36 In the sections that follow we critically assess these and other studies and

discuss their implications.

See Part B.IV.B.3a) for a discussion of evidence of changes in market liquidity around regulatory reforms.

See Part B.IV.B.2 and Part B.IV.B.3a) for a discussion of evidence on dealer provision of liquidity in normal

times and in times of stress before and after various regulatory reforms.

See Part B.IV.B.3a) for a detailed analysis.

See Part B.IV.B.3c) for a discussion of existing research on post-trade transparency.

See Part B.IV.B.3b) for an analysis of existing findings on electronic trading.

See Part B.V.C for a discussion of research on spillovers between single-name CDS and reference security

markets.

Empirical analysis by DERA staff on corporate bond market liquidity conditions yields

similarly mixed results. Following other studies, we segment the sample period into several subperiods, including the phase-in of the Trade Reporting And Compliance Engine (TRACE), precrisis, crisis, post-crisis, regulatory, and post-regulatory time periods.37 We present four main

results. First, during the time periods after the crisis period we find an increase in the fraction of

corporate bond issues with trades, higher levels of trading activity when traded, and greater par

dollar volume traded compared to any other period except post-crisis.

Second, we find that transaction costs have generally decreased or remained flat, with

particularly strong declines for small trade sizes and relatively riskier investment grade (IG)

bonds. However, because transaction costs can be estimated only for trades that occur, we are

unable to observe how regulation and other market influencing factors may have had an effect on

the ability of counterparties to find liquidity and successfully engage in a trade. In other words,

trades sought but not executed cannot be empirically measured. Hence, interpreting the reported

decline in transaction costs as an improvement in market liquidity requires consideration of the

above evidence on changes in trading activity over time.

Third, we consider changes in dealer activity as a proxy for changes in the availability of

liquidity through market making activity. We find that the median number of dealers providing

liquidity per corporate bond issue has remained stable across all sample periods. Moreover, we

do not observe notable changes in the number of dealers providing liquidity per bond issue

Our sample period cutoffs are aligned with Bessembinder et al. (2016) and Bao et al. (2016). We designate the

January 2003 through December 2005 as the “TRACE Phase-in” sub-period. We define January 2006 through June

2007 as the “Pre-crisis” sub-period. We designate July 2007 through April 2009 as the “Crisis” sub-period and May

2009 through June 2012 as the “Post-crisis” sub-period. Lastly, we divide the rest of our sample into two additional

sub-periods. We designate July 2012 through May 2014 as the “Regulatory” sub-period37 and June 2014 through

September 2016 as the “Post-regulatory” sub-period. We discuss these issues in great detail in Part B.IV.C.

around the changes in regulation. Across sub-periods, more dealers trade in small trade sizes. In

particular, while the fraction of large size (greater than $5,000,000) principal trades is similar

across sub-periods, the portion of medium size ($100,000 - $1,000,000) principal trades is larger

during the “Regulatory” and the “Post-regulatory” sub-periods.

Finally, we explore cross-sectional evidence on recent corporate bond quotation activity

on ATS, which sheds light on the current use of electronic trading in corporate bonds. We

document large cross-sectional heterogeneity in ATS activity for different types of bond issues.

We find that electronification may be associated with lower trade sizes. We also find that the

majority of interdealer trades enjoy positive price improvement, whereas small customer trades

experience negative price improvement, on average.

Overall, it is not clear that corporate bond market liquidity has deteriorated following the

enactment of the Dodd-Frank Act, the implementation of the Volcker Rule, and the

implementation of the Basel III reforms. As discussed below, the observed trends in market

liquidity metrics are consistent with multiple alternative explanations.

In addition to Treasury and corporate bond markets, we have considered changes in

liquidity in other markets. Specifically, we explore: (1) potential diffusion of liquidity to singlename CDS, and (2) the evolution of fund liquidity. A recent CFA Institute survey addresses both

as potential drivers of changes in secondary corporate bond market liquidity.38 Academic

research also examines spillovers between single-name CDS and corporate bonds and the

interaction between fund and bond liquidity.39 We consider whether these potential explanations

may be consistent with observed changes in liquidity metrics.

See CFA Institute (2016).

See Parts B.V and B.VI of this report.

The Report critically re-examines findings regarding the effect of the CDS market on

bond liquidity. Existing literature finds evidence of two competing effects of trading activity in

single-name CDS on bond liquidity. In particular, some evidence suggests that access to hedges

of credit risk can enhance liquidity in riskier bond issues. Other evidence indicates that

participants may be looking for liquidity across markets, and CDS liquidity may be crowding out

bond market liquidity. That is, CDS is an alternative means by which market participants gain

exposure to the credit risk of debt issuers.40 The analysis below documents changes in the

volume of the market, participants, transaction and quotation activity in single-name CDS using

public, commercial, and regulatory data.41

We examine three groups of measures: (1) metrics of transaction activity, including

notionals, market values, and participants by credit, industry, and tenor; (2) measures of singlename CDS trading activity using a regulatory feed, including interdealer and dealer-customer

notionals, trade sizes, counts, and zero trading days; and (3) quotation activity, including number

of quoted underliers, quotes per underlier, quoted spreads, etc., from a commercial database. We

find that interdealer trade activity has declined after 2010, but dealer-customer activity has

remained stable, a result that is consistent with two competing explanations: (1) a reduced

ability by dealers to find liquidity on the interdealer market; and (2) greater efficiency in dealer

intermediation chains matching buyers to sellers. Consistent with the latter, the number of

participants transacting in a given underlier has remained relatively constant, the fraction of zero

trading days has decreased, and the frequency of trading for active underliers has remained flat

See Part B.V.C of this report.

See Part B.V.D of this report.

or elevated after the financial crisis and reforms that have been enacted to date.42 However,

quoting activity has declined, and quoted spreads for the least liquid high yield underliers have

risen. Overall, our time series and cross-sectional results are consistent with several alternative

explanations which are not mutually exclusive.

Lastly, the analysis that follows explores fund liquidity, which contributes to a holistic

picture of changes in secondary market liquidity and potential structural changes in corporate

bond and Treasury markets during the past decade. In particular, research suggests that liquidity

can flow from bond markets into investment companies (such as mutual funds and ETFs), and

vice versa. For instance, market participants seeking exposure to the credit risk of issuers may

choose to allocate into bond funds instead of underlying bonds. In this way, bond funds,

particularly open-end funds and ETFs, can serve as a substitute instrument that investors can use

if and when the underlying bond markets are illiquid. We find that the evidence on the interplay

between fund activity and bond liquidity is mixed, that fund ownership of corporate bonds has

increased over this Report’s period of interest, and that fund activity could impact liquidity

measures in underlying bonds in multiple ways.

Methodological Considerations

DERA staff analyzed existing economic research and performed novel data analysis.

Throughout this Report we discuss a number of data and experimental design issues that limit

our ability to make causal determinations as to the effect of reforms on access to capital and

As discussed in Part B.V.B, many of the substantive Title VII rules governing the single-name CDS market have

been proposed but not adopted (e.g., capital and margin requirements for dealers and major participants, swap

execution facilities), and compliance with many adopted rules is not yet required (e.g., dealer registration, crossborder activity, business conduct standards etc.).

market liquidity. In this section we introduce some of the broad methodological considerations

and limitations of the analysis.

As discussed above, the Report examines primary issuance and secondary market

liquidity across many markets from the early 2000s through 2016. Any study of such scope and

magnitude faces challenges, and two are most salient: baselining and identification. First,

Dodd-Frank, Volcker, and Basel III reforms followed a historic financial crisis and the ensuing

market rally. As a result, the pre-regulatory period includes the recession and the bull market

that follows. Using this period as a baseline could bias estimates for many capital raising and

liquidity metrics. To address this challenge, subject to data constraints and where practicable,

we have extended our samples to the early/mid 2000s to capture a longer time period prior to the

enactment of regulatory reforms. Where such analysis is not possible or practicable, we

recognize the sensitivity of our conclusions to the selection of the baseline period.

Similarly, regulatory reforms of interest coincided with a portfolio of other policies,

market structure changes, demand shifts, and types of market participants. For instance,

electronic trading, low interest rates, and market participants reevaluating the risks and returns of

various business models in the aftermath of the financial crisis contaminate the comparison of

liquidity measures before and after regulatory reforms of interest. As a result, the direct impact

of regulatory reforms on liquidity in corporate bond and Treasury markets is likely confounded

with the effects of these innovations and shocks.

Second, we are limited in our ability to make causal inferences. The prevalent

econometric techniques used to test for causality, such as event study methodology, differencesin-differences estimation, instrumental variables, or regression discontinuity design, are not

feasible for many of the analyses performed. As illustrated in Appendix A, the rules

implementing the Dodd-Frank Act and Basel III reforms were proposed, enacted, and adopted

over several years, and in some cases have not yet been fully implemented as of this writing.

Market participants widely anticipated and responded to many of these reforms years ahead of

the compliance or effective dates across markets. As a result, event study evidence on the impact

of reforms on transaction activity and dealer supply of liquidity is difficult to interpret. In

addition, many regulatory reforms impacted large groups of participants at the same time, so we

lack cleanly identified and otherwise comparable “treatment” and “control” groups of market

participants. Absent well-defined treatment and control groups, the validity of differences-indifferences estimation is questionable.

Where we cannot draw causal inferences, we engage in a comprehensive exploration of

the current state and recent changes in primary issuance and secondary market liquidity and

consider whether the observed trends and statistics are consistent with a variety of proposed

explanations.

Some additional limitations of the analysis include the following:



The analysis of offerings relying on the JOBS Act provisions is qualified by small sample

sizes and relatively short observation periods. Thus, it is unclear to what extent it can be

extrapolated to future years or periods with different aggregate conditions. Medium- and

long-term success of such placements remains an area for future study.



We are cautious in using crisis or post-crisis figures as benchmarks for activity levels in

normal times. Where the available data do not permit us to examine market activity for

the early to mid-2000s period (e.g., single-name CDS), trend analysis is limited.



The analysis of dealer balance sheets using Financial and Operational Combined Uniform

Single (FOCUS) data is limited by the exclusion of Alternative Net Capital (ANC) filers,

owing to a lack of comparable data for those filers during our sample period. To the

extent that ANC filers may have been more affected by regulations, our estimates of

changes in activity may be conservative.



Because of the unavailability of relevant data, we are unable to examine changes in

dropped (unexecuted) orders, order splitting, and difficulty in executing large block

orders on liquidity, among other things.

The rest of the Report is structured as follows. Part A analyzes primary issuance of

equity, debt, and ABS; and Part B evaluates changes in secondary market liquidity in Treasuries,

corporate bonds, single-name CDS, and funds.

Part A. Access to Capital: Primary Issuance

Introduction

In the United States, companies can use a wide variety of securities offerings to raise

capital. Securities laws require that all offers and sales of securities be either registered with the

SEC under the Securities Act of 1933 (the Securities Act) or conducted under an exemption from

registration. When raising capital through the sale of securities to any potential investors in the

public capital market, unless the transaction qualifies for an exemption from registration,43 the

issuer must register the offer and sale of securities with the SEC, a process that is accompanied

by extensive disclosure at the time of the offering and subsequent reporting (a “registered”

offering). Alternatively, a company can raise capital by accessing the capital markets through a

transaction exempt from registration (an “exempt” or “unregistered” offering). This path allows

issuers to avoid certain regulatory burdens and the increased oversight that comes with a

registered offering, with the intended effect of reducing issuance costs and the time required to

raise new capital. Exempt offerings may be particularly attractive to smaller firms, for whom

conducting registered offerings and becoming subject to reporting requirements may generally

be too costly. However, because exempt offering alternatives require issuers to disclose less

information and are accompanied by less oversight, they are generally subject to investor

restrictions and/or offering limits. The investor protection provisions of the exemption claimed

must be met to qualify for the exemption from registration.

Companies that are willing to register their transactions can access the public equity

market via registered equity offerings such as IPOs and SEOs, or the public debt market via

registered debt offerings. Companies with or without a registered offering or a registered class

See the discussion of Rule 506(c) of Regulation D, Regulation A and Regulation Crowdfunding below.

of securities can raise capital via exempt debt and equity offerings, such as Regulation D

offerings or Rule 144A offerings.

Recent changes to the securities laws made by the JOBS Act, which was enacted in 2012,

and its implementing regulations, were designed to promote both registered and exempt

offerings. Title I of the JOBS Act streamlined the registered offering process for a class of

issuers called emerging growth companies (EGCs).44 Other provisions of the JOBS Act

expanded options for exempt securities issuance: Title II required that the SEC permit general

solicitation under Rule 506 of Regulation D and Rule 144A (subject to certain conditions); Title

III required that the SEC create a new method of raising capital (crowdfunding); and Title IV

required that the SEC update a little-used exempt offering provision (Regulation A). It is thus

reasonable to expect that these changes may have important effects on the amount of capital

being raised in exempt offerings.

Since the JOBS Act is specifically focused on the primary capital markets, in this section

we explore whether any developments in these markets may be linked to the JOBS Act. Where

relevant, we also discuss whether observed changes can be linked to the Dodd-Frank Act. It is

challenging to establish causality with respect to either regulation, however, because so many

other factors could affect the primary capital markets—factors for which we cannot control. The

JOBS Act was signed into law on April 5, 2012, and the several titles that comprise it went into

The JOBS Act defines EGCs as an issuer with less than $1 billion in total annual gross revenues during its most

recently completed fiscal year. If an issuer qualifies as an EGC on the first day of its fiscal year, it maintains that

status until the earliest of (1) the last day of the fiscal year of the issuer during which it has total annual gross

revenues of $1 billion or more; (2) the last day of its fiscal year following the fifth anniversary of the first sale of its

common equity securities pursuant to an effective registration statement; (3) the date on which the issuer has, during

the previous 3-year period, issued more than $1 billion in nonconvertible debt; or (4) the date on which the issuer is

deemed to be a “large accelerated filer” (as defined in Exchange Act Rule 12b-2). See also Rel. No. 33-10332,

Inflation Adjustments and Other Technical Amendments Under Titles I and III of the JOBS Act (Mar. 31, 2017),

available at https://www.sec.gov/rules/final/2017/33-10332.pdf (raising the $1 billion limit to $1.07 billion to adjust

for inflation) (JOBS Act Technical Amendments Release).

effect in the period from 2012 (Title I) through 2016 (Title III). Since these changes took effect

over several years, it is difficult to pinpoint any causal relationship between the passage of either

regulation as a whole or the implementation of different provisions, and developments in the

capital markets.

More generally, it is important to note that issuers will choose the type of offering that is

optimal from their point of view in terms of costs and benefits. Those costs and benefits may

depend on the current regulatory environment but will also depend on various other factors such

as the general state of the economy, interest rate cycles, etc. For example, prior economic

studies document the presence of hot and cold markets for registered equity offerings.45 These

hot and cold markets are driven by macroeconomic factors, changes in the level of information

asymmetry between investors and issuers, and changes in investor sentiment. It is also possible

that registered and exempt capital markets will respond differently to these factors, and may

function as either substitutes or complements. For example, it is possible that when registered

markets are cold companies switch to exempt capital markets, and vice versa. Alternatively, a

hot registered market could prompt companies to seek additional financing from exempt markets

in preparation of future public offerings.

Finally, while our analysis focuses on securities issuance, we recognize that bank lending

is an important source of financing for issuers, and consumer lending is a valuable source of

consumer access to capital. However, such lending falls within the statutory authority of

banking regulators and the Consumer Financial Protection Bureau (CFPB), and the Commission

is a primary regulator of capital markets. The analysis below, therefore, does not examine

See, e.g., Lowry and Schwert (2002), Helwege and Liang (2004), Gao et al. (2013), and Arikan and Stulz (2016)

lending markets directly, but considers asset-backed securitization markets, which support a

large volume of primary lending in an originate-to-distribute model.

II.

Capital Markets for Registered Offerings

One of the channels through which businesses can raise capital in the United States is a

registered offering. In this section, we consider the issuance of equity and debt in the registered

market, and document the evolution in the volume and structure of such issuance over time.

Total registered issuance in the United States has increased steadily from 2011 through 2016, as

shown in Figure C.1. It grew from $1.42 trillion in 2015 to $1.49 trillion in 2016. The period

2013-2016 witnessed the largest registered issuance in the US for the last 11 years.

Figure 1 plots capital raising in the IPO and SEO markets during the period 1996-2016.

The data suggests that IPO activity reached highs in 1999, 2007 and 2014, and lows in 2003,

2008, and 2016.

Figure 1. Capital raising through registered equity offerings (in $ billions), 1996-2016

250

$ Billions

200

150

100

Equity SEO

Equity IPO

Source: DERA analysis

Figure 1 illustrates the cyclicality of issuance activity and shows the dynamics of IPO

issuance through economic booms and busts. We cannot determine whether the Dodd-Frank Act,

which was enacted in 2010, notably affected IPO activity since we are unable to identify

mechanisms through which the Dodd-Frank Act would have impacted, positively or negatively,

IPO activity. For example, several of the Dodd-Frank Act’s executive compensation provisions

were not implemented in the sample period, and several other provisions of the Act did not apply

to EGCs following the enactment of the JOBS Act. In contrast, as can be seen from Figure 1 the

JOBS Act, which was enacted on April 5, 2012 and included provisions concerning IPOs and

exempt offerings, may have had a positive effect on IPO activity. However, the observed effects

are also generally consistent with higher issuance in strong macroeconomic conditions.

Further, we also observe a decline in IPOs in 2015 and 2016. We recognize that certain

provisions of the JOBS Act concerning various types of exempt offerings were implemented in

2015 and 2016. However, given the overall size of those markets documented below, a shift in

capital raising from traditional IPOs to Regulation A or crowdfunding offerings cannot explain

the decline in IPO activity in recent years. At the same time, the 2015-2016 decline in IPOs is

consistent with changes in investor demand, market saturation and the increased availability of

private funding and other alternatives for exit. A recent industry analysis has also identified a

market correction stemming from historically high market valuations, political and

macroeconomic uncertainty, and the availability of private capital enabling firms to selectively

time IPOs as potential contributing factors.46 Post-crisis evolution in IPO issuance is broadly

consistent with historical patterns of IPO waves.

Ernst & Young, May 2017, “Looking behind the declining number of public companies: An analysis of trends in

US capital markets,” https://www.sec.gov/spotlight/investor-advisory-committee-2012/ey-an-analysis-of-trends-inthe-us-capital-markets.pdf

IPOs by EGCs may be becoming the prevailing form of issuance in some sectors. For

example, Proskauer (2017) finds that 78% of IPO issuers in 2016 were EGCs, with a particularly

high concentration of EGC IPOs in health care, telecommunications, energy and power, and

financial service sectors (between 86% and 95%). At the same time, EGCs represented only

17% and 43% of IPOs in industrial and consumer/retail sectors respectively. Proskauer (2017)

also estimates that 90% of EGC issuers between 2013 and 2016 that disclosed testing-the-waters

communications operated in the health care and telecommunications and media sectors. Issuers

in those sectors often have shorter operating histories and lack revenue or net income, which is

consistent with greater opacity and risk of EGC issuers.

Title I of the JOBS Act was intended to make it less costly for EGCs to go public.

Research by Dambra et al. (2015) finds that the number of IPOs, and especially those by small

issuers, has increased notably over pre-JOBS Act levels. However, another study, Chaplinsky et

al. (2016), finds no reduction of direct issuance costs, accounting, legal, or underwriting fees for

EGCs, and observes an increase in indirect issuance costs in the form of underpricing.47

Proskauer (2017) estimates average IPO expenses as a percentage of base deal for 2016

placements, and finds that EGCs incur higher total IPO expenses (difference of 2.21%).

However, unlike Dambra et al. (2015) and Chaplinsky et al. (2016), this statistic is descriptive

and does not account for the potential selection of opaque and risky issuers into EGC status, or

control for differences in EGC and non-EGC issuer growth, profitability, sector and other

fundamentals.48

Underpricing is typically defined as the percentage difference between the market closing price on the day of the

initial public offering and the offer price at which underwriters sell shares to investors.

See Lowry et al. (2017) for a comprehensive overview of finance research on IPOs since 2000.

More generally, it is difficult to disentangle the above effects of the JOBS Act from the

effect of the general improvement in macroeconomic activity during this period. Prospective

registered equity issuers are exposed to aggregate economic and industry-level risks. Negative

macroeconomic shocks that reduce cash flows or increase the level of risk can reduce valuations

making offerings appear less attractive to investors and leading to a decrease in the number of

deals and/or deal sizes. Such aggregate trends similarly affect cycles in registered offering

activity. Small issuers may be relatively more affected by downturns if their cash flows are

lower and less diversified and if they lack sufficient collateral to obtain debt financing when their

internal cash flow declines.

Table 1 lists the number of offerings, the average and median offer size, and the average

and median gross spreads for both IPOs and SEOs. Consistent with Figure 1, these statistics

show that the average and median offering sizes for IPOs are close to what they were prior to the

crisis. There has also been an increase in small company IPOs—IPOs with proceeds up to $30

million were approximately 17 percent of the total number of IPOs in the period 2007-2011 and

22 percent in the period 2012-2016.

Figure 2 presents capital raising activity in the registered debt market for 2005-2016.

Consistent with findings in other studies, the amount of funding obtained through the registered

debt market on an annual basis is much larger than that obtained through the registered equity

market. The dollar volume of registered debt appears to have increased in recent years, which

may be a result of improving macroeconomic conditions and a low interest rate environment. As

economic prospects for companies improve, companies tend to increase investment, increasing

their demand for financing. Table 2 presents summary statistics for registered debt offerings and

shows that the average and median offer size of these offerings are much larger than those of

IPOs and SEOs.

Figure 2. Capital raising through registered debt offerings (in $ billions), 1996-2016

1,400,000

1,200,000

$ Billions

1,000,000

800,000

600,000

400,000

200,000

Public debt

Source: DERA analysis

Next, we consider the cost of registered debt offerings. Because of the low level of

interest rates, companies may be able to obtain debt financing at low cost. We find that the

average and median gross spreads are notably lower for registered debt offerings. The gross

spreads reported in Table 2 are similar to what prior economic studies have documented (Fang

(2005)): issuers raising capital through registered bond issues pay commissions between 0.7%

and 1.5% of the size of the offering.

III.

Capital Markets for Exempt Offerings

Introduction

Having considered registered offerings, we now turn to the analysis of exempt issuance.

Total primary unregistered issuance in the United States, which is the capital raised through all

the different types of unregistered offerings discussed below, has increased from 2010 through

2016, as shown in Figure C.2. Most recently, it dropped from a peak of $1.87 trillion in 2015 to

$1.68 trillion in 2016. During the period 2009-2016, total primary unregistered issuance has

consistently outpaced total primary registered issuance. Amounts raised through exempt

securities offerings of debt and equity for 2012 through 2016 combined exceeded amounts raised

through registered offerings of debt and equity over the same time period by approximately 26%.

In comparison, the same figure for 2009 through 2011 was 21.6%.

This market is governed by several exemptions from registration, including those under

Sections 4(a)(2), 3(b) and 3(a)(11) of the Securities Act. For example, Section 3(b) is the

exemptive authority for Rule 504 under Regulation D as well as Regulation A.49 Other parts of

the exempt market rely on “safe harbors”: rules and regulations that set forth specific conditions

that, if satisfied, ensure compliance with an exemption from registration. For example, issuers

can use Rule 506(b) of Regulation D, which is a non-exclusive safe harbor under Section 4(a)(2),

Regulation S for offerings outside of the United States, and Rule 144A, for the resale of

restricted securities to qualified institutional buyers. Finally, Rule 506(c) of Regulation D is a

stand-alone exemption for unregistered sales to accredited investors by means of general

solicitation. Bauguess et al. (2015) provide a comparative analysis of the characteristics of these

and other offering exemptions and safe harbors.

In 2015, Regulation A was amended to reflect the changes included in Title IV of the JOBS Act. Among the

changes in Regulation A is an increase in the amount of capital that can be raised (from $5 million to $50 million)

and preemption from state registration and review for certain offerings. See Rel. No. 33-9741, Amendments to

Regulation A (Mar. 25, 2015) (Regulation A+ Adopting Release). Rule 504 was amended, effective January 20,

2017, to increase the amount of capital that can be raised (from $1 million to $5 million) and to add the

disqualification of certain bad actors. Rule 505 has been repealed effective May 22, 2017. See Rel. No. 33-10238

Exemptions to Facilitate Intrastate and Regional Securities Offerings (Oct. 26, 2016) 81 FR 83494. We included the

historical Rule 505 data in our analysis.

The importance of exempt capital markets as a source of financing in the economy is

underscored by the fact that less than 0.02% of the estimated 28.8 million firms in the United

States are currently exchange-listed firms.50 Moreover, there has been a steady and substantial

decrease in the number of reporting companies in the United States.51 During this period,

exempt offerings of securities have contributed substantially to capital formation in the U.S.

economy, particularly for small and emerging companies that are often considered to be the

engine for creating new jobs,52 driving innovation, and accelerating economic growth. Hence,

exempt capital markets provide an important financing alternative for companies that, for various

reasons, forego financing in the registered capital markets.

Data for some of these exemptions are more readily available than for others. For

example, because issuers relying on Section 4(a)(2) are not required to file any document with

the Commission, offering information available in the commercial databases likely

underestimates the amount of capital raised through this exemption. Similarly, the available data

on Regulation D offerings could underestimate the true amount of capital raised through such

offerings. While Regulation D requires the filing of a notice on Form D no later than 15 days

after the first sale of securities, that filing is not a condition to the provision. Accordingly, it is

See SBA, Office of Advocacy, United States Small Business Profile (2016), available at

https://www.sba.gov/sites/default/files/advocacy/United_States.pdf. See also Barry Ritholtz, Where Have All the

Public Companies Gone?, BLOOMBERG VIEW (Jun. 24, 2015).

The decline in the number of US-listed firms in 1996-2003 represents approximately 74% of the decline from

1996 to 2016. See Ernst & Young, May 2017, “Looking behind the declining number of public companies: An

analysis of trends in US capital markets,” https://www.sec.gov/spotlight/investor-advisory-committee-2012/ey-ananalysis-of-trends-in-the-us-capital-markets.pdf. Also see Doidge et al. (2017).

During the period 1998-2008, U. S. Small Business Administration estimates show that small businesses

contributed almost 50% of U.S. non-farm GDP and accounted for 55% of U.S. employment, including 66% of all

net new jobs since the 1970s. See Robert Longley, Top Ten Reasons to Love US Small Businesses THOUGHTCO, at

https://www.thoughtco.com/reasons-to-love-us-small-businesses-3319899 (Sept. 4, 2015) (citing Office of

Advocacy, Small Business Administration). See also Small Business Administration, Small Business Quarterly

Bulletins, at https://www.sba.gov/advocacy/small-business-quarterly-bulletins.

possible that some issuers do not file a Form D for offerings under Regulation D.53 In addition,

there is no requirement to file a Form D amendment reporting the total amount actually raised in

the offering under Regulation D.54 Data used in the primary issuance analysis is described in

more detail in Appendix C.

General data on Regulation D and Rule 144A offerings

Figure 3 shows the amounts raised in Regulation D offerings, given the data limitations

discussed above, and Rule 144A offerings. The amount of capital raised through Regulation D

offerings is much larger than that raised in the Rule 144A market. When combined, the capital

raised through Regulation D and Rule 144A offerings in a year is consistently larger than the

total capital raised via registered equity and debt offerings. Most Regulation D offerings (over

66%) include equity securities; by contrast, in the Rule 144A market, the vast majority of issuers

are financial institutions and over 99% of securities are debt securities.

Table 3 provides summary statistics on the number of Regulation D offerings and the

average and median offering amount.55 The number of Regulation D offerings is an order of

magnitude larger than the number of registered debt and equity offerings. However, the average

and median offer sizes of Regulation D offerings are much smaller than those of registered

equity and debt offerings.

Separate analysis by DERA staff of Form D filings by funds advised by registered investment advisers and

broker-dealer members of the Financial Industry Regulatory Authority, Inc. (FINRA) suggests that Form D filings

are not made for as much as 10% of unregistered offerings eligible to use the Rule 506(b) safe harbor under

Regulation D.

See the General Instructions to Form D. An update to Form D may be required to reflect a change in the

information previously filed, except that certain less substantial changes enumerated in Rule 502 of Regulation D

(e.g., an increase in the offering amount of less than 10%) do not trigger the requirement to update the filing. If the

requirement to update is triggered, current information must be provided for the entire form.

Due to data availability constraints, the analysis of Regulation D issuance covers 2009 through 2016

Figure 3. Capital raised through Regulation D and corporate Rule 144A offerings (in $

billions), 2005-2016

1600

1400

$ Billions

1200

1000

800

600

400

200

2005

2006

2007

2008

2009

Regulation D offerings

2010

2011

2012

2013

2014

2015

2016

Corporate 144A offerings

Source: DERA analysis

Rule 506(c) of Regulation D

Title II of the JOBS Act directed the Commission to engage in rulemaking to permit

general solicitation in Rule 506 offerings, provided that sales are made only to accredited

investors and the issuer takes reasonable steps to verify purchasers’ accredited investor status.

The Commission subsequently adopted Rule 506(c) of Regulation D, permitting the use of

general solicitation and advertising subject to such conditions. From September 23, 2013, to

December 31, 2016, a total of 5,374 issuers disclosed in their Forms D that they initiated 5,474

new Rule 506(c) offerings (Table 4). During that period, almost $70.6 billion was reported

raised in initial Form D filings. An additional $37.1 billion was reported to be raised in amended

form D filings, some of which were originally initiated as Rule 506(b) offerings. During the

same period, there were 65,772 new Rule 506(b) offerings that reported to raise $2,186.2 billion

in initial Form D filings, and an additional $1,935.8 billion was reported to be raised in amended

form D filings. Though large in absolute terms, issuances claiming the new Rule 506(c)

exemption have accounted for only 3% of the reported capital raised pursuant to Rule 506 since

becoming effective in September 2013, through December 31, 2016.

While the underlying motivation for permitting general solicitation was to boost capital

formation through increased accessibility of certain issuers to accredited investors, the vast

majority of Regulation D issuers continue to raise capital through Rule 506(b) offerings. Some

have noted that the novelty of the Rule 506(c) provisions after decades of non-permissibility of

general solicitation in Regulation D offerings may be one reason why Rule 506(b) continues to

dominate the Regulation D market. In particular, issuers with pre-existing sources of financing

or intermediation channels, or both, may not yet have a need for the new flexibility. Other

issuers may become more comfortable with market practices as they develop over time,

including, among other things, certainty over what constitutes general solicitation.56 There may

also be concerns about the added burden or appropriate levels of verification of the accredited

investor status of all purchasers.57 For instance, Warren (2015) indicates that investor privacy

concerns regarding the disclosure of confidential financial information may be behind issuer

reluctance to rely on Rule 506(c) provisions. Markets may develop more efficient means for

verifying investor status over time.

Regulatory uncertainty has also been identified as a possible explanation for the relatively

low level of Rule 506(c) offerings. For example, certain pooled investment funds that need to

comply with Commodity Futures Trading Commission (CFTC) regulations continued to be

See, e.g., Keith Higgins, Director of the Division of Corporation Finance, U.S. Securities and Exchange

Commission, Remarks before the 2014 Angel Capital Association Conference (Mar. 28, 2014) available at

http://www.sec.gov/News/Speech/Detail/Speech/1370541320533. See also comments of Jean Peters, Board

member, Angel Capital Association, at the 33rd Securities & Exchange Commission Government-Business Forum

on Small Business Capital Formation (Nov. 20, 2014).

See comments of Jean Peters, Board member, Angel Capital Association, at the 33rd Securities & Exchange

Commission Government-Business Forum on Small Business Capital Formation (Nov. 20, 2014).

subject to the CFTC’s prohibition on advertising after September 23, 2013 (and at least until

September 2014), and therefore could not use Rule 506(c).58 Further, the Commission’s

proposed amendments to Regulation D and Form D at the time Rule 506(c) was adopted have

elicited widely divergent views from commenters, with some commenters expressing the view

that the “overhang” from the proposed (but never finalized nor withdrawn) rule has chilled use of

the new exemption.59

Additional analysis in Table 4 shows that the average amount reported sold in an initial

Rule 506(c) offering ($13 million) is much smaller than the average amount reported sold in a

Rule 506(b) offering ($26 million). The lower amounts reported to be raised at the date of initial

filing may be because issuers that anticipated difficulties raising capital in a timely manner chose

the Rule 506(c) market so that they would have an ability to advertise or generally solicit their

offering to a broader audience of potential investors. It is also possible that some sophisticated

investors perceive the election of the Rule 506(c) exemption as a signal that issuers anticipate

difficulties in raising sufficient capital and consequently consider it a less attractive offering,

which could also dissuade issuers from using the new exemption for their financing needs.

Overall, it is not clear whether offerings under Rule 506(c) are indicative of new capital

formation or a reallocation from other offering types. Consistent with the somewhat limited

uptake of new Rule 506(c), we do not observe a notable migration of existing issuer capital

raising activity from Rule 506(b) to Rule 506(c). In particular, only a small number of offerings

See Letter from Gary Barnett, Director, Division of Swap and Intermediary Oversight, CFTC to Regina Thoele,

National Futures Association, available at

http://www.cftc.gov/idc/groups/public/@lrlettergeneral/documents/letter/14-116.pdf.

See Warren (2015). See also Keith Higgins, Director of the Division of Corporation Finance, U.S. Securities and

Exchange Commission, Remarks before the 2014 Angel Capital Association Conference (Mar 28, 2014) available at

https://www.sec.gov/news/speech/2014-spch032814kfh (noting that then-Chair White had stated publicly that

issuers are not required to comply with the proposed rule, and that appropriate transition provisions would be

considered for ongoing offerings if a final rule were adopted).

switched from relying on Rule 506(b) to Rule 506(c). From September 23, 2013 to December

31, 2014, approximately 398 continuing Regulation D offerings switched their exemption to

Rule 506(c).60 These “switched” offerings have reported capital raisings of $12 billion. There

has been a similar movement in the number of “repeat” issuers (issuers that used to access the

Regulation D market via Rule 506(b) offerings) that have switched their offering types from

Rule 506(b) to subsequent Rule 506(c) offering: issuers that had a prior Regulation D offering

initiated 447 new Rule 506(c) offerings. These issuers have reported capital raisings of $16.7

billion.

Investors in Regulation D Offerings

Regulation D allows both accredited and non-accredited investors to participate in private

offerings, with an unlimited number of non-accredited investors in Rule 504 offerings, while

former Rule 50561 and Rule 506(b) offerings may include no more than 35 non-accredited

investors. Only accredited investors can participate in Rule 506(c) offerings. On the basis of

information collected from Form D filings, most participants in Regulation D offerings are

accredited. For example, on average 9% of new offerings included non-accredited investors for

the period 2009-2016 (Table 5). Offerings by financial issuers and real estate investment trusts

(REITs) are more likely to have non-accredited investors (13% of offerings had at least one such

investor during 2009-2016), while offerings by venture capital funds only rarely include nonaccredited investors (only 1% of offerings have at least one such investor).

The transition guidance in the Rule 506(c) Adopting Release clarifies that only offerings initiated prior to

September 23, 2013, can rely on the transition guidance to switch their exemption to Rule 506(c). See Rel. No. 339415, Eliminating the Prohibition Against General Solicitation and General Advertising in Rule 506 and Rule 144A

Offerings (July 10, 2013).

As noted above, the repeal of Rule 505 became effective May 22, 2017. See Rel. No. 33-10238, Exemptions to

Facilitate Intrastate and Regional Securities Offerings (Oct. 26, 2016).

Aggregated Form D information also indicates that, on average, more than 260,000

investors participated in Regulation D offerings for the period 2009-2016, of which more than

103,000 participated in offerings by nonfinancial issuers, more than triple the number of

investors that participated in offerings by hedge funds. However, the number of unique investors

is likely less than 260,000. Because an investor can participate in more than one Regulation D

offering, our aggregation likely overstates the actual number of unique investors, and we have no

method of estimating the extent of overlap. The mean number of investors per offering (14) is

substantially larger than the median (4), indicating the presence of a small number of offerings

with a large number of investors. Much of this skew appears to be driven by financial offerings.

For the period of 2009-2016, the median number of investors per offering varied between two

and seven across all types of offerings. During the same period of time, the mean number of

investors in nonfinancial offerings was nine, while the mean number of investors in financial,

pooled investment funds (e.g., hedge funds, private equity funds, and venture capital funds) and

REIT offerings varied from 15 to 25.

Offerings involving non-accredited investors are typically smaller than those that do not

involve non-accredited investors. This is evident in Table 6 below which shows that while the

presence of non-accredited investors is large in former Rule 505 offerings (40%), where the

number of non-accredited investors is limited to 35 and offering limit is $5 million, the

proportion is much higher for offerings under Rule 504 (58%) that have access to an unlimited

number of non-accredited investors but historically had an offer limit of $1 million.

Interestingly, a notably lower percentage of Rule 506(b) offerings (8%), including those that

have an offer size of up to $5 million, report selling or intending to sell to a non-accredited

investor. The big difference between Rules 506(b) and (c) and other rules under Regulation D is

that the former have preemption from state registration and review.62 Rule 506(b) provisions,

unlike Rule 504 or former Rule 505 provisions, also require the non-accredited investors to be

“sophisticated.”63 Thus, while issuers may prefer to raise capital under Rule 506(b) because of

the preemption of state registration and review, non-accredited investors who are also not

sophisticated are thus unable to participate in a Rule 506(b) offering.

Regulation D Offering Fees

When an intermediary is used in a Regulation D offering, there is notable variation in the

fees across each class of issuer. We calculate the total fee for an offering as the sum of

commissions and finder’s fees, scaled by the offering amount. Information from Form D filings

indicates that total fees are smallest for pooled investment funds and largest for nonfinancial

issuers (Figure 4). Nonfinancial issuers paid on average about 6% in total fees for Regulation D

offerings in 2009-2016. In comparison, a company going public pays an average gross spread of

7% to its IPO underwriters, while a reporting company raising equity through a follow-on

(seasoned) equity offering pays an average gross spread of about 5.4%. Issuers raising capital

through registered bond issues pay commissions between 0.9% and 1.5% of the size of the

offering.

States retain the authority to investigate and bring enforcement actions for fraud, impose state notice filing

requirements, and collect state fees.

Non-accredited investors in Rule 506(b) offerings must have sufficient knowledge and experience in financial and

business matters to make them capable of evaluating the merits and risks of the prospective investment, or the issuer

must reasonably believe immediately prior to making any sale that such purchaser comes within this description. See

Rule 506(b)(2)(ii).

Figure 4. Total fees paid by type of Regulation D issuer: 2009-2016

7.00%

6.00%

5.00%

4.00%

3.00%

2.00%

1.00%

0.00%

Hedge Fund Private Equity

Other

Venture

Fund

Investment Capital Fund

Fund

Financial

Services

Real Estate Non‐Financial

(Operating)

Source: DERA analysis

In contrast to operating issuers, hedge funds raising capital through Regulation D

offerings and private equity funds paid about 1%. Brokers and finders are no more costly, on

average, than the underwriters who charge fees for registered offerings, so fees do not provide an

obvious reason for their relatively infrequent use in exempt offerings.

The availability of general solicitation under new Rule 506(c) may have changed the role

of intermediaries in these offerings relative to their role in the traditional offerings under

Regulation D. During the period between September 23, 2013, and December 31, 2016,

intermediary usage in Rule 506(c) offerings was dramatically higher among operating and

financial issuers, compared to similar Rule 506(b) issuers (Figure 5). Overall, Rule 506(c)

offerings exhibited a higher level of intermediary usage (33% of new offerings) than Rule 506(b)

offerings (17% of new offerings). The higher usage of intermediaries in Rule 506(c) offerings

may relate to issuers, and especially non-fund issuers, seeking to rely on outside entities,

including third-party online platforms, to verify accredited investor status, a requirement for

using general solicitation.

Figure 5. Role of intermediaries in Rule 506(c) market: September 23, 2013 - December 31,

2016

% of offerings with Intermediaries

10%

40%

30%

20%

10%

Venture

Hedge Fund Private Equity

Other

Capital Fund

Fund

Investment

Fund

Financial

Services

Commission & Fees (% of total

amount sold)

12%

50%

Real Estate Non‐financial

506(b) Intermediary Usage

506(c) Intermediary Usage

506(b) fees

506(c) fees

Source: DERA analysis

On average, Rule 506(c) offerings also pay higher fees than Rule 506(b) issuers. Figure

5 shows that operating issuers paid almost 6.1% in fees in 506(c) offerings, relative to 5.3% paid

by such non-fund, nonfinancial Rule 506(b) offerings.

Figure 6 depicts the fees for different offering sizes, irrespective of issuer type or

provision under Regulation D. Average total fees decrease with offering size (Figure 6). Unlike

the gross spreads in registered offerings, the differences in commissions for Regulation D

offerings of different sizes are large: the average commission paid by issuers engaging in

offerings of up to $1 million (6.2% over the period 2009-2016) is more than three times higher

than the average commission paid by issuers engaging in offerings of more than $50 million

(1.9% over the period 2009-2016). These results are consistent with larger deals generating

economies of scale for the involved intermediaries. Even so, the vast majority of the offerings

are conducted without the use of a financial intermediary.

Figure 6. Total fees paid by size of Regulation D offering: 2009-2016

7.0%

6.0%

5.0%

4.0%

3.0%

2.0%

1.0%

0.0%

$0 ‐ <1million

$1 ‐ <5million

$5 ‐ <10million $10 ‐ <50million

Greater than

$50million

Source: DERA analysis

Overall, capital formation through private placement of securities has increased

substantially since the onset of the financial crisis. Amounts raised through exempt securities

offerings have outpaced the level of capital formation through registered securities offerings

during recent years. In Parts A.III.B through A.III.E, we have provided insights into a large

segment of the exempt securities market—offerings conducted in reliance on Regulation D.

Next, we turn to another type of exempt offerings, namely, offerings under Regulation A.

Regulation A Activity Overview

Regulation A is an exemption from registration for small offerings under Section 3(b)(2)

of the Securities Act. Prior to June 19, 2015, it enabled issuers to raise up to $5 million in a 12month period (subsequently, up to $50 million). It is available to issuers organized, and with a

principal place of business, in the United States or Canada. Historically, the Regulation A

exemption was not available to Securities Exchange Act of 1934 (Exchange Act) reporting

companies, investment companies (including business development companies), development

stage companies that have no specific business plan or purpose or have indicated that their

business plan is to engage in a merger or acquisition with an unidentified company or companies,

issuers of fractional undivided interests in oil or gas rights or a similar interest in other mineral

rights. In addition to these existing categories of ineligible issuers, the newly amended

Regulation A also excludes issuers that have not filed certain ongoing reports required by

Regulation A, issuers subject to certain Section 12(j) orders by the Commission, and issuers

subject to “bad actor” disqualification under Rule 262.

Title IV of the JOBS Act added Section 3(b)(2) to the Securities Act, directing the

Commission to adopt rules exempting from registration public offerings of up to $50 million

annually. On December 18, 2013, the Commission proposed rules to implement Title IV of the

JOBS Act by modernizing and expanding Regulation A and, on March 25, 2015, the

Commission adopted final rules.64 The final rules expand Regulation A into two tiers: Tier 1,

for securities offerings of up to $20 million (that tracks more closely “old” Regulation A); and

Tier 2, for offerings of up to $50 million. Under the final rules, Tier 2 issuers are required to

include audited financial statements in their offering documents and to file annual, semiannual,

and current reports with the Commission. With the exception of securities listed on a national

securities exchange, upon qualification, purchasers in Tier 2 offerings either must be accredited

investors or are subject to specified limitations on their investment. The amendments to

Regulation A took effect on June 19, 2015, and may have resulted in changes in the type of

offerings and issuers in this market in potentially notable ways.

See Regulation A+ Adopting Release.

We consider Regulation A offerings qualified by the Commission during 2005-2016.65 A

little under half of offerings were identified as being by issuers in the financial sector. The most

common jurisdiction of incorporation was Delaware. Figures 7 and 8 report the number of

qualified offerings and amounts sought in qualified offerings between 2005 and 2016.

Figure 7. Number of qualified Regulation A offerings, 2005-2016

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: DERA analysis

In a typical year during 2005-2016, there were about 14 qualified offerings seeking to

raise approximately $163.3 million. We note that there were substantially more issuers seeking

to raise capital under Regulation A during June 19, 2015– December 31, 2016 (97 qualified

offerings seeking to raise up to approximately $1.8 billion in the aggregate). We do not have

complete information about amounts raised during that time. We estimate, on the basis of issuer

Where relevant and where sufficient information was available, we focused on unique offerings and exclude postqualification amendments or new filings that are substantially similar to prior filings by the same issuer. We sought

to maintain accuracy, but some measurement error is inevitable. For some offerings, offer amounts were not

available in offering circulars. Offerings with missing information on amounts sought were excluded from the

totals.

reports of amounts raised filed during 2005-2016 that are available to us, that 56 issuers reported

positive proceeds in Regulation A offerings, totaling approximately $314.6 million.66 The total

includes 27 issuers that reported in 2015-2016 an aggregate of approximately $238.6 million in

proceeds raised in completed and ongoing offerings qualified under amended Regulation A.

Figure 8. Aggregate amounts sought in qualified Regulation A offerings, 2005-201667

1800

1600

1400

1200

1000

800

600

400

200

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Source: DERA analysis

The evolution of Regulation A offering activity during the period under consideration,

2005-2016, was affected by several relevant market and institutional considerations. First, the

Commission amended the Regulation A exemption in 2015 as part of implementing the mandate

Some issuers filed reports of sales with zero proceeds. Additionally, incomplete information is available to us

regarding the outcomes of Regulation A offerings during the examined period. Amounts raised are based on the

reports of sales filed during the examined period and thus reflect a lag: they do not include amounts raised during

the examined period that are reported at a later date, amounts raised in offerings in progress (unless the issuer has

opted to report them during the examined period), or amounts raised and reported after the end of the examined

period. For some offerings in the pre-amendment period, final reports of sales on Form 2-A were either not available

or not accessible electronically from EDGAR or ThomsonOne. Thus, we cannot determine with certainty whether

all of the offerings that qualified during the examined period have commenced or if any have been abandoned or

terminated by issuers.

These amounts are not inflation-adjusted. Since larger aggregate offering amounts were observed at the end of

the examined period, expressing offering amounts in 2005 dollars had the effect of accentuating the differences

between pre-amendment and post-amendment annual totals.

of Title IV of the JOBS Act. Second, compared to the size of the registered offerings and private

placement markets, Regulation A experienced relatively limited use during the examined period,

particularly prior to the effectiveness of the 2015 amendments. When the number of

observations is small, statistical analysis lacks power and may be easily skewed by a few

observations. Thus, any inference regarding potential trends or the set of issuers seeking to

participate in this market must be approached with considerable caution. Third, to the extent that

the Regulation A market serves as a smaller-scale alternative to a traditional IPO or SEO or as a

method of financing merger and acquisition transactions, growth outlook—and, in turn, the

extent of investor interest in a potential offering—at the economy and industry level can affect

Regulation A activity. We discuss these considerations in greater detail below.

The end of the examined period includes the months immediately following the

effectiveness of Regulation A amendments. Although the period after the effectiveness of the

amendments was relatively short, it was characterized by increased filing activity, with filers

taking advantage of the expanded Regulation A provisions and seeking qualification of larger

maximum offering amounts than under pre-amendment Regulation A. While it is too early to

assess the extent to which Regulation A amendments will affect the amount of capital formation

over the long run, based on the early indications available so far, aggregate filing counts and

aggregate offer amounts and deal sizes have likely increased relative to the pre-amendment

period.

Furthermore, the 2015 Regulation A amendments contained certain provisions that may

have ramifications for the development of a potential secondary market in Regulation A

securities. Specifically, the creation of an ongoing reporting regime for issuers in Tier 2

offerings may contribute to a reduction in information asymmetries between issuers and

investors and enable issuers to meet the requirements for having their securities quoted on one of

the higher over-the-counter (OTC) market tiers, potentially resulting in improved liquidity for

Regulation A investors. However, at this time, for the majority of issuers secondary trading in

Regulation A securities is either at a nascent stage or nonexistent.

Prior to the adoption of Regulation A amendments, analysis indicated that among the

factors that could potentially be related to limited use of Regulation A were compliance with

state securities review and qualification, a comparatively low $5 million offering limit, the

timing and cost associated with filing an offering statement with the Commission for

qualification, and the availability of other exemptions under the federal securities laws.68

While Regulation A activity has exhibited a notable increase after the effectiveness of the

Regulation A amendments, absolute levels of filing activity have remained low compared to

other unregistered offerings such as Regulation D and Rule 144A, potentially consistent with

issuers, service providers, and investors adjusting and learning about the new provisions. To the

extent that the Regulation A amendments require an initial period of adjustment and/or confront

market participants with a learning curve, the Regulation A offering activity may not be

representative of the typical level of Regulation A offering activity expected after the market has

gained experience with amended Regulation A.

At the same time, it is possible that future Regulation A offering activity may remain

modest. Issuers may continue to prefer Rule 506(b) offerings and private placements in reliance

on Section 4(a)(2) because of their lower initial and ongoing compliance related cost and the

absence of an offering limit. Issuers that elect to undertake an initial public offering may

continue to favor the traditional IPO route and become Exchange Act reporting companies.

See GAO, Factors that May Affect Trends in Regulation A Offerings, GAO-12-839 (July 2012), available at

http://www.gao.gov/assets/600/592113.pdf (GAO Report).

Additionally, a lack of secondary market liquidity may discourage investors from participating in

Regulation A offerings at valuations that the issuer finds attractive.

Furthermore, investors may hesitate to invest in issuers about which the market has less

information (known as “information asymmetry”) because of concerns about adverse selection

(lower quality issuers choosing to raise financing). In many cases, a venture capital fund or a

major underwriter, which may provide implicit certification of the prospects of a startup or small

issuer, is not involved. Most Regulation A issuers are small companies without analyst coverage

or notable institutional ownership, and both tiers of offerings subject issuers to disclosure

requirements that are less extensive than those imposed on Exchange Act reporting companies.

While institutions may be in a better position to analyze information about opaque issuers and

overcome adverse selection, less sophisticated investors may have greater difficulty in evaluating

the prospects of an issuer on the basis of offering materials alone. In addition, while venture

capital and angel investors may be able to negotiate downside protection options for their

investments in high-risk and high-information asymmetry companies, less sophisticated investors

may have less bargaining power in negotiating offering terms. Having less information about the

issuer may discourage such investors from investing or may lead investors only to invest in

offerings at valuations below those that the issuer would find attractive. Finally, we note that

there is not enough evidence at this time to determine whether the increase in capital formation

following amendments to Regulation A has served as a complement to or a substitute for capital

raising via other methods.

Overall, early signs indicate that amended Regulation A may offer a potentially viable

public offering on-ramp for smaller issuers as an alternative to a traditional registered IPO and

offer either an alternative or a complement to other securities offering methods that are exempt

from Securities Act registration. Preliminary evidence suggests that there has been an increase

in Regulation A offering activity in the initial period since effectiveness of the Regulation A

amendments; different types of issuers have initiated offerings; and issuers participating in the

offerings have generally sought to utilize the new provisions afforded by the 2015 amendments.

Like other small-scale analyses, the findings of this analysis of the Regulation A market

are qualified by the sample size and the relatively short observation period, thus, it is unclear to

what extent it can be extrapolated to future years or periods with different aggregate conditions.

The types of issuers that use this offering method in the future may differ from early adopters,

and medium- and long-term outcomes of Regulation A issuers remain an area for future analysis.

Further, questions remain regarding future offering outcomes and trends in intermediary

involvement and secondary market liquidity as the Regulation A market continues to develop.

Regulation Crowdfunding Activity Overview

Title III of the JOBS Act (Title III) amended Section 4 of the Securities Act and created a

new exemption from registration for Internet-based securities offerings of up to $1 million69 over

a 12-month period. Title III was intended to help small and startup businesses conduct lowdollar capital raising on the Internet. It can be thought of as an Internet-based method` of raising

seed financing from a broad, mostly retail investor base. Title III included a number of investor

protection provisions, including investment limitations, issuer disclosure requirements, and a

requirement to use regulated intermediaries. The SEC proposed securities-based crowdfunding

rules on October 23, 2013, and adopted the final “Regulation Crowdfunding” rules on October

On March 31, 2017, the Commission adopted amendments to increase the amount that issuers can raise through

crowdfunding to adjust for inflation. The maximum aggregate offering amount increased to $1,070,000, and the new

thresholds became effective on April 12, 2017. See JOBS Act Technical Amendments Release.

30, 2015, to implement the requirements of Title III.70 Issuers were able to use the new

exemption beginning May 16, 2016, when Regulation Crowdfunding became effective.71

While securities-based crowdfunding under Regulation Crowdfunding shares certain

similarities with non-securities-based (lending-based, reward-based, donation-based, and royaltybased) crowdfunding, such as the ability of the public to participate and the use of an Internetbased platform to solicit backers, there are important distinctions. Non-securities-based

crowdfunding campaigns do not involve a profit or revenue-sharing model and are generally not

subject to regulation under federal securities laws. Although any crowdfunding backer may have

nonpecuniary reasons for participating, backers in non-securities based crowdfunding campaigns

are more likely to be guided by such motives. Overall, the differences in the legal framework,

characteristics of fundraisers, and objectives of funders limit extrapolation from non-securities

based crowdfunding to Title III crowdfunding.

Regulation Crowdfunding established requirements for issuers and intermediaries seeking

to participate in an Internet-based crowdfunding offering. The key provisions are summarized

below:72



A given issuer is able to raise up to $1,070,000 across all crowdfunding offerings in a 12month period. An issuer must raise at least the target amount to receive funds.

Crowdfunding securities are generally subject to resale limitations for one year.

See Rel. No. 33-9470, Crowdfunding (Oct. 23, 2013) 78 FR 66427 (Crowdfunding Proposing Release); Rel. No.

33-9974, Crowdfunding (Oct. 30, 2015) 80 FR 71387 (Crowdfunding Adopting Release).

Provisions related to funding portal registration became effective on January 29, 2016, to give funding portals

additional time to undergo the SEC registration and FINRA membership process.

See Crowdfunding Adopting Release for details. In the JOBS Act Technical Amendments Release, the

Commission revised the investment limits and other dollar amount thresholds in Regulation Crowdfunding to adjust

for inflation. The inflated-adjusted amounts are reflected below.



The rules impose limits on the amount that an investor can invest in all Title III

crowdfunding offerings over a 12-month period. Investors with both an annual income

and net worth of at least $107,000 can invest up to 10% of the lesser of annual income or

net worth, but an investor’s total investment across all Title III offerings may not exceed

$107,000 in a 12-month period. Other investors can invest the greater of either $2,200 or

5% of the lesser of their annual income or net worth.



Crowdfunding issuers are subject to disclosure requirements at the time of the offering

(on Form C), during the offering’s progress and on completion of the offering (on Form

C-U) and annually in the form of annual reporting requirements (on Form C-AR).

Additionally, in offerings of over $107,000 in a 12-month period, financial statements

must be reviewed by an independent accountant, and in offerings of over $535,000 in a

12-month period (except the issuer’s first crowdfunding offering), financial statements

must be audited.



Crowdfunding securities must be offered through an SEC-registered intermediary, either

a broker-dealer or a funding portal, a new intermediary type established in Regulation

Crowdfunding. These intermediaries must take measures to reduce the risk of fraud,

make required disclosures about issuers available to the public, provide communication

channels to permit discussion of offerings on the platform, disclose the compensation

received by an intermediary, provide educational materials to investors, and comply with

additional requirements related to investor commitments, notices to investors, and

maintenance and transmission of funds. Registered funding portals that participate in

crowdfunding offerings may engage in a narrower set of activities than broker-dealers.73

Given the offering limits, crowdfunding is primarily used by relatively small issuers, thus

many of the economic considerations applicable to small and early-stage issuers apply to

crowdfunding as well.74 The availability of solicitation over the Internet and sales to investors

nationwide, irrespective of the location of the issuer (as long as the issuer is a U.S. issuer)

distinguish Regulation Crowdfunding from intrastate securities-based crowdfunding regulated

under state law that historically has relied on Securities Act Rules 147 or 504.75 The statistics

reported in Table 7 are based on the analysis of data as reported in EDGAR filings of Forms C,

C-U, and CFPORTAL through December 31, 2016, except as specified otherwise.76 For

offerings that have been amended, the information is generally based on the latest amendment

associated with that central index key (CIK) and file number as of the report date, except as

specified.

Between May 16, 2016, and December 31, 2016, excluding 24 withdrawn77 offerings and

potential duplicate filings,78 there were 163 unique offerings by 156 issuers (including 7 issuers

Among other things, a funding portal cannot offer investment advice or recommendations; solicit purchases, sales

or offers to buy the securities offered or displayed on its platform; compensate employees, agents or other persons

for solicitation or based on the sale of securities on its platform; and hold, manage, possess, or otherwise handle

investor funds or securities.

See Crowdfunding Adopting Release.

See Crowdfunding Adopting Release. To facilitate intrastate securities-based crowdfunding, the Commission

recently amended Rule 147 and Rule 504 and adopted a new intrastate offering exemption as Rule 147A. See Rel.

No. 33-10238, Exemptions to Facilitate Intrastate and Regional Securities Offerings (Oct. 26, 2016). Amendments

to Rule 504 took effect on January 20, 2017. The amended Rule 147 and the new Rule 147A took effect on April

20, 2017.

Data comes from the XML portion of Forms C and C-U and amendments to them. When we refer to offerings,

we refer to initiated offerings that have not been withdrawn, unless specified otherwise. We analyze withdrawn

offerings separately. When discussing completed offerings, we refer to offerings that have reported proceeds of at

least the amount raised on Form C-U. Unless specified otherwise, offerings with Forms C-U filed without proceeds

information reported are excluded from the analysis.

Withdrawn offerings include unique offerings for which a Form C-W was filed and a new Form C or amendment

was not subsequently filed and offerings that used an intermediary that filed a Form CFPORTAL-W to withdraw its

[Footnote continued on next page]

that filed for more than one crowdfunding offering).79 Of those, 28 offerings reported meeting

their target amount on Form C-U as of December 31, 2016.80 Statistics are presented at the

offering level.

The median (average) offering between May 16, 2016, and December 31, 2016, targeted

approximately $53,000 ($110,000). For almost all of these offerings, oversubscriptions up to a

higher maximum were accepted (the median issuer set the maximum close to the $1 million limit

in the final rules). Of the offerings that reported having raised at least the target amount, the

median (average) amount reported raised was notably larger, at approximately $171,000

($290,000).81

Amounts reported raised are based on filings of Form C-U and generally pertain to

completed and not ongoing offerings. Under the final rules, interim progress updates may be

provided by the intermediary and are not required to be filed on EDGAR, but issuers must file

Form C-U within 5 business days of reaching the target amount for offerings that do not accept

amounts in excess of the target amount known as “oversubscriptions” and within 5 business days

funding portal registration, even if the filings themselves had not been withdrawn. During this time period, 24

offerings were classified as withdrawn. The remaining sample may contain additional withdrawn or abandoned

offerings that have not been identified using these criteria (e.g., offerings that have reached the deadline date but

have not been associated with filing activity or updates) and additional offerings may be classified as withdrawn at a

future date (e.g., if the issuer withdraws an offering or if the portal through which it is offered withdraws its

registration). Overall, since amounts sought may not be successfully raised, statistics on the amounts sought should

be interpreted with caution. The actual ex post amount of capital formation in this market may be considerably

lower than the amounts sought in offerings that had been initiated.

Cases of multiple filings by the same filer on Form C with substantially similar offering information made within

a short span of time are consolidated into a single offering.

See Ivanov and Knyazeva (2017).

In addition, there were four Forms C-U filed during January 1, 2017 - January 15, 2017, for offerings with

deadline dates in 2016; for one of two offerings for which Forms C-U were filed before January 1, 2017, without

proceeds information, proceeds information was obtained on the funding portal page. As of January 15, 2017,

approximately $10 million in proceeds was reported raised for 33 offerings by issuers filing Forms C-U. No

offerings have been withdrawn on Form C-W between January 1, 2017, and January 15, 2017.

Unless specified otherwise, amounts raised are based on data through December 31, 2016. If data from note 80

above is added, the median (average) raise becomes approximately $171,000 ($303,000), which illustrates the

caveat that estimates obtained from a small sample can be highly sensitive to the addition of new data.

of reaching the offering’s deadline date for offerings that accept oversubscriptions.82 The

offering characteristics in Table 8 show that a typical offering was due to close within 4-5

months of initiation.83 With very few exceptions, issuers permitted oversubscriptions—

investments above the target amount sought. Issuers took advantage of the flexibility afforded

by Internet solicitation to raise as much capital as possible in a crowdfunding offering.

As can be seen from Table 8 and Figure 9, the most popular security issued was common

or preferred equity, accounting for 36% of offerings. Debt accounted for 20%, and there were

various other security types, such as units, convertibles, “simple agreements for future equity,”84

and others (including revenue sharing and membership / limited liability company (LLC)

interests).

Overall, initial evidence on the Title III crowdfunding market activity suggests that some

small, pre-revenue growth firms are beginning to use crowdfunding as a securities offering

method. However, the small sample limits the inference that can be drawn from statistics on

issuer and offering characteristics, fees, and measures of offering activity. More time is needed

to assess this market as it develops.

See also Crowdfunding Adopting Release, at 71417.

Offering information is based on the most recent filing for each offering, except as specified otherwise. Offering

duration (the number of months between the filing date and the deadline date) is based on the first filing.

“Simple agreements for future equity,” used in 26% of the offerings so far, were designed by a Silicon Valley

startup accelerator for early-stage entrepreneurial ventures to provide their holders with option-like payoffs from a

potential conversion into equity, contingent on a subsequent valuation event (such as a follow-on financing round or

offering at a specified valuation) but no voting, dividend or coupon rights. Issuers may offer voting rights to larger

investors. The conversion terms are based on whether the subsequent valuation event was at a higher than specified

valuation. See Green, Joseph, and John Coyle, 2016, Crowdfunding and the not-so-safe SAFE, 102 Virginia Law

Review Online 168, http://ssrn.com/abstract_id=2830213. But see Wroldsen, Jack, 2017, Crowdfunding investment

contracts, 11 Virginia Law & Business Review (forthcoming), http://ssrn.com/abstract_id=2844771.

Figure 9. Distribution of crowdfunding security types

Units, 7%

Misc., 5%

Equity, 36%

"Simple

Agreement for

Future Equity",

26%

Convertible, 6%

Debt, 20%

Source: DERA analysis

IV.

The ABS Market

Asset-backed securitization (ABS) plays an important role in the creation of credit by

increasing the amount of capital available for the origination of loans and other receivables

through the transfer of those assets in exchange for new capital to other market participants.85

Benefits of the securitization process may include reduced cost of credit and expanded access to

credit for borrowers, ability to match risk profiles of securities to investors’ specific demands,

and increased secondary market liquidity for loans and other receivables. In addition, the ABS

market, although not a primary issue market, is nevertheless an important one because it supports

a large volume of primary offerings issuance of underlying consumer and business loans and,

thus, plays an important indirect role in capital raising.86

See Rel. No. 34-73407, Credit Risk Retention (Oct. 22, 2014), 79 FR 77602 (Credit Risk Retention Adopting

Release).

We make a distinction here between the primary market for the ABS as securities and the primary market for the

underlying assets (loans, receivables, etc.).

Figures 10 and 11 show the dollar volume of both registered and Rule 144A ABS

offerings for different types of underlying loans: Figure 10 for Residential Mortgage-Backed

Securities (RMBS) and Figure 11 for ABS backed by all other types of collateral.

Figure 10. Registered and Rule 144A RMBS offerings (in $ billions), 2005-2016

800

700

600

$ Billion

500

400

300

200

100

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Registered RMBS

Rule144A RMBS

Source: DERA analysis

The dollar volume of both types of offerings has decreased dramatically following the

financial crisis. However, the issuance of registered RMBS almost stopped after 2008, whereas

the issuance of registered ABS backed by other types of loans continued. We note that the

market for private-label RMBS is distinct from other ABS markets because of the presence of

Government Sponsored Enterprises (GSE), and its dynamics are more likely linked to the

dynamics of the underlying housing market rather than to any effects stemming from changes in

the securities market.87

Figure 11. Registered and Rule 144A non-RMBS ABS offerings (in $ billions), 2005-2016

800

700

600

$ Billion

500

400

300

200

100

2005

2006

2007 2008 2009 2010

Registered non‐RMBS ABS

2011 2012 2013 2014

Rule144A non‐RMBS ABS

2015

2016

Source: DERA analysis

For non-RMBS, we observe that the overall volume of ABS issuance has notably

recovered since the trough of 2010. We also observe that the volume of private non-RMBS ABS

offerings was slightly larger than the volume of registered ones following the financial crisis, a

reversal from the pre-crisis period. Table 9 presents the number of ABS offerings, the average

and median size of offerings, and the gross fees associated with offerings between 0.2% and

0.4%. There is no discernible trend in the fees over the period under examination.

See, e.g., Rel. No. 33-9638, Asset-Backed Securities Disclosure and Registration (Sept. 4, 2014) 79 FR at 57192

(Regulation AB2 Adopting Release). (“In the RMBS market, private-label RMBS issuers encounter competitive

pressure from government-sponsored enterprises, whose mortgage-backed securities are guaranteed and exempt

from registration and reporting requirements. As private-label issuance has declined, issuance of agency RMBS has

increased.”).

We note that recent rules specific to the ABS market went into effect at the end of or after

the time period considered in the Report,88 and some rules (such as credit risk retention) affected

both registered and private markets. Regulation AB2, which fully applies only to some types of

registered ABS offerings, went into effect in stages, in November 2015 and in November 2016;89

the Credit Risk Retention rule went into effect in December 2016 for most asset classes and

applies to both registered and unregistered ABS.90 Thus, it is challenging to causally attribute

the above trends to regulatory impacts. Further, while such trends may be generally consistent

with regulatory impacts, they are also consistent with other explanations, such as a shift in

investor risk tolerance and beliefs about the risks and returns of various ABS offerings following

the financial crisis.

As we noted in the Methodological Considerations section, it is possible that some market participants anticipated

and responded to some of these reforms ahead of the compliance or effective dates.

Regulation AB2 shelf eligibility requirements other than asset-level disclosure and some other requirements went

into effect in November 2015. The asset-level disclosure requirements went into effect in November 2016 for some

types of ABS. Proposals to apply asset-level disclosure requirements to other types of ABS remain outstanding. See

Regulation AB2 Adopting Release, 79 FR at 57184.

See Credit Risk Retention Adopting Release, 79 FR at 77602.

Tables on Primary Issuance

Table 1. Number of offerings, offer size, and gross spreads for IPOs and SEOs, 2005-2016

Number of

Year offerings

SEOs

IPOs

2005 477

236

2006 486

246

2007 439

298

2008 280

2009 858

2010 861

200

2011 641

201

2012 738

206

2013 920

283

2014 811

347

2015 767

218

2016 702

119

Source: DERA analysis

Average offer

size

SEOs IPOs

$192 $159

$196 $188

$206 $210

$504 $195

$243 $311

$201 $203

$197 $187

$231 $217

$196 $202

$195 $257

$223 $164

$155 $90

Median offer

size

SEOs IPOs

$100 $105

$108 $104

$117 $114

$136 $126

$65

$139

$53

$90

$69

$81

$75

$77

$90

$99

$101 $90

$98

$80

$207 $80

Average gross

spread

SEOs IPOs

4.3%

6.7%

4.2%

6.5%

4.3%

6.6%

4.1%

6.7%

4.8%

6.3%

4.8%

6.7%

4.5%

6.3%

4.5%

6.4%

4.5%

6.5%

4.6%

6.5%

4.6%

6.5%

4.3%

6.5%

Median gross

spread

SEOs

IPOs

4.7%

7.0%

4.6%

7.0%

4.5%

7.0%

4.2%

7.0%

4.8%

6.8%

5.0%

7.0%

4.6%

7.0%

4.5%

7.0%

4.5%

7.0%

4.8%

7.0%

5.0%

7.0%

4.5%

7.0%

Table 2. Number of offerings, offer size, and gross spreads for public debt offerings, 20052016

Number of Average

Year

offerings

offer size

2005

1,843

$406

2006

1,739

$557

2007

1,489

$662

2008

1,189

$740

2009

1,405

$734

2010

1,827

$448

2011

1,537

$528

2012

1,481

$661

2013

1,514

$698

2014

1,604

$695

2015

1,565

$775

2016

1,636

$810

Source: DERA analysis

Median

offer size

$250

$350

$425

$400

$500

$250

$350

$500

Mean gross

spread

1.2%

1.0%

1.3%

1.5%

1.3%

1.7%

1.0%

0.8%

1.3%

1.1%

0.8%

Median gross

spread

1.0%

0.7%

1.0%

1.2%

0.8%

1.5%

1.3%

0.7%

0.8%

0.7%

Table 3. Capital raised through Regulation D and Regulation D/A (amended) offerings*

Regulation D Regulation

filings

D/A filings

Year (number)

(number)

2009 13,764

7,077

2010 17,581

11,864

2011 18,174

12,536

2012 18,187

13,284

2013 19,846

14,533

2014 22,004

15,254

2015 22,854

15,651

2016 22,992

16,490

Source: DERA analysis

Mean

amount sold

($ millions)

Median

amount sold*

($ millions)

1.5

1.4

1.5

*Mean and median amount sold based on initial (new) Form D filings only. Total amount sold

includes additional amounts raised and reported in amended filings, recorded at the time of the

amendment.

Table 4. Capital raised through Rule 506(c) and Rule 506(b) offerings: September 23, 2013

- December 31, 2016

Form D

Rule

Filings

506(c)

5,474

506(b)

65,772

All 506

71,146

Regulation

D**

73,556

Source: DERA analysis

Number of

Amendment

Filings

874

33,430

34,304

Total

amount

sold*

($ billions)

$108

$4,122

$4,230

Mean

amount sold

($ millions)

$13

$26

$25

Median

amount sold

($ millions)

$0.7

$1.6

$1.5

Median offer

size

($ millions)

$2.4

$2.2

$2.3

50,491

$4,232

$24

$1.4

$2.0

* Total amount sold includes incremental amounts reported to be raised in amended filings

(Form D/As). Mean and median amounts sold based on initial (new) Form D filings only.

Median offer size is based on offerings that report their amount of offering.

** Includes all four rules: Rules 504, 505, 506(b) and 506(c).

Table 5. Investors participating in Regulation D offerings: 2009-2016

32,684

22,572

Mean

Investors

per

Offering

Fraction of offerings

with at least one

non-accredited

investor

7,428

31,524

12,220

53,943

103,194

263,621

13%

10%

Total Number

of Investors

Hedge Funds

Private Equity Funds

Venture Capital

Funds

Other Investment

Funds

Financial Services

Real Estate

Nonfinancial Issuers

All offerings

Source: DERA analysis

Median

Investors per

Offering

Table 6. Proportion of Regulation D offerings that sold or intend to sell to non-accredited

investors91

Rule 504

2009

53%

2010

54%

2011

57%

2012

58%

2013

61%

2014

60%

2015

61%

2016

65%

2009-2016

58%

Source: DERA analysis

Rule 505

39%

41%

43%

44%

41%

36%

43%

41%

40%

Rule 506(b)

Offerings <=$5

million

10%

All 506(b)

offerings

10%

Rule 506(c) offerings can sell only to accredited investors.

Table 7. Market size statistics (at the offering level) for crowdfunding offerings, 2016

Aggregate ($ million)92 Median ($ 000s) Mean ($ 000s) Observations

Target amount

18.0

110

163

Maximum amount

101.1

999

647.5

163

Amount raised

8.1

171

290

2894

Source: DERA analysis

Table 8. Offering characteristics for crowdfunding offerings, 2016

Offering duration, in months

%: Oversubscriptions accepted

Number of jurisdictions of solicitation

%: Security type ‘equity’

%: Security type ‘debt’

%: Security type ‘other’

Source: DERA analysis

Mean

Median

4.5

98%

50.6

36%

20%

44%

4.0

51.0

Observations

163

For issuers with multiple crowdfunding offerings, if the cumulative target or maximum offer amount is greater

than $1 million, we cap it at $1 million for purposes of computing aggregate amounts offered. For example, if an

issuer seeks up to $1 million in the first offering, raises $200,000, and seeks up to $800,000 in the second offering,

we record the cumulative maximum amount sought by the issuer as $1 million.

Maximum amount is defined as the maximum amount as specified in Form C if the offering accepts

oversubscriptions (investments above the target amount) and is defined as the target amount if the offering does not

accept oversubscriptions.

Excludes reports without information on the proceeds (for example, reports noting “end of offering” without

indicating a dollar amount of proceeds).

Table 9. Number of offerings, offer size, and gross spreads for registered and private ABS

offerings, 2005-2016

Number of

offerings

Rule

Year

Reg’d

144A

2005

1,594

907

2006

1,508

1,550

2007

1,088

1,102

2008

163

240

2009

264

2010

395

2011

280

2012

157

449

2013

180

540

2014

188

628

2015

178

635

2016

151

547

Source: DERA analysis

Average ($ mil)

Rule

Reg’d

144A

$910

$356

$959

$402

$964

$471

$863

$545

$1,068 $454

$785

$410

$871

$491

$1,001 $408

$964

$414

$966

$439

$901

$434

$924

$416

Median ($ mil)

Rule

Reg’d

144A

$734

$206

$796

$226

$700

$300

$710

$190

$946

$250

$772

$210

$877

$303

$1,026 $358

$995

$388

$1,000 $412

$951

$408

$894

$400

Gross Fee

Rule

Reg’d

144A

0.2%

0.3%

0.2%

0.3%

0.2%

0.3%

0.4%

0.3%

0.4%

0.3%

0.4%

0.3%

0.4%

0.3%

0.2%

0.3%

Part B. Market Liquidity

I. Introduction

As discussed above, primary issuance enables issuers to raise capital and impacts the

types of securities available for capital allocation by businesses, investors, and consumers.

Primary issuance characteristics can contribute to a reduction in secondary market liquidity if

there is a high degree of concentration of risky issuers in certain issuance types or when primary

issuance becomes fragmented. At the same time, the liquidity of issues in secondary markets

determines whether investors are able to exit positions of different sizes quickly and without

price impact, which may influence investor demand for securities in primary markets. As we

noted earlier, the ability of market participants to exit their investments when secondary market

liquidity is strong may facilitate primary issuance and increase the probability of placement

success.

Therefore, secondary liquidity is an important characteristic that influences capital

markets. In this section we turn to the evolution of market liquidity. In addition to analyzing

liquidity in Treasuries and corporate bonds, we consider developments in single-name CDS and

funds to test whether spillovers and liquidity diffusion across markets may contribute to

observed trends in Treasuries and corporates. The sections below discuss a variety of liquidity

metrics in those markets.

From the outset, we note that the analysis below considers the time series and crosssectional evolution of various liquidity metrics, and does not seek to estimate the optimal amount

of liquidity under various market structures or stress scenarios. Similarly, we recognize that

liquidity is only one attribute of a market, albeit an important one. We do not seek to establish

how liquidity should or should not be weighed against other market attributes, such as

informational efficiency or market stability.95

II. Empirical Measures of Market Liquidity

Broadly, liquidity refers to the ability to execute transactions of a required size in a short

period of time with little price impact.96 A vast academic literature on market microstructure

formulates different measures reflecting various dimensions of liquidity.97 Existing measures of

liquidity can be grouped roughly into three categories: trading activity measures (e.g., trading

volume, turnover, average trade size), transaction cost measures (e.g., bid-ask spread, price

impact), and measures of liquidity supply (e.g., dealer inventory, order book depth). Because

liquidity is priced, i.e., the ability to sell an asset quickly has value in and of itself,98 some of

these measures reflect not only direct execution costs, but also the premium paid for more liquid

assets. Some measures can be observed only at specific frequencies (e.g., daily), but many of

these measures can be estimated with both daily and intraday data.

Trading Activity

Trading activity metrics generally reflect the overall amount of trading in a particular

bond or market, and greater activity may reflect an increased ability of a participant to buy or sell

For instance, there may be a tradeoff between informational efficiency and liquidity. When markets are opaque,

market participants may be less willing to transact, dampening liquidity. At the same time, when market

participants are highly informed about the value of an asset, prices accurately reflect existing information and little

trading may occur. For example, Grossman and Stiglitz (1980) showed that informational efficiency reduces

incentives of economic agents to expend resources to acquire information. Their seminal result is that, because

information is costly, prices cannot perfectly reflect available information—if they did, those who spent resources to

obtain it would receive no compensation. Therefore, they conclude that there is an equilibrium amount of

“disequilibrium.”

See, e.g., Sarr and Lybek (2002) and Bank for International Settlements (2014).

These dimensions of liquidity are: (i) tightness, which refers to low transaction costs; (ii) immediacy, which refers

to the speed with which orders can be executed; (iii) depth and breadth, which refer to the existence of abundant buy

and sell orders at various price levels; and (iv) resiliency, that refers to the market’s ability to quickly correct order

imbalances and move prices back to fundamental values if prices are disturbed. See Sarr and Lybek (2002).

See, e.g., Amihud et al. (2013) for a collection of academic articles that present theory and empirical evidence on

the effect of liquidity on asset prices and how liquidity risk affects prices.

a bond. Trading volume and turnover directly measure trading activity in the market. If markets

are liquid, then market participants should be able to exchange large volumes of traded assets

either in absolute terms (trading volume) or in relation to the outstanding amounts of the assets

(turnover). We note that both of these metrics are influenced by the changing trading needs of

investors (e.g., trading volume might be elevated during times of high volatility), and by the

changing supply of an asset (e.g., turnover does not take into account the share of a security’s

supply held by long-term investors and not available for trading, which might change over time).

Therefore, it may be difficult to disentangle liquidity supply and liquidity demand explanations

of the evolution in trading volume and turnover.

Average transaction size is sometimes used as a measure of liquidity—larger average

trade size reflects participants’ ability and willingness to trade large quantities of assets with

small price impact. However, with the advent of electronic markets, investors may be able to

more efficiently split larger transactions into smaller amounts and rely on algorithms to optimize

execution or to obscure their trading strategies. Thus, a transaction size metric might exhibit a

secular downward trend because of structural changes in the market rather than any other effects.

Transaction Costs

Transaction costs and price impact of trades capture the price dimension of liquidity, with

lower transaction costs and lower price impact generally suggesting improvements in this

liquidity dimension. We note that empirical measures of transaction costs reflect trade execution

costs and do not reflect untraded bonds. Therefore, it is important to interpret the transaction

cost evidence in conjunction with the trading activity metrics above.

A quoted bid-ask spread is a common transaction cost measure. It is calculated as the

difference between buy and sell quoted prices and serves as a proxy for the direct cost of a

round-trip trade. A quoted bid-ask spread measures the tightness dimension of liquidity and the

direct transaction costs of executing a trade. However, a quoted bid-ask spread does not take

into account the quantity dimension of the order book. The quantities available at the bid or the

ask price might be limited, despite a narrow quoted bid-ask spread and, thus, execution of large

trades at these prices might not be possible. A closely related metric is the effective spread,

which is a better proxy for true transaction costs. It is twice the difference between the execution

price and the average of the bid and the ask price. In the absence of quote data, Roll (1984)

suggests an estimator of the effective spread on the basis of the serial covariance of the change in

price and shows that, under certain assumptions, this measure approximates transaction costs

well.

Other transaction cost measures are related to price impact, motivated by Kyle (1985),

and are based on the estimated price changes per given net order flow. Price impact measures

assess the change in a security’s price when a liquidity taker uses up some of the supplied

liquidity. Lower price impact indicates better market resiliency and an ability to execute trades

without adverse impact on prices. However, price impact does not measure direct transaction

costs or market depth.

Liquidity Supply

Liquidity supply in fixed income markets can be represented by the total amount of bonds

held by dealers in inventory. This is an ex post measure of whether dealers have been willing to

take on inventory risk. It may be interpreted as an imperfect proxy of potential future ability of

dealers to supply liquidity, but does not necessarily measure dealers’ willingness to provide

liquidity. This measure also does not take into account the possibility that market participants

other than dealers might substitute for dealers as liquidity providers. A reduction in the dealer

inventory levels may be offset by an increase in the inventory held by non-dealer liquidity

providers.

Similarly, visible quoted depth represents the amount of securities available for

sale/purchase at the best bid/offer. Quoted depth measures the supply of liquidity by market

participants as the volume that can be transacted at the quoted levels. Another measure of

market depth, order book depth, is the amount of securities available for sale/purchase within a

certain price range. We note, however, that neither measure of depth considers the cost

dimension of liquidity, because they both focus on the quantity offered for purchase or sale

conditional on price.

Composite Measures

Finally, some studies suggest composite measures that would present a single number to

summarize multiple facets of liquidity.99 These composite measures typically rely on weighted

averages or principal component analysis of several liquidity measures that quantify different

dimensions of liquidity. However, such index measures may be difficult to interpret, and there is

little consensus in academic and practitioner research on the use of aggregate liquidity metrics.

See, e.g., Korajczyk and Sadka (2008) and Adrian et al. (2015) that use methods based on the principal component

analysis for the U.S. equity markets and for the U.S. Treasury markets, respectively, Autorité des Marchés

Financiers (2015) that uses weighted averages to measure liquidity of French bond market, and Financial Conduct

Authority (2016) that uses a combination of both approaches to measure liquidity of the UK bond market.

III.

Treasuries

Introduction

U.S. Treasury securities are fixed income securities issued by the U.S. government,

priced by most market participants as nearly default free.100 These securities play a unique role

in financial markets because of their aggregate market size, level of trading activity, and backing

by the U.S. Government. They serve as a critical element in the financing of the U.S.

Government and the execution of U.S. monetary policy. U.S. Treasuries are used as a highquality investment, a store of value, and as a primary tool for interest rate risk management by

not only investors, but also nation states. In addition, their yield is often used as the benchmark

yield for pricing many other fixed income instruments.101

The U.S. Treasury market is the largest government securities market in the world. As of

September 30, 2016, there are $19.6 trillion of Treasuries securities outstanding, with $14.2

trillion held by the public. Of publicly held debt, $13.6 trillion is tradable in financial markets.102

Treasury securities make up approximately 33% of the entire U.S. fixed income market, which

also includes municipal, mortgage-related, corporate, federal agency, money market, and assetbacked securities.103

The U.S. Treasury market is also one of the most liquid and lowest transaction cost fixed

income markets in the world.104 Treasury securities can be viewed as close cash substitutes

because market participants can generally rely on the ability to convert Treasuries into cash

100

Krishnamurthy and Vissing-Jorgensen (2012) even argue that the Treasury interest rates are lower that the “true”

riskless interest rates because of the liquidity and convenience of Treasury securities.

101

See Fleming (2000) and Joint Economic Committee (2001).

102

See Monthly Statement of the Public Debt of the United States, September 30, 2016, U.S. Treasury at

https://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm.

103

See SIFMA statistics at http://www.sifma.org/research/statistics.aspx.

104

See, e.g., Bank for International Settlements (2016).

rapidly and at low cost. Currently, trading in the U.S. Treasury market is more active than in all

other U.S. fixed income markets combined. The average daily trading volume in the U.S.

Treasury market in September 2016 was $499 billion and made up 64.6% of the entire U.S. bond

markets trading volume.105

Because of its importance in setting benchmarks for financial markets, its scale, and its

trading activity, the liquidity of the secondary U.S. Treasury market is an important

consideration for both market participants and regulators.106 In this section, we consider changes

in U.S. Treasury market liquidity and whether any observed changes are consistent with the

hypothesis that Dodd Frank, Volcker, and Basel III reforms, among other factors, had adverse

effects on liquidity in this market. From the outset, we note that the Treasury market has

evolved since the financial crisis of 2007–2009 in ways that may have influenced liquidity

conditions. We summarize these changes below and discuss how they and other potential drivers

may be changing liquidity conditions.

First, regulators introduced, adopted, and made effective several new regulations that

affected market participants—and, in particular, dealers. During and after the crisis, most major

dealers became banks or bank holding companies and, thus, became subject to new enhanced

capital and liquidity requirements and other applicable banking regulations. In particular, the

new leverage ratio requirements of the Basel III framework were intended to constrain excess

leverage and may have increased the costs of market making in U.S. Treasuries.107 Parts of the

Dodd-Frank Act—in particular, the Volcker Rule—also directly affected dealers’ trading

105

See SIFMA statistics at http://www.sifma.org/research/statistics.aspx.

The Treasury, the SEC, the Office of the Comptroller of the Currency (OCC), the Federal Reserve Board (FRB),

and the Federal Deposit Insurance Corporation (FDIC), regulate different aspects of the cash Treasury market and

many of its participants, while the CFTC regulates the futures markets, including the Treasury futures markets, and

many of its participants. See Joint Staff Report (2015).

107

See, e.g., Bank for International Settlements (2014).

106

activities in fixed income markets. Some market participants believe that these regulations have

substantially changed dealers’ business models and practices, affecting dealers’ balance sheets

and profitability and their ability to provide liquidity to fixed income markets.108 For instance,

some have argued that Basel III minimum capital requirement and its lack of risk-weighting may

potentially make capital intensive, low risk, low-margin and high-volume business, such as

market-making in highly rated sovereign bonds and repo, less profitable and may, therefore,

reduce its volume. For a more detailed regulatory reform timeline that covers other post-crisis

regulations, see Appendix A.

Second, the U.S. Treasury market structure has undergone substantial structural changes

over the last decade. Most interdealer trading and a substantial share of institutional trading in

Treasuries has migrated from voice networks to electronic marketplaces. According to

Greenwich Associates (2015), 84% of institutional investors traded Government bonds

electronically in 2015 compared to 61% in 2005. The growth of electronic trading has increased

the speed of trading while reducing its cost.

Third, the U.S. Treasury market recently experienced two major events that affected

market liquidity: the 2013 Taper Tantrum, when remarks by then-Federal Reserve Chairman Ben

Bernanke triggered a substantial selloff and a yield increase of over 100 basis points within a 10week period,109 and the October 15, 2014 event, when yields abruptly decreased and reverted

within a span of 15 minutes without any clear catalyst. In response to the second event, staff

from a group of regulators produced a joint report (Joint Staff Report (2015)) and hosted two

conferences on Treasury market structure and liquidity in 2015 and 2016.

108

See Bank for International Settlements (2014) and Bank for International Settlements (2016).

See, e.g., Silvia and Moehring. Case Study of the Taper Tantrum and Term Premiums, Wells Fargo Securities

(Aug. 4, 2015).

109

We recognize that several recent regulatory initiatives aim to change some aspects of the

Treasury market structure. For instance, the implementation of post-trade reporting of Treasury

transactions for FINRA members and the corresponding expansion of TRACE reporting,110 the

Federal Reserve’s transaction initiatives for banks announced in 2016,111 and other related

reforms aimed at improving market monitoring and oversight by regulatory agencies may impact

market participants’ behavior, market structure, participation, and liquidity metrics going

forward.

In the following sections, we review possible determinants of the changes in Treasury

market liquidity and challenges in causal identification of the effect of individual factors,

applicable empirical liquidity measures, and recent evidence on the evolution of secondary

market liquidity in Treasuries.

Determinants of Liquidity Changes

Multiple factors potentially affect market liquidity, and in this section we consider a

number of such factors. However, as discussed in the Broad Economic Considerations section of

the Report above,112 our analysis of Treasury market liquidity faces challenges in establishing

causality for any single driving factor that might affect Treasury market liquidity. Among other

complications, we note that the precise timeline of various regulatory changes and market

responses to each regulatory reform is ambiguous because of multiple other events and marketwide structural changes occurring over the same period of time. We also note that various

110

Rel. No. 34-79116, Self-Regulatory Organizations; Financial Industry Regulatory Authority, Inc.; Notice of

Filing of Amendment No. 1 and Order Granting Accelerated Approval of a Proposed Rule Change, as Modified by

Amendment No. 1, Relating to the Reporting of Transactions in U.S. Treasury Securities to TRACE (Oct. 18, 2016)

81 FR 73167 (Oct. 24, 2016).

111

See Press Release, Board of Governors of the Federal Reserve System, Federal Reserve Board announces plans

to enter negotiations with FINRA to potentially act as collection agent of U.S. Treasury securities secondary market

transactions data (Oct. 21, 2016), available at

https://www.federalreserve.gov/newsevents/press/other/20161021a.htm.

112

See Introduction to the report.

liquidity drivers may offset one another and dampen observed trends, which may lead us to

observe that Treasury liquidity has not changed in response to regulatory changes in aggregate,

whereas each change might have, in fact, differentially affected liquidity, with individual impacts

in opposite directions. Such considerations further complicate causal identification.

One of the most commonly cited factors behind changes in secondary market liquidity is

the introduction of new regulations, in particular, the Dodd-Frank Act (especially, the Volcker

Rule) and the Basel III framework post-crisis. These regulations were aimed at promoting

financial stability.113 However, some commenters have argued that those regulations imposed

higher costs of carrying inventory and restrictions on proprietary trading activities of banks,

which may have reduced dealer provision of liquidity. Crucially, we note that U.S. Treasuries

are exempt from the Volcker Rule’s prohibitions on proprietary trading. Therefore, the changes

in Treasury market liquidity reported below are unlikely to be directly attributable to the Volcker

Rule, though the Volcker Rule may indirectly affect them as a result of spillover effects from

other markets.114

In addition to the regulatory reforms of interest, the Treasury and other fixed income

markets underwent a number of structural changes in recent years. The growth of electronic

trading, an increasing share of proprietary trading firms in the Treasuries market, and the growth

of bond ownership by large asset managers are all likely to have impacted Treasury liquidity.

113

See Preamble, Dodd–Frank Wall Street Reform and Consumer Protection Act, Pub.L. 111–203, H.R. 4173.

For example, one of the related markets is the market for derivatives on Treasuries. The Volcker Rule does not

provide an exemption for trading in derivatives on Treasury securities similar to the exemption for Treasuries

(although other exemptions, e.g., the risk-mitigating hedging exemption, may be available for such trading). See Rel.

No. BHCA-1, Prohibitions and Restrictions on Proprietary Trading and Certain Interests In, and Relationships

with, Hedge Funds and Private Equity Funds (Dec. 10, 2013) 79 FR at 5639 (Volcker Rule Adopting Release). The

lack of exemption for derivatives on U.S. Government obligations could affect liquidity in the underlying Treasury

market in either direction.

114

For instance, the bond ownership share by mutual funds has risen notably post-crisis.115

Traditionally, mutual funds have been liquidity seekers, and their increased ownership of bonds

together with higher magnitude and volatility of fund flows116 may create higher and more

volatile liquidity demand because of higher redemption risk. At the same time, increases in

trading activity by proprietary trading firms might make them de facto liquidity providers.117

Moreover, the financial crisis may have led to changes in dealer risk appetites, return

expectations, and risk management practices, resulting in changes in observed liquidity

conditions. A general decline in risk taking and changes in risk management practices combined

may have contributed to reductions in dealer leverage independent of regulatory compliance

effects. Adrian et al. (2017a) document dealer deleveraging and a reduction in balance sheets

occurring during and in the immediate aftermath of the 2007-2008 financial crisis, before many

of the regulations at issue were announced, proposed, or adopted.

Three additional factors, including diffusion of liquidity to other markets, liquidity jumps,

and liquidity bifurcation (diverging liquidity conditions in the same market for different

subgroups of bonds), may further obstruct inference about causal effects of particular drivers of

liquidity. These three factors, to date, have not been widely studied in the academic literature

because of data limitations and difficulty in finding clear evidence to permit accurate causal

attribution of changes in liquidity to changes in these factors.

115

See Figure 4.5 in Joint Staff Report (2015), which shows that the share of Treasury securities held by mutual

funds has increased in recent years, from under 4 percent in the years preceding the financial crisis to 6.7 percent at

the end of March 2015.

116

See Figure 4.6 in Joint Staff Report (2015), which shows that the magnitude and the volatility of Government

bond fund flows has increased since 2008.

117

See Joint Staff Report (2015). The Report notes, however, that proprietary trading firms often act as short-term

liquidity providers and do not carry substantial inventory to respond to liquidity demands from other market

participants.

First, in addition to the cash Treasury market, market participants have access to an active

Treasury futures market.118 Thus, changes in Treasury market liquidity may reflect a diffusion of

liquidity between the cash Treasury market and the Treasury futures market. For a complete

picture of the liquidity conditions available to Treasury market investors, we need to consider the

co-liquidity of the Treasury market with its derivatives market; and so we review available

evidence in the following sections. We also recognize that liquidity in corporate bond and

single-name CDS markets may interact with activity in Treasuries.119 Hence, for a cohesive

understanding of changes in market liquidity conditions, it is important to consider liquidity in

Treasuries in conjunction with liquidity in corporate bond and single-name CDS markets.

Second, Adrian et al. (2015) introduce the concept of “liquidity risk” that describes the

elevated probability of sudden spikes in illiquidity rather than changes in the overall liquidity

level (similar to elevated “volatility of liquidity”). They argue that the recent increase in

incidence of “flash” events in various financial markets can be described by a model of liquidity

that has a slow-moving continuous level component and a jump component. However, jumps in

liquidity have not been rigorously studied. If such liquidity risk is indeed present in the Treasury

market, there are no main studies of its causes or drivers. If, as these researchers posit, changes

in liquidity include a jump component, a factor may affect liquidity by changing the intensity and

the size of the jump component without affecting the slow moving component of liquidity. For

econometricians, estimating and making statistical inferences about models with jumps is

generally more difficult and requires a longer time series of data. This, in turn, makes statistical

inferences that rely on such models to identify changes in the level of liquidity difficult to make.

118

See Joint Staff Report (2015), Tables 3.3 and 3.4.

We explore changes in corporate bond and CDS markets liquidity later in Sections IV and V of Part B of this

report.

119

Third, liquidity conditions in different sectors of the same market may evolve in opposite

directions (“liquidity bifurcation”). For example, a highly liquid electronic market for the most

recently issued Treasuries of a particular maturity (“on-the-run” Treasuries) may attract

participants seeking liquidity and low transaction costs who might otherwise seek to trade in the

largely voice-based markets for Treasuries issued before the most recent issue (“off-the-run”

Treasuries) and Treasury Inflation Protected Securities (TIPS), reducing liquidity in these

markets. Therefore, looking at a single market-wide measure of liquidity might obscure more

complicated substitution between market segments.

In light of the above, it is difficult to disentangle multiple concurrent and correlated

drivers of liquidity, limiting our ability to draw causal inference with respect to any individual

determinant of liquidity. While we are unable to identify causal impacts, the analysis below

sheds

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