Wall Street watchdog set to adopt rules aimed at GameStop-type risk

Wall Street watchdog set to adopt rules aimed at GameStop-type risk

By Douglas Gillison

(Reuters) – Wall Street‘s top regulator was poised Wednesday to adopt rules tightening the time-frame for stock trades in an effort to tamp down the kind of risk seen in 2021’s GameStop fiasco, when retail investors suffered heavy losses.

The U.S. Securities and Exchange Commission (SEC) was also due to vote on whether to propose changing rules protecting client assets held by investment managers.

Officials say shortening the time between when a securities order is placed and when a trade concludes can lessen the kind of “systemic risk” spotlighted in early 2021 when the share price of the consumer electronics retailer GameStop Corp plummeted during a bout of intense market volatility.

Trade groups have broadly welcomed the commissions proposal to cut the so-called settlement cycle to a single business day from two, six years after an earlier SEC rule shortened the period from three days.

Market participants eagerness to move to the shorter settlement cycle “will help expedite the transition and overcome any obstacles,” such as expensive systems updates and industry-wide changes to processes, Cornell University Law Professor Birgitta Siegel said in a comment submitted to the SEC.

Industry players have complained, however, that the SEC has proposed requiring compliance with the new rule by March 31, 2024, six months earlier than they would like.

In a report on the events surrounding the GameStop trades of early 2021, SEC staff noted that the longer a trade remained unsettled, the greater the likelihood that a buyer or seller would default — by refusing to pay or to hand over shares sold.

Clearing houses often require trading platforms to offset such risks with high-dollar margin deposits, costs that can skyrocket during periods of volatility and market stress.

GameStops share price tanked after its earlier volatility resulted in a multi-billion-dollar margin call on trading platform operators such as Robinhood Markets Inc. Robinhood and others responded by blocking users from buying the stock.

A shorter settlement cycle should see fewer defaults and thus help cut margin deposit costs, thereby reducing the chances of such a scenario recurring, according to the SEC.

(Reporting by Douglas Gillison; Editing by Megan Davies and Bradley Perrett)