(Refreshes lead, adds information on the SEC contingency plan)

WASHINGTON, Sept 30 (Reuters) - The U.S. government is

heading for a shutdown on Wednesday as congressional Democrats

and Republicans hit an impasse over how to continue to fund the

federal government.

A shutdown could affect financial markets by limiting the

operations of financial regulators and delaying the publication

of key economic data.

How might markets react?

Historically, markets have tended to shrug off shutdowns.

However, this time could be different.

A prolonged shutdown risks delaying or canceling key

economic data releases investors use to assess macroeconomic

trends, such as the monthly employment and inflation

reports. That could cause investors to rely more on alternative

data or take on more defensive positions as they anticipate

volatility in asset prices, Reuters reported on Monday.

Without key economic data, the Federal Reserve would be

"flying blind," making it more likely to stick with its own

economic projections of two 25-basis-point rate cuts for the

rest of 2025, analysts said.

With investors unable to assess the extent of a U.S.

economic slowdown, the Treasury yield curve could steepen

further as rate cuts get priced in with more conviction, leading

to a wider gap between short- and long-dated Treasury yields, TD

Securities said in a note.

A lengthy government shutdown could also affect some market

participants' ability to conduct complex trades for which they

may require regulatory guidance.

What happens to financial regulators?

A shutdown would reduce the U.S. Securities and Exchange

Commission (SEC) to a skeletal staff of around 9% of current

levels, according to its August 2025 plan for a lapse in

government funding.

This would severely limit the agency's ability to review

corporate filings, investigate misconduct, and oversee markets.

Likewise, the Commodity Futures Trading Commission would

furlough almost all of its employees and cease most market

oversight activity, according to its contingency plan.

Previous government shutdowns have caused delays in the CFTC

publishing reports on traders' positions in futures and options

markets.

The banking regulators and consumer watchdog, which are not

funded by congressional appropriations, will remain functional.

In 2019, a protracted government shutdown slowed down some

of Trump's deregulatory efforts in part because of staff

furloughs at the Office of the Federal Register, which must

formally publish all steps in the rule-writing process, Reuters

reported at the time.

Will IPOs and listed companies be affected?

Yes. A shutdown would likely freeze the IPO pipeline.

Companies planning to go public would be unable to proceed

without the SEC's approval, potentially dampening momentum in

the equity capital markets, which have enjoyed an IPO boom in

recent months.

According to the SEC's contingency plan, routine company

filings to the SEC's "EDGAR" system would continue as long as

funding for the contractors that run the system is available. It

was not immediately clear how long that funding would last.

(Compiled by Michelle Price; Editing by Marguerita Choy,

Franklin Paul and Andrea Ricci)