July 9, 2023
To whom it may concern,
I am writing to express my support for the proposed rule with file number S7-32-10. I believe that this rule can significantly contribute to the stability and transparency of the financial markets.
As a retail investor, I have witnessed firsthand the destabilizing effects that non-disclosed large swap positions can have on the market, as exemplified by the collapse of Archegos Capital Management in 2021. Archegos held large swap positions, which were not disclosed due to existing rules. This lack of transparency led to a situation where significant risks were hidden from the market, creating a ticking time bomb that eventually exploded, causing market instability and substantial losses for numerous entities.
The lack of transparency and reporting in the Archegos situation had severe consequences, including the following:
1. Information Asymmetry and market manipulation: The non-disclosure of Archegos's large swap positions created an uneven playing field and the ability for Archegos to mislead counterparties and manipulate the market with extreme leverage.
2. Market Destabilization: The sudden liquidation of Archegos's positions, triggered by a decline in the price of ViacomCBS shares, led to severe market destabilization and extraordinary losses for Archegos's lenders, which included major global banks.
3. Losses for Credit Suisse and Consequences for Taxpayers: One of the hardest-hit was Credit Suisse, which reported a loss of approximately 4.4 billion CHF as a result of Archegos's failure. This significant loss contributed to the instability of the bank and led to a crisis of confidence amongst its stakeholders.
In response to this crisis, the Swiss government reportedly provided a 100 billion CHF backstop to UBS to facilitate a forced merger with Credit Suisse. This forced merger is a highly unusual intervention in the western capital markets, which typically operate under principles of free-market capitalism which jeopardizes the foundation of trust they are built on. When UBS shareholders were forced to merge with a failing bank, what difference remains between a dictatorship like Saudi Arabia and Switzerland?
Furthermore, this intervention highlights the potential for significant taxpayer exposure in these situations. The mere fact that such drastic measures were considered emphasizes the systemic risk that large, undisclosed swap positions can pose to the global financial system.
The proposed rule addresses these issues by enhancing transparency and providing regulators with more tools to monitor and mitigate risk in the security-based swap market. By requiring the reporting of large security-based swap positions, the rule will provide much-needed visibility into these often opaque derivatives, thereby helping to prevent future Archegos-like situations and contributing to overall market stability.
Let's be realistic, there are more of these ticking time bombs out there.
When information asymmetry prevails, market dynamics can be manipulated. Large security-based swaps, whether through a single position or aggregated smaller ones, distort perceived supply-demand balance, warping market sentiment and the intrinsic value of securities. This can lead to inefficient capital allocation and create opportunities for institutional investors to exploit retail investors. By enhancing market transparency, all participants gain equitable information access, fostering fairness and efficiency in price discovery.
In conclusion, I strongly support the adoption of the proposed rule and believe that it is a critical step towards improving market transparency, reducing systemic risk, and protecting individual investors from the risk institutional investors take on, institutional investors from themselves, as well as limiting potential future burdens on taxpayers from when bank losses are inevitably socialized.
Thank you for considering my comments.
Sincerely,
Andrew