October 2021

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How risk-free should financial markets be for market participants, and how much should regulators intervene to ensure full transparency across short selling, stock borrowing and derivatives trading? Following the rise of meme stock trading and the fall of Archegos, these questions have been tabled with potentially broad-ranging impacts for prime brokers, hedge funds, securities finance and the Total Return Swaps industry.

At the core of the issues is to what extent should investors be protected and professional investors have the right to keep their strategies hidden from the general public. Technology advances have created a legion of new analytics, to the point where it should be assumed that market participants of all sizes can break down holdings and position reports just minutes after they are released. This level of transparency means that any reporting in the public domain is available to everyone, and fast.

The US regulatory reaction to meme stock trading and the Archegos collapse has been to focus on increased reporting rules. Some of these make sense, for example combining equities, options and Total Return Swaps in the same exposure reports. Others, however well meaning, are unlikely to deliver the objectives of ensuring fairer, more liquid and safer markets for all investors. The European approach is to review the existing Short Selling Regulation with its existing reporting obligations.

Instead of a focus on transparency, a better conversation is needed about what elements of market structure support the desired end result. Regulators will find that transparency is one piece of the puzzle but that other inputs may be either more important or may arrive at a similar conclusion without new requirements on market participants.

This report should be read by regulators considering new transparency rules for short selling. It should also be useful to any institutional market participant using long or short leverage, prime brokers and retail brokers offering short selling and margin services, and agent lenders and beneficial owners in the securities lending markets.

Table of Contents

  • Executive Summary
  • Investor Protection or a New Bubble Act?
  • Regulatory Objectives Beyond Systemic Risk Oversight
    • – Who Should Have Transparency?
  • Would Transparency Have Prevented Market Volatility in H1 2021?
  • Data Transparency vs. Market Structure
    • – Avoiding a Culture of Safety-Net-ism
  • About the Author
  • About Finadium LLC

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