This week saw high volatility in GameStop (GME) stock which originated in investing subforum of social media platform Reddit and later expanded to other platforms as a response to hedge funds shorting the stock. On Thursday, certain platforms temporarily restricted GME purchases and officials began to publicly take note of the situation. Specifically, the SEC released a statement that it is “monitoring the situation” and Fed Chair Jerome Powell dismissed any link between the events and low interest rates. Meanwhile, Senate Banking Committee Chair Sherrod Brown (D-OH) and House Financial Services Chair Maxine Waters (D-CA) released statements announcing that they intend to hold hearings on the events and New York Attorney General Tish James announced that her office is looking into the trading activity as well as the decisions by platforms to restrict trades.
This week's events raise many questions related to the impact of social media on investing and public equity markets, the timing and nature of trading restrictions, and whether new guardrails are needed. While Congress can issue statements and hold hearings relatively quickly, any actual regulation will be slow and follow lengthy study and comment periods. With the SEC currently lacking a confirmed Chair and a director of enforcement, the Administration’s nominee, Gary Gensler, will have his work cut out for him if and when he is confirmed.
In the meantime, broker-dealers will likely want to take steps to maintain their compliance with existing regulations as well as their ability to serve customers. In particular, they should be considering rescinding margin capabilities or increasing house margin maintenance requirements. When doing so, firms should evaluate and resize liquidity buffers to incorporate any increases in margin requirements. Further, before short sales are accepted from customers, they should also make certain that they are able to ascertain a locate on the security so that delivery can be made on the settlement date.
This week saw a number of climate risk actions from regulators, the industry and the new Administration:
With increasing attention to climate change risk from the nation’s central bank, the head of the largest asset management company and the new Administration, it is becoming abundantly clear that the clean-energy train has left the station. In order to get on board, firms will need to embed climate change risk into their enterprise risk management processes and financial projections as well as fully understand and disclose their own carbon footprints. This includes managing existing and new investment risks stemming from the transition to a low-carbon economy and innovating by incorporating climate risks into products and services, such as temperature goal-aligned investments to meet evolving customer preferences.
On the regulatory front, the Fed’s creation of a Supervision Climate Committee shows that specific regulatory expectations could well be on the horizon. A logical direction for the Fed to take would be to integrate climate risk into stress testing, following in the footsteps of the Bank of England. Recognizing supervisory requirements take time, firms can get prepared by adopting the TCFD recommendations, including conducting scenario analysis, and communicating efforts to regulators and other stakeholders around climate strategy, governance, risk management, metrics and targets.
On Wednesday, the European Commission announced its decision that the SEC’s framework regulating central counterparties (CCPs) is equivalent to EU requirements, which means SEC-regulated CCPs will be able to apply for recognition with the European Securities and Markets Association (ESMA). Once ESMA grants recognition, these CCPs will be able to provide clearing services in the EU while remaining subject only to US regulation. In response to the announcement, the SEC released a statement applauding the decision and stating that it will work with ESMA to facilitate recognition of SEC-regulated CCPs. Last November, the SEC released a policy statement providing details on how EU-regulated CCPs can request exemptions from SEC rules that would impose “unnecessary, duplicative, or inconsistent requirements” if applied in addition to home jurisdiction requirements.
During a time when the industry has had to contend with a pandemic, political uncertainty, and post-Brexit loose ends, this equivalence decision comes as welcome relief, especially considering that US firms can continue to operate in the EU without making major adjustments to their business practices and operating models. Compared with the EU’s temporary (18-month) equivalence decision regarding UK CCPs, the decision for US CCPs has no expiration. This, along with the US regulatory framework now being considered equivalent by both the EU and UK, has allowed the US markets to benefit from the failure of the two European financial jurisdictions to agree to let their financial firms deal directly across their border. Unless there is a significant change signalled in upcoming negotiations, the shift of activity to the US may become permanent rather than a temporary blip.
These notable developments hit our radar over the past week:
Financial Services Leader, PwC US