An Essay on Pluralism in Financial Market Infrastructure Design: The Case of Securities Holding in the United States

This essay will appear as a chapter in a forthcoming edited volume published by Oxford University Press. It builds on the earlier article, Beyond Intermediation: A New (FinTech) Model for Securities Holding Infrastructures, 22 U. Pa. J. Bus. L. 386 (2020), which argues that serious consideration should be given to modifications of the deeply intermediated securities holding systems in the United States and elsewhere. Many of the costs and risks imposed by the intermediated holding systems fall within the domain of the regulation of securities markets (internal costs), such as impairments of shareholder voting and bondholder claims against issuers. Others fall outside of that sphere (external costs), such as the enforcement of anti-money laundering and anti-terrorist financing regulations and tax laws. These legacy holding systems reflect a monopoly for the intermediaries (stockbrokers and banks) who benefit from the infrastructure, sustained by the path dependence resulting from the influence of the relevant intermediaries and the entrenched, sticky characteristics of the infrastructure and the regulatory environment. This essay argues that the prevailing infrastructure imposes external costs on constituencies outside the securities markets, while its beneficiaries, the intermediaries, do not internalize these costs. This represents a classic negative externality and a fundamental regulatory failure. The essay explains the broad societal impact of financial market infrastructures, which are very understudied aspects of financial markets. It emphasizes the regulatory failures in the regulation of financial markets and in regulation more generally. It challenges regulators (primarily the SEC in the United States) to establish more ambitious goals for the securities holding infrastructures and the Fintech community to meet those goals. Finally, the essay further illuminates a roadmap and framework for a cost-benefit analysis of the prevailing infrastructure and the reforms that are outlined in Beyond Intermediation