SC Connecticut News

In 2009, Andrew Metrick and Gary Gensler were both serving in the Obama Administration on the front lines of the response to the Global Financial Crisis. They worked together to address hidden risks in the “repo” market that played a major role in the market crashes of that era.

Fifteen years later, when Gensler, now the chair of the U.S. Securities and Exchange Commission (SEC), visited Yale SOM to speak with students, Metrick noted that “traditionally, the SEC has not really cared about financial stability. It wasn’t in the DNA of the SEC pre-Gensler.” In a discussion earlier this year, he asked Gensler why he had introduced it as a priority.

Gensler described the SEC’s three-part mission: protecting investors; facilitating capital formation; and maintaining fair, orderly, and efficient markets. “I think that financial stability has something to do with all three,” he said.

As a result, Gensler explained, the SEC is moving forward with 15 to 20 policy and rulemaking projects specifically aimed at resilience and financial system stability. These include registering money market and open-end funds, data transparency, and shortening settlement cycles.

Working toward a reduced timeline for trade settlements, Gensler said, “sounds maybe a little bit boring. It’s the plumbing of the markets, but time is money and time is risk.” Shortening settlement of stock trades from two days to one can add resilience during periods of extreme volatility.

Asked how AI can make regulators more effective, Gensler asked, “What is AI but math, data, and computational power?” He explained that AI is perfectly suited for pattern recognition involved in monitoring financial markets for insider trading or other forms of malfeasance. “We already use it,” Gensler said. “If we had the resources, we could use it more.”

Gensler explained that the SEC’s 5,000 employees, supported by 2,000 additional contractors, oversee $110 trillion in equity markets and $230 trillion in fixed income markets. “We're resource constrained,” he said. By comparison, he noted that the whole banking sector is $23 trillion.

The SEC also tracks and selectively reviews disclosures from over 5,000 exchange-listed public companies—another promising use for AI. “But you should always expect the government will not be at the cutting edge,” he said. “It’s not how we’re structured, and it’s not how we compensate people.”

Regarding digital finance technologies such as cryptocurrencies and blockchain technology, Gensler expressed skepticism. He stated: "With all respect," adding "I just don’t see that a couple thousand years of economic history is going to be transformed because you have a new accounting ledger—blockchain technology." He noted that major crypto companies are not using blockchain technology to keep their books and records.

The largest potential systemic risk on the horizon according to Gensler is quantum computing. “The problem with quantum is you can use brute force to break any cryptographic approach,” he said. While optimistic about future quantum-resistant cryptography development, he emphasized concerns about transition periods where existing cryptographic methods may become vulnerable.

Addressing other systemic risks, Gensler pointed out potentially problematic combinations of leverage and volatility in specific markets. Surveys by regulatory bodies show significant funding for macro hedge funds being provided by banks at near-zero margins which implies high leverage.

Markets are also adjusting to an environment without quantitative easing after about 15 years of central bank intervention post-2008 crisis. This adjustment has led to increased volatility as traders lack experience operating under these conditions.

Gensler warned: "Couple that with the amount of leverage that banks are providing to non-banks...it works until it doesn’t work."