The SEC’s Continuing Efforts On The Market Crisis
As efforts to quell the current market crisis continue, the SEC extended a temporary market rules regarding short selling. At the same time, the agency reiterated its requests for additional regulatory authority from Congress over credit default swaps while discussing its current difficulties in investigating that market.
The Commission extended its rule requiring large institutional investment managers to disclose certain short sales and positions. An emergency order issued on September 18, 2008, discussed here, initially imposed the disclosure obligation at a time when the Commission was concerned about the impact of short selling on certain financial institutions and others. That order was later extended, with some modifications. The new order, published on October 15, 2008, extends the disclosure and filing requirements as to certain short positions of large institutional investment managers until August 1, 2009. This apparently reflects the Commission’s continuing concern regarding the impact of short trading on the market.
In addition, Erik Sirri, Director of the Division of Trading and Markets, testified on October 15, 2008, before the House Committee on Agriculture about credit default swaps. In his testimony, Mr. Sirri reiterated the Commission’s request for additional authority over that market. Chairman Cox has repeatedly urged Congress to grant the Commission this authority as discussed here, as the market crisis has unfolded.
After noting that the Commission’s current authority with respect to OTC credit default swaps is limited to enforcing the antifraud prohibitions, Mr. Sirri noted that the SEC staff is involved in discussions with the Federal Reserve Bank of New York, the Commodity Futures Trading Commission and industry members with a view toward creating a central counterparty for credit default swaps. Currently there are four potential central counterparties for CDSs: Eurex, NYSE Euronext, CME Group/Citadel and Intercontinental Exchange/The Clearing Corporation. In view of the important relationships between the securities markets and the CDS market, the Commission staff intends to pursue these discussions as a way of reducing risk in the market.
Mr. Sirri went on to note that the Commission is “doing what it can under its existing statutory authority to address concerns regarding this market” despite the fact that market participants typically structure their activities in credit default swaps to fall within the swap exclusion of the Securities Act and the Exchange Act. The comments of Mr. Sirri referenced the expansion of the Commission’s investigations into these markets regarding possible manipulation involving certain institutions.
In his testimony, Mr. Sirri noted that “[t]he expanded investigations will require hedge fund managers and other person with positions in CDSs to disclose those positions to the Commission and provide certain other information under oath. This expanded investigation should help to reveal the extent to which the risks I have identified (regarding the lack of a central clearing mechanism, counterparty risk and a lack of uniform records) played a role in recent events. Depending on its results, this investigation may lead to more specific policy recommendations.”
Nevertheless, the investigations into these markets have apparently proven difficult. The lack of uniform record keeping and filing requirements has apparently resulted in the production of incomplete and inconsistent information. At the same time, Commission investigators have found the inquiries difficult and time-consuming in view of the SEC’s limited jurisdiction in the area.