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SEC Proposes New Rules Aimed at Securities-Based Swaps

On Behalf of | Dec 21, 2021 | Regulatory Issues (SEC, FINRA)

Anyone who holds a large position in a securities-based swap should be aware of new rules proposed by the Securities and Exchange Commission (SEC). The proposed rules aim to prevent fraudulent, manipulative and deceptive activity with regard to securities-based swaps. The proposed rules also seek to prevent parties from exerting undue influence over the CCOs of firms that participate in securities-based swaps.

In explaining the move, SEC Chair Gary Gensler cited the major role securities-based swaps played in the 2008 financial crisis, as well as the more recent collapse of Archegos Capital Management. “When Archegos Capital Management collapsed,” said Gensler, “we saw once again the risks that might arise. At the core of that story was Archegos’ use of total return swaps based on underlying stocks, as well as significant exposure that the prime brokers had to the family office.”

Traders Would Face Stricter Disclosure Requirements

Under the proposed rules, any entity holding at least $300 million or the equivalent of 5% of the shares of a stock would face new reporting requirements, including their identities, position in the stock and loans related to purchasing the stock.

The SEC hopes the new reporting requirements will alert the trading public that certain entities are amassing large positions in a given security, the same set of circumstances that resulted in the Archegos Capital collapse.

A Broader Crackdown on Fraudulent Activity

New rules would also prohibit:

  • Fraudulent, deceptive or manipulative conduct in relation to any transaction involved in conducting a securities-based swap
  • Any attempt to coerce or mislead or otherwise influence the CCO of an entity that participates in securities-based swaps

If the new rules pass, traders may need to quickly adjust their practices to keep in line with the regulatory framework. If you have questions or concerns about SEC rules and regulatory issues, we encourage you to contact the securities law attorneys at Ford O’Brien Landy LLP. We advise and represent clients in New York and nationwide.

Source: Bloomberg, “SEC Plan Forces Firms Like Archegos to Reveal Swap Positions,” March 15, 2021