The US Securities and Exchange Commission is weighing rules that would require securities-based swaps dealers to disclose their positions – and potential third-party risks, chairman Gary Gensler says.
“As the March collapse of the family office Archegos Capital Management showed, this may be an important reform to consider,” Gensler said in a virtual address on 21 July to an American Bar Association panel. “At the core of that story was Archegos’s use of total return swaps based on underlying stocks and significant exposure that the prime brokers had to the family office.”
Gensler has already put private fund reforms at the top of his regulatory to-do list. The collapse of Archegos at the hands of a man who had already been fined by the SEC for misconduct has given the chairman his entrée into the shadowy world of home offices.
It is a potentially target-rich environment. Home offices, overseas trusts and the like move trillions around the globe quickly, and with little formal regulation. The commission has already filed a lawsuit against space company Momentus’s former CEO, Mikhail Kokorich. The commission says Kokorich not only misled investors about the state of his company’s technology, but had hidden from them the fact that the US government had deemed him to be a national security risk.
Behind Momentus was Stable Road Acquisition Corp, a blank-check company. Behind Stable Road were a bevy of family offices, including one fronted by former US National Football League quarterback Joe Montana, records show.
“The limited transparency in this market,” Gensler said of Archegos in his speech, “combined with potential shortcomings in market participants’ risk management, contributed to firms taking overly large positions and to subsequent system-wide tremors when firms started to unwind those positions.”
Commission staff are also dusting off an unfinished 2011 rule on security-based swap execution facilities, Gensler said. The proposed rule would have formally defined the facilities, laid out registration requirements and implemented 14 core principles required by Dodd-Frank.
Gensler, who used to chair the Commodity Futures Trading Commission, said the SEC ought to align its rules with those of the commodities regulator, “bringing together buyers and sellers with transparent, pre-trade pricing and lowering risk in the marketplace.”
The SEC will be likely to make a new attempt to implement the proposed rule, with new notice and comment periods, Gensler said. He added that he had also asked his staff “to consider ways we can continue to increase transparency and reduce risk through our unused authorities, particularly with regard to security-based SEFs and position reporting”.
“I’ve also asked staff to make recommendations on proposed rules for the commission’s consideration on the anti-fraud and anti-manipulation mandate from Dodd-Frank, as now included in Section 9(j) of the Exchange Act,” Gensler said.
The chairman also says he would like to clear up any confusion over his feelings about crypto-currencies.
“Make no mistake,” he said. “It doesn’t matter whether it’s a stock token, a stable value token backed by securities, or any other virtual product that provides synthetic exposure to underlying securities. These platforms – whether in the decentralised or centralised finance space – are implicated by the securities laws and must work within our securities regime.”
“If these products are security-based swaps,” Gensler added, “the other rules I’ve mentioned earlier, such as the trade reporting rules, will apply to them.”
Under existing rules, swap dealers and ‘major’ swap participants are required to register with the SEC by 1 November. Gensler said he expects to see between 45 and 50 entities register. On 8 November, rules requiring swaps to be recorded in an SEC database go into effect. The data will be publicly available on 14 February 2022, the chairman added.