Wall Street’s top regulator has voted in favor of proposed rules that would require hedge funds to report immediately when they suffer extreme losses or large investor withdrawals, in a bid to plug loopholes exposed by market turmoil l ‘last year.
Wednesday’s Securities and Exchange Commission guidelines are part of a series of new standards designed to bolster the stability of U.S. financial markets. The commissioners also backed plans for more transparency in the market for $23 billion in US government debt, which underpins global finance. The rules will now be submitted for public comment.
The collapse of Archegos, a so-called family office that managed Bill Hwang’s wealth, last year forced Wall Street banks to report losses of more than $10 billion when a series of highly concentrates that used derivatives backfired. Although Archegos is not subject to the new rules, hedge funds and private equity funds that follow a similar strategy would be within the scope of the updated guidelines, officials said.
SEC Chairman Gary Gensler said US authorities’ analysis of hedge fund reporting requirements over the past decade had identified “significant information gaps”. “For example, we would benefit from more timely information during rapidly changing market events such as the March 2020 malfunction in the Treasury market,” he said.
Many hedge funds and private equity firms have historically provided only limited information about their business despite significant growth over the past 10 years. Private fund assets under management more than doubled, from about $5 billion in 2013 to $11 billion at the end of 2020, according to the SEC. The number of funds jumped 70% over the same period.
The SEC wants to speed up disclosures to a single business day if a hedge fund experiences an extraordinary loss, large margin calls, events resulting in large client withdrawals, a sharp drop in its cash position, or any material change in its relationships with prime brokers. investment banks that provide financing.
Hedge funds often face margin calls—requests to provide more cash or U.S. Treasury bills as collateral for borrowed money—from their banks during times of market volatility or when they experience significant losses. .
The changes also include reducing the reporting threshold for private equity managers from $2 billion to $1.5 billion in assets under management. This would ensure that the same proportion of the private equity industry was covered as when the reporting standard was first adopted in 2013, SEC officials said.
The Treasury market reforms follow a series of incidents over the past decade that have tested its sustainability and the proliferation of the stock of US debt.
Over the past 15 years, the market has shifted from a market primarily organized between banks and brokerage intermediaries to one dominated by high-speed traders on electronic platforms. Corporate bonds are also increasingly traded electronically rather than by telephone.
The amended rules seek to capture platforms trading in corporate or government securities that fall outside the scope of the SEC, requiring them to comply with existing standards that protect investors, promote fair and orderly and maintain the technological infrastructure that underpins US financial markets.
The new rule would bring about 20 companies across all security asset classes under the jurisdiction of the SEC, officials said. These companies would register with the SEC as exchanges or operate as alternative trading systems, meaning they would register as broker-dealers, SEC officials said.
Some features of platforms such as Tradeweb or MarketAxess could fall under the new definition of “exchange” proposed by the SEC, officials said.
“Together, I think these measures would promote resilience and better access to the Treasury market, which forms the basis of much of the rest of our capital markets,” Gensler said.