The SEC has adopted a financial crisis-inspired rule barring traders in asset-backed securities from betting against the same assets they sell to investors

The SEC has adopted a financial crisis-inspired rule barring traders in asset-backed securities from betting against the same assets they sell to investors, per Reuters.

Read full article by Reuters: https://www.reuters.com/markets/us/wall-st-regulator-adopts-dodd-frank-rule-against-trader-conflicts-2023-11-27/#:~:text=Nov%2027%20(Reuters)%20%2D%20The,assets%20they%20sell%20to%20investors.

The SEC's recent action is a response to the Dodd-Frank law, a legislative effort to eliminate practices that contributed to the 2008 global financial crisis.

This rule represents one of the final implementations of the Dodd-Frank Wall Street reform legislation enacted in 2010 and has undergone a complex journey to reach completion. An earlier version addressing traders' "conflicts of interest" was initially proposed in 2011 but never reached the finalization stage.

The rule prohibits "securitization participants" from engaging in transactions that involve shorting or purchasing credit-default swaps against the same securities. Parties covered by this rule include underwriters, placement agents, and sponsors for asset-backed securities.

Certain activities, such as risk hedging and market-making, are exempt from the rule.

SEC Chair Gary Gensler stated that this rule is relevant to a market that played a significant role in the 2008 financial crisis.