Hedge funds and big money managers like BlackRock are fighting transparency plans being pushed by the SEC in an attempt to avoid the type of “meme stock” madness that occurred last year. Chris Flood and Harriet Agnew report for The Financial Times:
Gary Gensler, the SEC chair, said in November that it was time to bring securities lending “out of the dark”.
The SEC has proposed extensive reforms to securities lending arrangements which allow hedge funds to pay a fee to borrow stocks and bonds in order to bet that an asset will fall in value — the process known as “short selling”.
Lenders and lending agents will together pay about $375m in initial costs and $140m annually thereafter to comply with the proposed reporting requirements, according to the SEC.
But the drastic changes in reporting and disclosure standards planned by the SEC have triggered opposition from hedge funds and other key players in securities lending, including BlackRock, the world’s largest asset manager.
Jennifer Han, head of regulatory affairs at the Managed Funds Association, the Washington-based trade body that represents hedge fund managers, said the SEC’s proposals were “misguided” and could create more meme-stock style volatility “leading to situations similar to the GameStop market event”.
Han said the MFA was “strongly concerned” that other market participants would be able to reconstruct or reverse-engineer a hedge fund’s trading strategy if the SEC insisted on highly detailed reporting of securities lending transactions, even if this information was anonymised.
Similar objections were voiced by the Alternative Investment Management Association, the London-based trade body that represents hedge funds and private credit managers with combined assets of more than $2tn.
The SEC’s proposals would allow other traders to “front-run or short squeeze” hedge funds that wanted to bet against a company’s stock, said Jiri Krol, head of government and regulatory affairs at Aima.
Several hedge fund managers said they saw little upside in talking about their short positions in the current environment. David Einhorn, founder of Greenlight Capital, which made big bets against Tesla and Lehman Brothers, has sharply curtailed his public discussions around his short positions. Einhorn declined to comment.
But Carson Block, the founder of Muddy Waters Research, said the new reporting requirements would benefit all market participants by “making it easier to gauge scepticism about a company and its propensity to be driven upward in a short squeeze, GameStop being the modern day poster child”.
Demand from hedge funds pushed the cost of borrowing GameStop shares to more than 100 per cent during the second quarter of 2020 — an exceptionally high level. By contrast, average lending fees on other US securities were around 1.5 per cent at the same time.
Revenues from lending GameStop shares reached $121.7m over the 18 months ending June 30, according to the data provider IHS Markit.
The SEC said that the high costs required to borrow GameStop shares could have constrained short sellers and contributed to a price bubble.
Many ordinary investors also lost out when the GameStop bubble popped and the value of the retailer’s shares collapsed from an intraday high of $483 in late January 2021 to $40.59 by mid-February.
“Speculators are not the only ones harmed when a bubble collapses. There is collateral damage to innocent bystanders including buy-and-hold retirement investors in index funds,” said James Angel, a finance professor at Georgetown University’s McDonough business school.
One of the SEC’s most contentious proposals is that all lenders of securities should be required to provide details of their transactions within 15 minutes to a central regulatory body, most likely the Financial Industry Regulatory Authority, which will publish some of the data.
BlackRock, which earned $555m from securities lending last year, said intraday reporting would provide “low informational value” to the SEC while imposing significant additional costs on lenders. BlackRock wants the deadline for reporting to be shifted to the close of the following trading day.
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