News
Reddit Trading and Resilience in U.S. Equity Finance Part 2
On February 4th, 2021, the Securities and Exchange Commission called for a “robust public discussion” about whether online brokers’ late January suspensions of retail trading should lead to changes in the market infrastructure. In the view of attorneys for the aggrieved retail traders, there will be a lot for the SEC to consider. More than 50 lawsuits have been filed as of today, creating another form of discussion. Our blog series on the potential infrastructure changes continues with a few of the likely discussion topics.
A large class-action lawsuit has cited, as evidence of an anti-trust conspiracy, the alleged wave of selling by hedge funds and institutions in the overnight markets of January 27th, 2021. Plaintiffs allege that the hedge funds, their brokers and the institutional investors conspired to prevent further increases in the prices for the contested issues, which would have deepened their already-substantial losses.
Reddit Trading and Resilience in U.S. Equity Finance Part 1
The trading suspensions set by online brokers in late January 2021 reminded many industry veterans of the systemic circuit breakers that were first deployed during the Black Monday crash of October 1987. In both instances, a loose band of derivatives traders was prevented by the capital rules of the equity clearing and settlement system from continuing to crush exposed short sellers and risk a systemwide collapse. Then and now, changes to the infrastructure were front of mind for regulators when the chaos subsided.
Moving ESG Beyond Policy into Practice
Accountability in voting is in the news, and nowhere more so than on Wall Street. Through their U.S. credit policy association and its Asian counterpart, Bankers have responded to suspicion among critics that problems abound in the murkiness of the proxy voting practices of asset managers for large pensions, mutual funds, and other institutional investors. With the launch of the “Global Framework for ESG and Securities Lending (GFESL),” the partnership by the two industry associations aims to provide a shared decision-making framework for managing ESG considerations in securities lending.
Managing Cash for Changing Flows and Structures
Since 1980, the cash-based securities lending program has evolved to become the prevalent form of collateral management model in the United States. By 2005, U.S.-domiciled insurers, pension funds, mutual funds and corporate treasurers had securities valued at more than $1.25 trillion on loan. This evolution has not come without difficulties. In the 1990s, securities lenders found that a rising interest rate environment suddenly depressed the value of their cash collateral investments, in some cases to the point of loss when lenders were unexpectedly required to return cash deposits to borrowers. A few lenders sustained losses that exceeded the income they had earned over the course of several years, although in several cases agent lenders absorbed the damages in order to protect their franchises.
Bankers: We’re Losing Control of the Narrative on Securities Finance
Our February 1st blog, “An Existential Moment for Securities Finance,” was followed three days later by a meeting of the Securities Finance Committee of the Bank of England. According to the meeting minutes, published yesterday, bankers registered “concerns” about negative headlines for securities lending
An Existential Moment for Securities Finance
Feb 1, 2021: The social controversy over Gamestop’s (GME) battle of wills — r/wallstreetbets v ‘The Shorts’ — may well harden the scrutiny of regulators and litigators toward the US$2.4 trillion global equity finance ecosystem that supports hedge fund strategies. This is a pivotal moment, not only for GME and The Shorts, but also for the clearing systems that their lenders and agents use to secure the funds’ trade settlements and financings.
Ignorance of clearing house rules, coupled with uneven disclosures had clearly inflamed social tensions over the GME short squeeze. These tensions were exacerbated when risk managers at clearing houses were portrayed in the media as fighting the popular uprising of legions of day traders.
A Twenty-Year Journey to Transparency
Securities lending has proven the most challenging aspect of shadow banking for regulators to bring under a regulatory rubric. One of the most vexing aspects for regulators has to be how to make securities lenders’ decision processes about whether to recall lent securities to vote proxies more transparent to investors and the regulators themselves.
Compliance with the DOL’s New Proxy Rules May Stump ERISA Fiduciaries
A counter-revolution in ESG Investing? On Friday, December 11, the Department of Labor (DOL) issued its final rules on proxy voting by ERISA fiduciaries. As proposed last August 30, the draft rules drew hundreds of responses by the ESG-directed investing community, many of which criticized the proposal as unworkable. The final version of the rules […]
Banking Leaders set to Control ‘Shadow Exposures’
Shadow banking is history, say banking leaders, a thing of the past. New compliance and risk management systems based on the Securities Finance Transaction Regulation (SFTR) and the industry’s evolving Common Domain Model (CDM) will enable financial service providers to regulate their clients’ exposure to counterparties with far more specificity than ever before possible. Originally accepted as a regulatory imposition, bankers are now viewing the SFTR reports of their loan principals as a platform to help state pension funds and others meet their ESG and tax compliance goals with unprecedented precision — along with proof of funding.
Regulators Want ESG Funds to Justify their Strategies
Today the Department of Labor (DOL) issued final rules clarifying the regulatory guideposts for fiduciaries of private-sector retirement and other employee benefit plans in light of recent trends involving environmental, social, and governance (ESG) investing. The DOL is not the only regulator with ESG funds in their cross-hairs. The Securities and Exchange Commission (SEC) has begun verifying asset managers’ and mutual funds’ ESG strategies through examination and is considering amending the mutual fund “name test rule” to ensure funds are living up to their ESG promises to shareholders.