Chair of the Securities and Exchange Commission, Gary Gensler, testified to the House of Financial Services Committee on January’s market volatility.
In prepared remarks, he noted that while entities such as GameStop, Melvin Capital, Reddit, and Robinhood have garnered a significant amount of attention, the policy issues raised by this winter’s volatility go beyond those companies, rather the events are part of a larger story about the intersection of finance and technology.
“The central question is this: When new technologies come along and change the face of finance , how do we continue to achieve our core public policy goals and ensure that markets work for everyday investors?
“Whenever there are major market events, it’s a good idea to consider what risks they might have placed on the entire financial system, even when the system holds.
“I’d like to highlight a few areas: First, at least one firm didn’t have sufficient liquidity to meet margin calls and had to fundraise within hours to meet $1 billion-plus obligations, and several brokers chose to shut down customer access to trading. While these liquidity challenges faced by brokers didn’t cascade to the rest of the economy, they did, unfortunately, affect many investors’ ability to trade.
“Second, several hedge funds lost significant money during these events. Though it doesn’t appear to have triggered broader market events, at least one fund had to raise funds rapidly to cover losses. Further, as was publicly reported with the Archegos situation, losses at individual firms can have wider impacts on the banking system.
“Third, issues of concentration, whether among market makers or brokers at the clearinghouse, may increase potential system-wide risks, should any single incumbent with significant size or market share fail,” he said.