A new intraday margin call rule is hitting Wall Street hard as the SEC plans to bolster the resiliency and integrity of the market.
The U.S. Securities and Exchange Commission on Wednesday voted on the proposal that would require clearing houses to monitor margin exposures on an ongoing basis and give them the authority to make intraday margin calls as frequently as circumstances warrant, per Reuters.
The new intraday margin call rule was inspired by the ‘meme stock’ frenzy of 2021.
Specifying the ongoing monitoring of intraday exposure, and under what circumstances intraday margin calls would be made, would strengthen clearing houses’ risk management and give greater transparency around how they manage intraday risk, the SEC said.
“Intraday margin calls have been important in our markets just in the recent past,” SEC Chair Gary Gensler said during a SEC open meeting ahead of the vote on the proposal.
“It happened during the volatility in January 2021, around the so-called meme-stock events. We also had intraday margin calls just in March of this year when we had heightened Treasury volatility – volatility in the Treasury market was greater than in 35 years.”
Under the SEC proposal, clearing houses would also have to establish specific requirements in their recovery and wind-down plans, including describing how the plans would be reviewed and tested.
“Greater consistency across recovery and wind-down plans would enhance the resiliency and continuity of our market plumbing,” Gensler said.
Wall Street Fights Against Tighter Regulation in the Markets
“We do not believe that collecting data on increases in margin, collateral, or an equivalent for other reasons is necessary, instructive, or relevant for monitoring and assessing systemic risk or even fund stress.
We believe that doing so would result in a significant number of false positive filings that have nothing to do with systemic risk,” Managed Funds Association said in a comment letter.
The SEC recently made changes to Form PF — a confidential reporting form for investment advisers in the US — to bolster investor protection efforts by requiring large hedge funds to report significant events such as investment losses, termination of prime brokerage relationships, and issues related to withdrawals and redemptions within 72 hours of the occurrence of the event.
“The negative side of these amendments would be a potential increase in fees for the investor.
Since funds will now have a higher reporting burden, this translates to more money spent on the compliance and legal fees for the fund, which ends up coming out of the investor’s pocket,” Evan Glover, chief investment officer at US-based hedge fund Tetelestai Capital, told FN.
Bryan Corbett, chief executive officer of Managed Funds Association — a Washington-based industry group representing 150 hedge funds managing nearly $2.6tn in assets — said that alternative asset managers do not pose systemic risks.
“We are concerned this final rule has the potential to exacerbate stress on funds, harm investors, and increase market volatility without commensurate benefit,” Corbett said.
Others in the Industry Approve
“One of the biggest risks to regulators effectively maintaining financial stability is the lack of clarity they have with hedge funds and other sophisticated asset managers,” according to Bob Elliott, a former Bridgewater executive and CEO of hedge fund ETF Unlimited.
“The new reporting framework does not get ahead of the issues,” he added.
However, Elliott said that the amendments will improve regulators’ ability to assess systematic risks.
Los Angeles-based hedge fund Hedonova’s chief investment officer Suman Bannerjee believes that the SEC has done a “great job”.
“The disclosure requirements are adequate enough to analyse systemic risk timely but not stringent enough to drive funds to offshore jurisdictions,” Bannerjee said.
Other SEC Rules Coming Later This Year
The Securities and Exchange Commission (SEC) will enforce new disclosure rules later this year that will increase “transparency and integrity” of corporate stock repurchasing, according to SEC Chairman Gary Gensler.
The newly adopted SEC rules will compel companies to disclose far more information about stock buybacks than they ever have before.
Regulations will start applying to publicly traded companies in the fourth quarter of this year, CNBC reports.
The new disclosure rules will allow investors “to better assess issuer buyback programs,” SEC Chairman Gary Gensler said.
The Chairman also noted the soaring rate at which U.S. corporate buybacks have grown in recent years, from a total of $950 billion worth in 2021, to more than $1.25 trillion worth last year.
These new disclosure rules will begin to apply when U.S. corporations report earnings for the fourth quarter of 2023, and to foreign issuers on a slightly longer timeline.
Public companies will need to disclose a daily log of repurchase activity, a description of the rationale behind each buyback, whether directors or officers of the company bought or sold shares within four days of the buyback, and other trading details.
Some investors argue that stock buyback actually combats heavy shorting in the market.
With a buyback, companies can increase earnings per share and increase the stock’s potential upside for shareholders who want to remain owners.
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