Hedge funds will have to start sharing significantly more information about their short-sale transactions with the Securities and Exchange Commission, setting up another clash between the industry and Wall Street’s main regulator.
(Bloomberg) — Hedge funds will have to start sharing significantly more information about their short-sale transactions with the Securities and Exchange Commission, setting up another clash between the industry and Wall Street’s main regulator.
The SEC finalized rules on Friday that require hedge funds and other big investors to report gross short positions in certain stocks at the end of each month, and details on related trading activity — including in derivatives — on a more regular basis. The agency would then aggregate positioning in equities across funds and publish that with a delay.
Reporting will generally be triggered if a hedge fund reaches a $10 million average short position during the reporting month, or a 2.5% gross short position relative to total shares outstanding. The SEC did away with a reporting requirement tied to a potential daily trigger.
“Given past market events, it’s important for the commission and the public to know more about short sale activity in the equity markets, especially in times of stress or volatility,” SEC Chair Gary Gensler said in a statement.
Short selling has long been a fixture of the US equity market, but the practice has grown more controversial. The SEC has faced pressure to increase scrutiny after retail traders banded together via social media in January 2021 and bought up shares in companies like GameStop Corp.
Gensler has resisted calls from critics encouraging a major overhaul of short-sale rules, though he has repeatedly said the $26 trillion private-funds market lacks adequate transparency. The plans voted on Friday by the agency’s five commissioners are the latest in a string of new regulations that require hedge funds to share more information with the regulator. The industry has pushed back on many of them.
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According to the SEC, the new short-sale reporting will help inform the market and regulators about overall short-sale activity. The new regulations are also meant to help distinguish between hedging activity by businesses and bets against a company.
Hester Peirce, one of the commission’s two Republicans, warned that the new, sensitive data held by the SEC could attract hackers seeking to tap into juicy private financial information. Jack Inglis, chief executive officer of the Alternative Investment Management Association, a hedge fund and private equity trade group, expressed similar concerns.
The Managed Funds Association said it appreciated the SEC’s decision to make short-seller data available publicly in an aggregated way. However, the trade group expressed disappointment that the rule would place “burdensome and costly” requirements, rather than using data that’s already collected.
In addition to mandating more detailed reporting on big bets against a stock, the SEC will also require for the first time certain disclosures on securities lending — a key aspect of short sales. Banks, pension funds, institutional money managers and brokerages that lend shares will have to disclose certain details about the transaction such as time of the loan, fees and which company’s securities are involved.
The reporting helps fulfill a lingering mandate under the post-crisis Dodd-Frank Act, and should bring more transparency to the $3 trillion securities-lending market, Gensler said.
The final version, approved by the agency’s three Democrats over objections by the two Republican commissioners, made changes from the SEC’s original proposal.
Firms will have to report loans the day after they go into effect, rather than within 15 minutes as originally proposed. The Financial Industry Regulatory Authority, which will receive the reports, will make public loan amounts 20 days later, rather than in near real time.
The Securities Industry and Financial Markets Association, a trade group for brokers and other securities professionals, said the changes to the final rule decrease the likelihood of market noise that would have resulted from the original 15-minute loan reporting requirement. However, MFA, which represents hedge funds, said that the securities-lending regulation “exposes confidential lending information on a loan-by-loan basis.”
Meanwhile, the new disclosures are an “incremental step” to more efficient securities lending, said Tyler Gellasch, president and chief executive officer of Healthy Markets Association, a trade group comprised of pension funds, asset managers and exchanges.
“The questions now are about the agency’s interpretations and whether, once they have this framework in place, how long it may take for them to start tightening the timelines — which could significantly change the marketplace,” he said.
(Updates with comment from hedge fund group in ninth paragraph.)
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