SEC to review short-selling, swap rules after GameStop, Archegos debacle

The U.S. securities regulator is considering measures to require big investors to disclose more about short positions, or bets that stocks will fall, use of derivatives to bet on other stock moves and to protect small investors from trading apps that use features common to video games in order to boost risky trading activity.

The review of rules by the Securities and Exchange Commission (SEC) was prompted by January’s GameStop saga and the meltdown of Archegos Capital, its new chair plans to tell lawmakers.

Gary Gensler, sworn in last month as chair of the top markets watchdog, will testify before the House of Representatives Financial Services Committee on Thursday.

Democrats are pressuring him 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 investment fund Archegos.

SEC staff are working on potential measures, Gensler will say, including greater disclosure of “short-selling,” a strategy 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, a family office.

In addition, Gensler has asked staff to draft a request for public input into how trading apps entice retail customers using game-like features such as points, rewards, bonuses, and competitions, according to his testimony.

Gensler did not elaborate on the timing for any potential regulatory proposals, which typically must go through a lengthy rule-making process including 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 collapse of Archegos, whose soured media stock bets left the fund and banks that financed its trades nursing roughly $10 billion in losses.

As volatility soared in January, retail broker Robinhood curbed buying in GameStop and other stocks because it could not provide the cash its clearinghouse, the Depository Trust & Clearing Corp (DTCC), required to guarantee those trades during the two days it takes them to settle.

Gensler has directed SEC staff to draft a proposal on expediting the settlement process to reduce system risks, according to his testimony.

The heads of the DTCC and the Financial Industry Regulatory Authority, which oversees brokers, will testify alongside Gensler.

Gensler’s promises to Congress spell disruption for Wall Street. The SEC is also cracking down on special purpose acquisition company or “SPAC” mergers, and drafting new climate change risk disclosure rules, issues Gensler is also likely to be grilled on.