U.S. Markets

Top U.S. regulator warns over corporate debt, market risks

WASHINGTON (Reuters) - The head of the top U.S. markets regulator on Monday issued a warning over market risks including rising corporate debt, a U.K. withdrawal from the European Union, and the transition away from a key lending rate.

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Jay Clayton, chairman of the Securities and Exchange Commission (SEC), told an audience in New York he continued to be concerned over corporate debt growth, which he said had been fostered by a decade of accommodative monetary policies.

In the United States, outstanding corporate debt stands at almost $10 trillion, almost 50 percent of GDP, he said.

“Those are numbers that should attract our attention,” said Clayton.

The U.S. corporate bond market, the world’s largest, has offered robust returns, particularly for foreign investors although Clayton added that there are signs those returns may be slowing.

“We should recognize what prices and price movement in the corporate debt market are telling us. For example, on a total return basis, the upside has become more limited while the downside has not improved.”

He added that the SEC, alongside other regulators, should monitor flows into and out of credit funds, and portfolio characteristics including concentration, liquidity and leverage.

Clayton also said U.S. banks should assess their exposure to the London interbank offering rate, known as Libor, ahead of a 2021 deadline to transition away from the lending benchmark rate. He said that the industry had to decide how to actively manage that risk, however.

The former Wall Street lawyer also flagged potential risks presented by Britain’s potentially messy divorce from the European Union without a transition period. He said the agency was drawing up a plan to respond to any potential impact of a “no-deal Brexit,” but that firms also have a role to be prepared for the fallout.

“I encourage our issuers, financial services firms and other market participants to fight off the complacency and fatigue that is endemic to situations of this type. I encourage you to continue to prepare for—and reasonably inform your investors of—the potential impacts of Brexit.”

Reporting by Katanga Johnson; Editing by Michelle Price and Chizu Nomiyama