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The SEC will intensify its review of risky derivative products



(Reuters) – The chairman of the US Securities and Exchange Commission warned on Wednesday that the agency may take more enforcement action in cases involving risky derivatives, saying such products could create “systemic risks” during times of market stress.

Last month, the agency filed charges against Bill Hwang, the owner of the private fund Archegos, and other executives, claiming that they engaged in fraud and market manipulation to create huge exposures to a handful of stocks using sophisticated stock swaps.

“Market participants’ use of derivatives affects so many parts of our markets, from SEC-registered funds that wrap these products in publicly offered strategies, to many private funds that use derivatives with significant levels of exposure,”

; SEC President Gary Gensler told an industry audience at Wednesdays. .

“The use of derivatives can pose unique and potentially significant risks for investors across market sectors … even for sophisticated investors, and can potentially create systemic risks by acting in unexpected ways when markets experience volatility or stressful conditions,” he added, referring to recent implemented measures against such behavior.

“There may be more (implementing measures) to come.”

US and UK financial regulators have held discussions with market participants, including brokers and dealers, as they try to determine the impact of Archego’s standard.

Even more, Mr. Gensler’s comments breathe new life into a long-running project at the SEC to apply stricter supervision to the securities segment of the derivatives market, in accordance with the guidelines from the 2010 Dodd-Frank Financial Reform Act.

The Commodity Futures Trading Commission has the main responsibility for monitoring derivatives, but the SEC has lagged behind in its efforts to write the necessary rules for the relatively small part of the securities-based derivatives market.

Separately, Gensler also warned that swaps based on cryptocurrencies would generally be considered as reportable security-based swaps under its rules.

“Without anticipating a single token … if a swap is based on a crypto asset that is a security, then it is a security-based swap. Therefore, our rules apply to them,” he said.


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