Wall Street regulators step up scrutiny of risky derivatives

© Reuters. On May 12, 2021, the seal of the U.S. Securities and Exchange Commission (SEC) appeared at its headquarters in Washington, D.C., United States. REUTERS/Andrew Kelly

Katanga Johnson

WASHINGTON (Reuters) – The head of the U.S. Securities and Exchange Commission warned on Wednesday that the agency could take more enforcement action in cases involving risky derivatives, saying such products could pose “system-wide risks during times of market stress. “.

Last month, the agency charged Bill Hwang, the owner of private equity fund Archegos, and other executives with engaging in fraud and market manipulation, using complex equity swaps to create huge exposures to a handful of stocks.

“The use of derivatives by market participants spans many parts of our market, from SEC-registered funds that package these products in strategies for public offerings, to private funds that use derivatives heavily,” SEC Chairman Gary Gensler told an industry audience Wednesday. .

“The use of derivatives can present unique and potentially significant risks to investors across the market sector…even to seasoned investors, and in unexpected ways when markets experience volatile or stressful conditions operations, thereby potentially creating a system-wide risk,” he added, citing recent enforcement actions against such conduct.

“There may be more (enforcement actions) to come.”

U.S. and U.K. financial regulators have been in discussions with market participants, including broker-dealers, to try to determine the consequences of Archegos’ default.

What’s more, Gensler’s comments breathe new life into a long-standing SEC program to impose stricter oversight on the securities portion of the derivatives market as directed by the Dodd-Frank Financial Reform Act of 2010.

The Commodity Futures Trading Commission has most of the responsibility for overseeing derivatives, but the SEC has lagged in its efforts to develop the required rules for the relatively small securities derivatives market.

Separately, Gensler also cautioned that cryptocurrency-based swaps are generally considered reportable security-based swaps under its rules.

“Without prejudging any one token…if the exchange is based on a crypto asset that is a security, then that’s a security-based exchange. So our rules apply to them,” he said.

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