By Katanga Johnson and Pete Schroeder
WASHINGTON (Reuters) -The new chair of the U.S. securities regulator told lawmakers on Thursday the agency was considering new trading rules to address issues raised by this year's GameStop Corp (NYSE:GME) trading saga and the meltdown of private fund Archegos Capital.
Gary Gensler also told the House of Representatives Financial Services Committee, just three weeks after being sworn in as Securities and Exchange Commission (SEC) chair, that he expected to propose new rules on corporate climate risk disclosures in the second half of 2021.
Democrats are pressing Gensler to take a tough stance on Wall Street after GameStop's fierce rally in January, fueled by bullish online posts on Reddit, and the March implosion of New York-based family office Archegos, exposed gaps in the SEC's rules.
They also want the SEC to implement President Joe Biden's agenda to incorporate the physical and business risks posed by climate change into financial rules.
"It is critical for our cops on the block at the SEC to protect investors and ensure our markets are transparent and fair," said Maxine Waters (NYSE:WAT), the committee's Democratic chair.
Gensler said in prepared testimony that new rules being considered included: greater disclosure on short selling, a strategy used to bet a stock will fall; more transparency for securities lending, which underpins short-selling; and new reporting rules for the complex equity swaps that felled Archegos.
Gensler said he had also asked SEC staff to draft a request for public input on potential new rules to rein-in so-called "gamification," whereby trading apps entice retail customers with game-like features such as points and competitions.
Shares of GameStop soared in January after retail investors gathering on Reddit and trading on low-cost brokerage platforms bought the video game retailer's shares, causing big losses for hedge funds that were short sellers of the stock.
As volatility soared, retail broker Robinhood curbed buying in GameStop and other stocks because it could not provide the cash its clearinghouse required to guarantee trades during the two-day trade settlement period.
Gensler, who developed a reputation for being tough on Wall Street when he ran the derivatives regulator from 2009 to 2014, said the incident was "not good for millions of investors."
He said the agency would review whether there was sufficient competition in the retail market, while SEC staff were also working on a proposal to expedite the two-day settlement process to reduce system risks.
Republicans warned against over-reacting to the incident by restricting Americans' access to the market. "We should not punish everyday American investors with...fewer investment options," said Patrick McHenry, the panel's top Republican.
ARCHEGOS RISK
The GameStop episode was followed in March by the meltdown of Archegos, whose stock bets turned sour and left the fund and banks that financed its trades with about $10 billion in losses.
That incident highlighted the "systemic" risks posed by securities-based swaps which were not captured by new derivative market transparency rules introduced following the 2007-2009 financial crisis, said Gensler. SEC staff are preparing recommendations on how to fix that, he said.
Gensler also said the agency was gathering feedback from investors on new rules for corporate climate risk disclosures, adding that any regulatory changes would likely require a lengthy rule-making process. A formal climate risk disclosure proposal would likely be published later in the year, he said.
"Investors do want to bring some consistency and comparability to climate disclosure," he told lawmakers.