The new chair of the U.S. securities regulator on Thursday told lawmakers the agency is considering new trading rules as it looks to address problems highlighted by this year’s GameStop Corp saga and the meltdown of private fund Archegos Capital.
Gary Gensler, sworn in last month as chair of the Securities and Exchange Commission (SEC), appeared before the House of Representatives Financial Services Committee.
Gensler said in prepared testimony that new trading rules being considered include: greater disclosure of “short-selling,” a strategy that hedge funds and other big investors use to bet a stock will fall; increasing transparency around securities lending, which underpins short-selling; and new reporting rules for the “total return” equity swaps that felled Archegos.
Democrats are pressing Gensler to take a tough stance on Wall Street after Gamestop’s fierce rally in January, fed by bullish posts on Reddit, and the March implosion of New York-based family office Archegos, exposed gaps in the SEC’s rules.
“It is critical for our cops on the block at the SEC to protect investors and ensure our markets are transparent and fair,” said Representative Maxine Waters, the Democratic chair of the committee.
Gensler also said he has asked SEC staff to draft a request for public input into how trading apps entice retail customers using game-like features such as points, rewards and competitions - a tactic known as “gamification.” He added that he has directed staff to draft a proposal on expediting the two-day trade settlement process to reduce system risks.
The SEC chair, who developed a reputation for being tough on Wall Street when he ran the U.S. derivatives regulator from 2009 to 2014, did not elaborate on the timing for any regulatory proposals, which typically must go through a lengthy rule-making process that includes public feedback.
Shares of GameStop soared in January after retail investors congregating on Reddit and trading on low-cost brokerage platforms bought shares in the video game retailer, causing big losses for hedge funds that had shorted the stock.
That episode was followed in March by the meltdown of Archegos, whose soured media stock bets left the fund and banks that financed its trades nursing roughly $10 billion in losses.
“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system,” Gensler said in his prepared testimony.
Gensler’s promises to Congress signal potential disruption for Wall Street, which is already feeling the pain from an SEC crackdown on shell-company mergers and worried about the agency’s pledge to stiffen rules on climate change risks.
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