The latest set of proposed U.S. regulatory reforms would be largely negative banks, exchanges, and certain securities firms, but some of the proposals would likely have positive effects, suggests a recent report from Moody's Investors Services.
The outcome will depend on the details of any changes that are actually enacted in response to the recommendations, the report says.
Earlier this month, the U.S. Treasury Department published a paper setting out a series of reform recommendations, which aim to address an executive order from President Trump to reconsider financial regulation. The Treasury report, which represents the second of four planned reports, focuses on capital markets, including proposals dealing with market structure, securitization, derivatives, and financial market infrastructure.
The likely impact on banks is mostly credit negative, the Moody's report says. Additionally, proposed changes to address market structure issues, including "maker-taker" fee models and ‘payment for order flow' practices, "may be credit negative for retail brokers, exchanges and high-frequency trading firms," the Moody's report adds.
"Any resulting restrictions on payment for order flow arrangements could be credit negative for retail brokers that derive significant revenue from this source," the Moody's report says. The report also recommends "new guidance for the use of equity market data feeds and a review of whether exchanges should harmonize and streamline complex order types. These could be credit negative for high-frequency trading firms and cash equity exchanges."
Possible positive impacts from the proposals could flow from recommendations that may encourage increased central clearing of derivatives, and stronger oversight of central counterparty clearing houses, the Moody's report notes.