Better Markets filed a comment letter in response to the Securities and Exchange Commission’s reopened rule proposal to require public reporting of large security-based swap (SBS) positions.
Why It Matters. The aftermath of the financial crisis brought reform to the SBS market, in the form of Title VII of the Dodd-Frank Act. It subjected both swaps and SBS to comprehensive regulation and directed the SEC to implement the new framework through its rules. While this has led to an increase in transparency and accountability in the SBS market, it has not solved all the major issues associated with SBS. For example, the SBS market continues to pose risks to the broader financial system. This was clearly illustrated in March 2021 when the hidden bets of an obscure trader managing a company called Archegos Capital Management exploded, causing huge losses for some banks, driving down the stock prices of several companies, and severely rattling markets. The Archegos meltdown confirmed the need for additional transparency in the SBS market and this reopened proposal would ensure that large SBS positions are publicly reported. That information will better equip investors and regulators to identify and respond to the buildup of potential risks in the markets.
What We Said. The Commission adopted two of the three reforms from the 2022 Proposal on June 30, 2023, but decided to continue to consider comments received on the provision requiring public reporting of large SBS positions. It is certainly a hallmark of good rulemaking and government transparency to disclose new information, and related analysis, which is relevant to a pending rule proposal, and to allow the public to provide comments on how that new information may or may not impact a proposal. However, while this additional economic analysis is helpful supplementary information, it does not justify any substantive changes to the reopened proposal. The specific concerns raised in the reopened proposal should not alter the substance of the final rule. The data currently required to be reported on SBS trading is not an adequate substitute for the newly proposed reporting requirements. Furthermore, the evidence clearly shows that the proposed reporting obligations for large SBS positions will have a negligible impact on activist investors.
Bottom Line. Better Markets reiterates support for the SEC’s proposal to require reporting of large SBS positions. The reopened proposal is an appropriate response to the type of threat exemplified by the Archegos fiasco, which revealed that the lack of transparency still prevalent in the SBS markets poses a serious danger to the broader financial system.
Read our full Comment Letter here.
