US SEC considering post-GME short selling disclosures
10 March 2021 US
Image: stock.adobe.com/Kristina Blokhin
The US Securities and Exchange Commission (SEC) is mulling new regulations in the wake of the GameStop-led market volatility of January.
Acting chair Herren Lee says the commission should “seriously consider” new regulations, particularly those obliging options trading firms to disclose additional information and to determine whether users of trading platforms understand the products being bought and sold.
It is “critical”, the letter says, that firms conduct sufficient due diligence about whether retail investors “qualify” to trade options before those customers begin trading.
Additionally, Herren Lee thinks the SEC should consider activating the moribund requirement under Section 929X of Dodd-Frank for increased disclosures of short selling to regulators and the general public.
929X would compel every institutional investment manager that affects a short
sale of a security to also file a report on a daily basis with the SEC in any way that the commission may determine. Such a rule would bring the US much closer in line with current rules in the EU and the UK.
The report would have to include, where applicable, the name of the institutional investment manager, the name of the issuer and the title, class, CUSIP number, number of shares or principal amount, aggregate fair market value of each security, and any failures to deliver the security. Such information would also have to be disclosed publicly at a minimum of every three months.
The letter also says the commission should look at the consequences of firms receiving payments in order to examine their order flow to determine, among other things, whether these practices are properly disclosed and consistent with “best execution obligations”.
Lee was responding to concerns voiced in Massachusetts senator Elizabeth Warren’s letter of 29 January over market manipulation and volatility following the GameStop saga.
The SEC makes it clear its study into the unusual events of January is ongoing, emphasising the fact that the results of the investigation would “facilitate discussion and evaluation of appropriate policy considerations”, as similar reports have done in the past.
Lee says the SEC is “analysing” the impact of the short positions of large investors such as hedge funds, the role that online message boards may have played, as well as trading restrictions imposed by certain broker-dealers, and whether these practices violated existing securities laws.
Although such stock prices appeared to “significantly deviate from what appears justified by market fundamentals”, Lee says it would be “premature to comment on whether or not any specific individual or entity’s conduct violated existing law”.
While the agency shares the Warren’s concern that securities markets should reflect prices that are “in line with the intrinsic and fundamental value of underlying companies,” and that “wild swings in value” may present “systemic concerns for financial systems or the stock market”, it appears the “core market infrastructure has proven resilient” during the events of January, Lee says.
Now read: GameStop: Now the dust has settled, what comes next? In the latest issue of Securities Finance Times
Acting chair Herren Lee says the commission should “seriously consider” new regulations, particularly those obliging options trading firms to disclose additional information and to determine whether users of trading platforms understand the products being bought and sold.
It is “critical”, the letter says, that firms conduct sufficient due diligence about whether retail investors “qualify” to trade options before those customers begin trading.
Additionally, Herren Lee thinks the SEC should consider activating the moribund requirement under Section 929X of Dodd-Frank for increased disclosures of short selling to regulators and the general public.
929X would compel every institutional investment manager that affects a short
sale of a security to also file a report on a daily basis with the SEC in any way that the commission may determine. Such a rule would bring the US much closer in line with current rules in the EU and the UK.
The report would have to include, where applicable, the name of the institutional investment manager, the name of the issuer and the title, class, CUSIP number, number of shares or principal amount, aggregate fair market value of each security, and any failures to deliver the security. Such information would also have to be disclosed publicly at a minimum of every three months.
The letter also says the commission should look at the consequences of firms receiving payments in order to examine their order flow to determine, among other things, whether these practices are properly disclosed and consistent with “best execution obligations”.
Lee was responding to concerns voiced in Massachusetts senator Elizabeth Warren’s letter of 29 January over market manipulation and volatility following the GameStop saga.
The SEC makes it clear its study into the unusual events of January is ongoing, emphasising the fact that the results of the investigation would “facilitate discussion and evaluation of appropriate policy considerations”, as similar reports have done in the past.
Lee says the SEC is “analysing” the impact of the short positions of large investors such as hedge funds, the role that online message boards may have played, as well as trading restrictions imposed by certain broker-dealers, and whether these practices violated existing securities laws.
Although such stock prices appeared to “significantly deviate from what appears justified by market fundamentals”, Lee says it would be “premature to comment on whether or not any specific individual or entity’s conduct violated existing law”.
While the agency shares the Warren’s concern that securities markets should reflect prices that are “in line with the intrinsic and fundamental value of underlying companies,” and that “wild swings in value” may present “systemic concerns for financial systems or the stock market”, it appears the “core market infrastructure has proven resilient” during the events of January, Lee says.
Now read: GameStop: Now the dust has settled, what comes next? In the latest issue of Securities Finance Times
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