SIFMA Looks Ahead at Markets, Regulation for 2021

Despite the coronavirus pandemic, U.S. capital markets thrived this year and in more ways than the record-setting stock market rally.

According to the Securities Industry and Financial Markets Association's 2021 outlook, which also takes stock — pun intended — of 2020 activity, year-over-year issuance through October rose 63% while IPO volume rose almost 47% and 10.9 billion shares traded daily, compared with around 7.4 billion historically.

Fixed income issuance surged over 46%, and ETF daily volume soared even more, up 47%.

Retail investors accounted for an estimated 25% of daily volume, more than twice the 10% historical average.

"When COVID hit the U.S. we saw a dramatic impact on markets," said Ken Bentsen, president and CEO of SIFMA at a recent briefing on the report, referring to the extreme swings in market volatility. Support from policymakers helped restore market liquidity and operational resilience by financial firms, whose staffers were largely working remotely, and helped maintain smooth market operations, said Bentsen.

He said the pandemic accelerated trends for remote working relationships in the securities industry and other industries and for electronic delivery of documents.

Regulatory Agenda

Looking ahead to a post-COVID agenda, which is now in sight because of vaccines that will be distributed next year, SIFMA "believes regulators and the financial services industry should develop rules and protocols" that fit that future environment, according to its 2021 outlook. SIFMA is also calling for:

The Securities and Exchange Commission to update its rule and guidance for electronic delivery of financial documents, including making e-delivery "the default for all investor communications"
The Depository Trust and Clearing Corp. (DTCC) and others to eliminate the issuance and handling of physical securities — less than 1% of assets serviced by the DTCC remain in physical form but they represent $780 billion.
State and federal regulators to modernize regulations for asset management including expanded and permanent relief for inter-fund lending and cross trading and to operational challenges to swing prices — all to help firms deal with future market disruptions.

Also on SIFMA's agenda for 2021, according to its outlook report and Bentsen's presentation, are the changing workplace — determining when employees should return to the office, regulatory relief to promote remote working, and virtual trading — the need for coordinated action by the public, social and private sector to significantly scale climate finance market structure and the structure of equity markets, equity market data distribution and securities exchange fees.

In addition, there's the transition from Libor to alternative lending reference rates, implementation of the consolidated audit trail and the potential of distributed ledger technology and the operational challenges posed by digital assets, including security tokens.

2021 Economic Growth

In a separate presentation preceding Bentsen's, Ellen Zentner, chair of the SIFMA Economic Advisory Roundtable and chief U.S. economist at Morgan Stanley, released the results of the SIFMA's latest economic survey based on the outlooks of the chief U.S. economists of 27 member institutions.

The median GDP growth estimate, comparing fourth quarter to fourth quarter, was -2.5% for 2020 and +3.5% 2021, which, compared to the SIFMA's midyear economic outlook, is less bearish for this year and less bullish for next year.

Economists surveyed by SIFMA expect U.S. GDP to return to it pre-COVID-19 level by the second half of 2021, which is more optimistic than what some other surveys have shown. An October survey of the chief financial officers of companies conducted by the Federal Reserve banks of Richmond and Atlanta along with Duke University's Fuqua School of Business, for example, found that only half shared that outlook, with the other half projecting late 2022 or beyond for a full recovery.

Fed Chairman Jerome Powell said last month the U.S. economy is "not going back to the same economy" that existed before the pandemic. It will be "a different economy … one that is more leveraged to technology," said Powell, who worries about the difficulties that will pose for many workers.

Zentner noted that the pandemic has created a "difficult environment for forecasting," though the advent of vaccines is positive. She will be closely watching labor force participation, which remains below pre-COVID levels and is a key underpinning for potential future growth, as well as consumer spending and a shift to more growth in services.

Two key factors for future economic growth, Zentner said, are the timing and success of coronavirus vaccine rollout and fiscal relief. Delays in the vaccine rollout or a lack of new fiscal report will slow the recovery. Conversely, a quick, extensive rollout of the vaccine and more fiscal support should speed it up.