The SEC imposes new regulations and laws into the market. This time it is concentrated on security-based swaps and money market funds.
The proposals are for the infusion of transparency into derivatives. This is implemented in the light of the Archegos Capital collapse. When implemented it will tighten the standards initiated after the 2008 recession.
According to the new regulation, if holdings of security-based swaps cross $300m or account for 5% of a company’s stock, they should disclose that data. That is the data that the financial environment of the USA lacks currently.
The information includes the position of their swaps and their identities with related securities or loans. A swap is a financial contract where two counterparts agree to swap their payments with each other, because of any changes in the market.
According to Gary Gensler, SEC chair, the collapse of Archegos Capital Management was due to the risk of this security-based swap more specifically total return swaps. The total return swaps are based on underlying stocks and exposure.
When the family company collapsed, it shocked the US financial market. It fell because of its failed bets on the share price moves of companies such as ViacomCBS and Discovery.
The company purchased total-return swaps of up to tens of billions of dollars from major banks in Wall Street.
The company can get exposure to share price movements without owning them. It was the banks they traded with, Credit Suisse being one of them.
These banks would then buy these shares and swap them based on their movements. The company then replicated this trade at the prime brokers it cooperated with. They did so in the margins using loaned money.
The stock market is a giant game of gamble. There are times when one gets good luck and others when they don’t. For Archegos it was later, as the share prices of many companies they wagered on fell it plunged the company into a loss.
In March, they defaulted on margin calls, which led to the banks recording a loss of $10bn leading to this crisis.
The SEC came under fire for its slow-paced rulemaking and the fact that such an off-brand company could inflict such damage to the banking sector. Thus, they decided to act. Their authority comes from Dodd-Frank Act 2010.
This act was implemented to curb over-risk making in the derivatives market. It came to prevent another 2008 recession but was delayed.
The possible regulation could be that the fund hold should at least 25% each day and 50% each week of their total assets in liquid assets. The current requirement is 10% and 30% respectively.
The regulation is seen, as a means to prevent the stress the money market funds face when investors pull back billions on their hasty liquidation by creating a good buffer.
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