Article
15 September 2026

5 Questions with Jessica Wachter: Inside DERA: How SEC Economists Turn Research Into Regulation

We interview Jessica Wachter of the Wharton School, University of Pennsylvania, to gain her perspective on translating economic research into regulation, evaluating whether rules achieve their goals, and how the Securities and Exchange Commission’s (SEC’s) economists analyze new products and market-structure reforms.

1. From 2021 to 2025, you led the Division of Economic and Risk Analysis (DERA) at the SEC, and your work has taken you from academia to congressional testimony on financial markets regulation. What do you see as the biggest tradeoffs when rigorous academic research is translated into public policy, and how does your experience as an academic and a regulator shape the way you approach a matter?

One fundamental difference between research and public policy is that research must be cutting edge to be published, whereas public policy should rest on well-grounded principles that command broad agreement. Policy is not the place to take a novel approach to a question. For an economist in government who is not in a research role—and many economists do excellent research in government—the work draws on the entire base of knowledge, not on the particular expertise required to publish in journals.

What drew me to the DERA role, in part, was the chance to explain first-principles economics to a wide audience: people who were not economics Ph.D.s or my students and who sometimes approached the issues through a skeptical lens. That is a marked departure from the day-to-day work of an academic, but it sharpened my thinking on important questions. I also came to value how economics can help people find common ground in regulatory contexts. Once you take something out of the realm of political debate and talk about the range of possible outcomes, you can find substantial agreement.

At the SEC, making progress on the deep, consequential issues we faced often required moving forward in the face of uncertainty. Here, economics, together with notice and comment, matters a great deal. Rather than asking the Commission to resolve every question in advance, notice and comment brings in the combined perspectives of the affected parties and the public. The economic analysis, in both the proposal and the adoption, sets out the Commission’s reasoning and what it expects a rule to accomplish. Commenters then have something specific to engage with, and the rule can later be judged against what was anticipated.

I believe economics should be central to policymaking. Economics is, in fact, central at the SEC, which I think has strengthened our capital markets. Promoting that view was a priority throughout my tenure.

What drew me to the DERA role, in part, was the chance to explain first-principles economics to a wide audience. . . I also came to value how economics can help people find common ground in regulatory contexts.

As for how I approach a matter, the SEC gave me a broader perspective than I would have had as an academic. I now see issues from several angles. First, I came to appreciate the role the SEC plays in protecting investors and promoting the integrity of our capital markets, which is easy to underestimate from the outside. Second, I had the opportunity to meet with affected parties, and I came away with a renewed appreciation of their perspectives and their willingness to engage in the rulemaking process. Both of those continue to inform my work.

2. At DERA, you oversaw the economic analysis behind major rule proposals. After a new regulation takes effect, what do you look for to assess whether it has achieved its intended goals without creating unintended burdens? What tells you a rule is working, or that it may need to be revisited?

I was asked this question all the time. There are formal mechanisms for looking back at rules, and what I would add from my own experience is that DERA is always interested in how a rule turns out in practice. The broader economics profession takes a strong interest in SEC rulemaking as well, so rigorous academic evaluations tend to follow. For important rulemakings, you get a sense of whether the rule was well designed, and the verdict does not always need to await the academic literature. It can be apparent immediately.

Economic analysis forces the SEC to say, on the record: here is what we think is going to happen, and here is the problem we are trying to solve . . . Because the SEC stated that expectation in writing, the rule can be evaluated against its intended goal.

One of the real strengths of the SEC process is the requirement to conduct economic analysis. That requirement reflects statutory obligations as interpreted and reinforced by case law. Economic analysis forces the SEC to say, on the record: here is what we think is going to happen, and here is the problem we are trying to solve. That discipline leaves little room for ambiguity. With the amendments to Rule 612 of Regulation NMS, for example, which reduce the minimum quoting increment for certain stocks from a full penny to half a penny, you can examine whether costs actually decline once they take effect. Because the SEC stated that expectation in writing, the rule can be evaluated against its intended goal. From there, a broader debate can follow about whether it was beneficial.

If the costs of complying with a rule become unsustainable, the SEC tends to hear about it. What you want to see is that the burden is not overwhelming for regulated firms, and that it does not change the nature of their business. The general principle is that if a rule is costly, there should be a corresponding benefit. The economic analysis is where that case is made. It sets out the rationale for the rule, the purpose it is meant to serve, and what the Commission expects to happen. Economics then provides the tools to evaluate a rule against that statement and to see how it plays out in practice. Money market funds are one area where DERA’s economists followed that industry closely, both before and after the rulemaking.

3. You served as chief economist and director of DERA during a pivotal period for digital asset regulation, including the approval of spot Bitcoin exchange-traded products. When a new type of financial product comes before the SEC, how do economists assess its potential benefits and risks, and what makes these analyses different from evaluating more traditional products like stocks and bonds?

The analysis is not necessarily different. It is the decision of a given exchange whether to list an exchange-traded product (ETP), a category that includes exchange-traded funds (ETFs). The relevant distinction here is between funds registered under the Investment Company Act and commodity trusts, such as spot bitcoin ETPs, that are not registered under that Act. Exchange listing requirements under the Exchange Act apply to both.

What made crypto somewhat different was the threshold question: is this a security or not? That matters for whether the product must register under the Investment Company Act. For spot bitcoin products, the underlying bitcoin is not a security. The exchange proposals to list those products came to the Commission under the Exchange Act.

Generally, Section 6(b)(5) of the Exchange Act requires that the rules of an exchange be designed, among other things, “to remove impediments to and perfect the mechanism of a free and open market and a national market system,” which tends to push in the direction of approval. But the same provision also requires that the rules be designed “to protect investors and the public interest.” That leads some to ask whether a given crypto product qualifies, and how many such products can. Here, the Commission’s economists can be helpful in determining whether a product could be harmful to markets and whether its disclosures will be adequate.

The SEC has traditionally not been a merit-based regulator. The question is not whether a product is a good investment; it is whether the product is consistent with the Exchange Act.

4. DERA supported the rule expanding central clearing in the U.S. Treasury market. What is central clearing, and how can it affect financial stability? As an economist, how do you weigh the benefits of lower risk against the costs to market participants? What happens when there are disagreements over these trade-offs?

Treasury clearing was one of the most important projects we undertook while I was at DERA. Clearing is the term for the process by which a trade is prepared for settlement, and central clearing means that process happens through a central counterparty, a clearinghouse.

The ability to trade first and deliver later is an important feature of our markets because it allows participants to put their capital to efficient use. . . The trade-off is that by the time settlement arrives, obligations crisscross the market like spaghetti wires.

In many of our securities markets, a party does not need to establish that it actually has the security or the cash in order to trade; delivery comes later, on a timetable that depends on the market. Equities, for example, went from T+2 to T+1 in 2024, meaning delivery one day after the trade; the Treasury market has been T+1 for a long time. The ability to trade first and deliver later is an important feature of our markets because it allows participants to put their capital to efficient use. Requiring the cash or securities to be in place before the transaction would mean less efficient deployment of capital. The trade-off is that by the time settlement arrives, obligations crisscross the market like spaghetti wires.

A central counterparty nets out these obligations. Suppose I sell a security to one party and buy the same security from another. The central counterparty offsets those positions, so my net obligation may be zero. That matters because if something happens to me—say I am a financial institution that is briefly out of the market—my counterparties are unaffected and can continue to trade. The 2008 financial crisis showed what can go wrong when instruments are not centrally cleared. And in 2020, when there was renewed volatility in the Treasury market, people were concerned that the limited coverage of central clearing exposed the market to dislocations it would not otherwise have faced.

Central clearing has worked extremely well in equities, corporate bonds, equity options, swaps, and futures. Large segments of the Treasury market remained outside central clearing for historical reasons, but there was widespread agreement that what works in those other asset classes would also work for Treasuries. We examined the question carefully and focused on keeping costs down as the market prepared for the transition.

5. Beyond digital assets and Treasury market reform, you worked on money market fund resilience, the settlement cycle, and other market-structure matters. As a former regulator, what do you believe would help attorneys understand how the SEC’s economists analyze markets?

Rulemaking is only one part of what comes before the SEC. But within that sphere, which includes new product evaluation and the rules of the self-regulatory organizations, economists approach markets from the perspective of Friedrich Hayek: that the market outcome is likely the most efficient one, because markets aggregate information in a way that regulatory planning cannot replicate.

As applied to regulation, the logic goes as follows. If the markets are not producing an outcome you would prefer, it is not enough to write a rule demanding that outcome, because there is probably a reason it has not emerged. For economists, a central question is, what is the market failure? And here, a market failure means something specific, not simply a stock market crash or an unwelcome outcome, but a reason we would not expect markets to deliver the most efficient result.

The natural instinct is to say that if we want to see X, we should write a rule that says market participants must do X. But participants will resist doing X unless it works for them economically. You can nudge things one way, but unless you are solving an underlying failure, you cannot necessarily expect wholesale change.

DERA’s guidance on economic analysis in rulemaking describes this rationale as necessary in the absence of a direct congressional mandate. This concept is not always intuitive. The natural instinct is to say that if we want to see X, we should write a rule that says market participants must do X. But participants will resist doing X unless it works for them economically. You can nudge things one way, but unless you are solving an underlying failure, you cannot necessarily expect wholesale change.

Central clearing is a case where it is optimal for a state actor to determine the rules, just as it is optimal for, say, traffic signs to adhere to a consistent design. When one body determines the best approach and everyone follows it, the full benefit is realized—something no participant could achieve acting alone. An even stronger example is the settlement cycle, which works only if everyone agrees on what it is.

The same lens applies to disclosure rulemaking, where the market failure may be less obvious than it is for something like central clearing or the settlement cycle. Many SEC rulemakings ask companies to provide information, and the question in each case is why that information should be required generally rather than left to each firm to decide on its own. The answer economists give is that information has the character of a public good. A firm that discloses does not capture the full value of what it produces, and investors cannot easily coordinate to demand it. That framing has been taken up by outside economists, and it runs through a good deal of the Commission’s disclosure work.

Jessica A. Wachter

Dr. Bruce I. Jacobs Professor in Quantitative Finance,
The Wharton School,
University of Pennsylvania

5 Questions with Jessica Wachter: Inside DERA: How SEC Economists Turn Research Into Regulation

2. At DERA, you oversaw the economic analysis behind major rule proposals. After a new regulation takes effect, what do you look for to assess whether it has achieved its intended goals without creating unintended burdens? What tells you a rule is working, or that it may need to be revisited?

Pricing Risk, Reading Markets—From Rare Events to the AI Boom

5. Beyond digital assets and Treasury market reform, you worked on money market fund resilience, the settlement cycle, and other market-structure matters. As a former regulator, what do you believe would help attorneys understand how the SEC’s economists analyze markets?