SEC Chair Gary Gensler issued a statement before the Financial Stability Oversight Council on financial resiliency of capital markets with regard to money market funds, open-end bond funds, and hedge funds. Gensler pointed out that the nature and scale of these fund sectors pose issues for financial stability. Gensler asked SEC staff to make recommendations for the SEC’s consideration on bolstering the resiliency of each of these fund sectors.
Gensler stated that money market funds, open-end bond funds, and hedge funds are a significant part of the capital markets. There’s $5 trillion in money market funds, nearly $7 trillion in open-end bond funds, and $9 trillion in gross assets under management in hedge funds. The nature, scale, and interconnectedness of these fund sectors pose issues for financial stability. This is evidenced by the 2008 financial crisis, at the start of the COVID crisis in March 2020, and in 1998, when the hedge fund Long-Term Capital Management failed. Gensler believes that the SEC has a responsibility to help protect for financial stability, and therefore, he asked SEC staff to make recommendations for the SEC’s consideration with regard to bolstering the resiliency of each of these fund sectors.
Money market funds and open-end bond funds. The SEC recently voted to propose amendments to rules that govern money market funds. With respect to open-end bond funds, Gensler asked staff whether there are improvements they can consider regarding the fund liquidity rule or through other reforms to enhance fund liquidity, pricing, and resiliency in possible future stress events.
Hedge funds. With respect to hedge funds, in January, the SEC voted to propose amendments to Form PF—a form adopted after the financial crisis that provides certain private fund information to the SEC and other financial regulators. The proposed amendments would require certain advisers to hedge funds to provide current reporting of events that could be relevant to financial stability. The SEC asked staff to work jointly with staff at the CFTC to consider whether they would recommend amending the joint portions of Form PF related to the periodic reports of hedge funds.
Further, in November, the SEC proposed a rule to require public reporting of large security-based swap positions. Total return swaps contributed to the transmission of risk during the failure of Archegos Capital Management last year. The SEC also re-proposed a new rule to prevent fraud, manipulation, and deception in connection with security-based swap transactions.