SEC Approves Rule That Could Expose Short-Sell Positions

June 22, 2021 by Victoria Turner
SEC Approves Rule That Could Expose Short-Sell Positions
The U.S. Securities and Exchange Commission in Washington, D.C. (Photo by Dan McCue)

WASHINGTON – The U.S. Securities Exchange Commission granted the accelerated approval yesterday of a rule change proposed by the National Securities Clearing Corporation related to its calculation and collection of supplemental liquidity deposits.

The change would have both activities performed on a daily rather than monthly basis. This change could expose hedge funds and brokers’ short sell positions.  

As seen in January’s short-sale frenzy by retail investors, short selling happens when investors borrow what they see as overvalued stock and sell it at the market price with the intention of buying it back at a lower price when returning it to the broker-dealer. 

In January, a group of retail investors banded together on online trading apps like online brokerage firm RobinHood and did the same with stocks such as GameStop and AMC. 

Robinhood then restricted trading on certain stocks, claiming it was necessary to meet deposit requirements set by the Depository Trust and Clearing Corporation. 

The move landed Robinhood in the hot seat before Congress. Charles Schwab, Interactive Brokers Group and TD Ameritrade also imposed some trade restrictions. 

However, Monday’s approval of the DTCC’s subsidiary’s proposal to “enhance its management of financial risks” associated with the calculation and collection of supplemental liquidity deposits might change the short sale game for hedge funds. 

It would essentially have them disclose their short positions, at least for the NSCC’s SLD providers, which will continue to be its 30 largest members or group of affiliated members. 

The NSCC is administered by the SEC and serves as a “central counterparty” to ensure financial transactions abide by their contracts and SEC requirements. As a clearance and settlement provider, it helps brokers mitigate the risk of their buy and sell positions, decreasing their number of payment obligations. 

However, as it stands, the supplemental clearing fund liquidity deposits that allow the NSCC to cover these risks were only calculated and collected before the equity options’ monthly expiration and if needed. 

The amendment will make these calculations happen daily, as well as create an SLD obligation that would allow for same-day calculation and collection of additional SLD if needed — enhancing the SLD disclosures. 

What happened in January was that a group of subredditors from the online platform Reddit caught wind of hedge funds’ short positions and essentially performed a “short squeeze,” where they bought declining stock and increased it exponentially, and some would say artificially. 

Essentially, these new retail investors played the same game as the hedge funds. This exposed the risky business behind short selling and prompted several hearings into insecurity within the securities trading landscape.

What exactly does this amendment mean for the hedge funds or other large affiliated members who engage in short selling? The seller of this stock does not own it, instead borrows it from the broker-dealer but must buy it back in the future. 

When they see the stock is overvalued and expect it to decline, they buy it back at a lower price and pocket the difference. Brokers can essentially do this in bulk. 

If the price rises; however, the investor has to pay that difference and take a loss. Much like a casino needs to have the money in its vaults for the chips it hands out, the NSCC wants to make sure it has enough supplemental deposits it can collect in its clearing fund to cover if a member defaults.

In its ruling, the SEC found the amendment “should help NSCC ensure it can complete settlement for all its members in the event one member defaults, which the Commission believes should promote the prompt and accurate clearance and settlement of securities transactions.” 

It remains uncertain if anything else will change in the regulatory landscape, but the matter is far from over with Robinhood and large brokerages. Charles Schwab, TD Ameritrade and Interactive Brokerage Group are still amid lawsuits for the alleged trading restrictions. 

A+
a-
  • AMC
  • Congress
  • GameStop
  • National Securities Clearing Corporation
  • Securities and Exchange Commission
  • short-selling
  • In The News

    Health

    Voting

    Finance

    Storied US Steel to Be Acquired for Over $14B by Nippon Steel

    U.S. Steel, the Pittsburgh steel producer that played a key role in the nation's industrialization, is being acquired by Nippon... Read More

    U.S. Steel, the Pittsburgh steel producer that played a key role in the nation's industrialization, is being acquired by Nippon Steel in an all-cash deal valued at approximately $14.1 billion. The transaction is worth about $14.9 billion when including the assumption of debt. The combined company... Read More

    Wall Street Rises on Hopes for Rate Cuts, as Dow Ticks Toward Another Record

    NEW YORK (AP) — Wall Street is ticking higher Thursday following its big rally the day before on excitement that... Read More

    NEW YORK (AP) — Wall Street is ticking higher Thursday following its big rally the day before on excitement that several cuts to interest rates may indeed be coming next year. The S&P 500 was 0.3% higher in morning trading and within 1.5% of its all-time... Read More

    What to Know About Renters Insurance and What It Does and Doesn't Cover

    NEW YORK (AP) — When the unexpected happens — whether fire, hail, or human error — renters insurance can provide much-needed... Read More

    NEW YORK (AP) — When the unexpected happens — whether fire, hail, or human error — renters insurance can provide much-needed stability. But many choose not to purchase coverage, including in places most frequently and hardest hit by natural disasters, new research shows. Linda Klamm, who works as... Read More

    Inflation Hits Lowest Point Since Early 2021 as Prices Ease for Gas, Groceries and Used Cars

    WASHINGTON (AP) — Squeezed by painfully high prices for two years, Americans have gained some much-needed relief with inflation reaching... Read More

    WASHINGTON (AP) — Squeezed by painfully high prices for two years, Americans have gained some much-needed relief with inflation reaching its lowest point since early 2021 — 3% in June compared with a year earlier — thanks in part to easing prices for gasoline, airline fares, used... Read More

    Consumer Confidence Declines Again in May, Particularly for Older Americans

    Consumer confidence fell in May as Americans, particularly older ones, became more pessimistic about the labor market, on top of... Read More

    Consumer confidence fell in May as Americans, particularly older ones, became more pessimistic about the labor market, on top of elevated anxiety over inflation. The Conference Board reported Tuesday that its consumer confidence index fell to 102.3 in May from 103.7 in April. It’s the fourth time... Read More

    April 27, 2023
    by Dan McCue
    Renewed Bipartisan Effort Aims to Open Banking to Cannabis Industry

    WASHINGTON — Just days after an extraordinary cannabis policy summit in the U.S. Capitol, a bipartisan group of lawmakers has... Read More

    WASHINGTON — Just days after an extraordinary cannabis policy summit in the U.S. Capitol, a bipartisan group of lawmakers has reintroduced a bill aimed at ensuring legal cannabis businesses have access to banking and other financial services. The SAFE Banking Act has actually had no problem passing... Read More

    News From The Well
    scroll top