The steady hum of activity coming from the U.S. Securities and Exchange Commission is keeping investment managers’ compliance teams busy.
There are a multitude of SEC pending items that could impact how, when, and where buy-side firms trade securities and clear executed trades. The regulator is seeking to carry out its mission of protecting investors, maintaining fair, orderly, and efficient markets, and facilitating capital formation; the industry is concerned the changes are too much and too fast, and would result in liquidity dislocations and increased costs for all market participants.
The SEC’s equity market structure proposals captured industry attention when unveiled in December 2022, and while these would have some impact on the buy side, trade intermediaries, i.e., brokers and exchanges, have the most at stake. It’s a handful of other changes, further along in their development, that asset managers are more closely watching.
“There are some rule changes that the SEC has already passed that have garnered more conversations, because they’re more impactful to the buy side,” said Christy Moccia, Chief Compliance Officer at Clear Street, which provides a clearing, custody, execution, and prime brokerage platform for asset managers.
Specifically, Moccia cited the move to T+1 settlement, short position and short activity reporting, and funding of the consolidated audit trail (CAT) as regulatory issues most meaningful for the buy side at present.
“The SEC has been very active the last couple of years, and they have put forth many different kinds of proposals,” Moccia told Markets Media. “For some of these, implementation will involve additional pass-through costs to the buy side.”
There is broad industry support for the move to T+1 settlement, at least conceptually. “Global market participants benefit from shortened settlement periods, as such moves can reduce counterparty exposure, improve liquidity, decrease collateral obligations, and expedite cash and security deliveries to retail investors,” the Investment Company Institute wrote in a Viewpoint published on Oct. 9.
The practical concern is about the U.S. moving to T+1 in May 2024, ahead of Europe and other markets. “No doubt, the coming misalignment of settlement cycles between North America and other jurisdictions will present some operational challenges,” the ICI said.
For short sales, on Oct. 13 the SEC adopted a rule that requires institutional investment managers that meet or exceed certain thresholds to report enhanced short position and short activity data for equity securities.
In an Aug. 11 comment letter, the Alternative Investment Management Association cited inconsistent disclosure frameworks across a set of new SEC reporting rules, including short sales for equities, as a logistical shortcoming.
But even if that were addressed, the AIMA said “market participants will still be faced with new costs and considerations, including, but not limited to, assessing how each new rule may impact their trading and investing strategies, to what extent new reporting frameworks need to be built or amended and whether new personnel are needed and/or additional resources required.”
Market participants and observers expect the SEC to revert by year-end with next steps on its equity market structure proposals.
There are two broad trends to the proposals, Clear Street’s Moccia noted. “One is that there’s a great tilt by the Commission to adding additional protections for retail investors,” she said. “Then there’s also an underlying current, of a need to level the playing field between different types of market centers, i.e., wholesalers, alternative trading systems, and exchanges.”
Moccia highlighted the SEC’s proposed rules to amend minimum pricing increments, or tick sizes, as having potential implications for the buy side. “Block trading functionality often has a component to it where a buy-side trader is notified that there’s potential contra-side interest in the pool,” she explained. “The buy-side trader is then able to react to that notification if they want to interact with the contra side, and see what the other side is willing to provide, in terms of liquidity and price.”
With the rule proposal, “there could be an impact on that type of functionality, where you may miss some trading opportunities that you currently have to get block size done without information leakage,” Moccia said.
