Welcome back to the channel everyone today, i want to talk about how over-leveraged hedge funds are absolutely screwed. The sec knows it and has proposed some new rules, of which, i think are some of the most important rules. We've ever seen so stay tuned and let's make some money, and now i want to dive straight in with the key information. So the sec has proposed this new ruling, which is an amendment to form pf to require current reporting and also amend reporting requirements for large funds.

Now i want to give some massive credit here to edward burchard who's gone through this entire filing and underlined all of the key points of significance. This filing requires large hedge funds to file within one business day any instances or occurrences of one of several reporting events. Now you might ask tom what are those reporting events? Basically, these large hedge funds have to file within one singular business day. If they've experienced any extraordinary investment losses, certain margin, events or counterparty defaults, they also have to file whether they've had any material changes in prime broker relationships.

Any changes in unencumbered cash operations, events or certain events associated with redemptions. Basically, if a hedge fund experiences some large losses and receives a margin, call, they have to let the sec know within one business day or if they fail to meet their margin requirements or their relationship with their prime broker breaks down and their prime broker won't process. Their trades again, they need to let the sec know. Within one singular day the filing says we have designed the reporting events to indicate significant stress at a fund that could harm investors or pose a significant risk in the broader financial system.

So basically, the sec is expecting some of these large hedge funds to experience significant stress that could harm investors in a short matter of time. The sec report even says word for word: for example, large investment losses or a margin default involving one large, highly levered hedge fund may have systemic risk implications. So clearly, the sec know of one very specific, individual hedge fund, that is very highly leveraged. That could be experiencing margin, problems or significant stress.

It says that highly levered funds counterparties could react by increasing or decreasing margin requirements or even limiting or suspending borrowing. It says investors may withdraw and these actions or responses could amplify the fund stress by forcing additional asset sales. Now, obviously, if this large highly leveraged hedge fund is forced to sell additional assets, that could absolutely cause and add to the current market crash now, just to sidetrack myself very quickly. Here you may have seen in the after hours.

Some absolutely catastrophic falls. Spotify was down 20. Facebook was down 18 snapchat down 14 and many other stocks have fallen in the after hours as well, and gavin reckons that there will be a lot of margin calls tomorrow morning at the open. Obviously, when tons of these large hedge funds open down 20 on their spotify position and down 18 on their facebook position, they won't be able to meet those margin requirements and could absolutely end up getting margin called.

Obviously, if there's some very large hedge funds being margin called on their facebook positions, it will force them to sell off their facebook and many other stocks as well, causing this exact thing that the sec is trying to prevent or not necessarily trying to prevent. But at least trying to increase the reporting around these events, so the sec will be made aware within one business day at the time of making this video i've just had a quick check and facebook isn't even down 18. At the moment, it's down nearly 22, as i record guys, if you're getting a little bit worried, holding your amc infidelity due to all the recent glitches and the fact that fidelity actually supports short sellers mumu are currently buying you. A free share of amc.

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It says current reports would be especially useful during periods of market volatility and stress such as during a market crash. Now i found this next page very, very interesting. Indeed. It says we believe large redemption requests or suspensions of withdrawals or redemptions material restrictions on withdrawals or redemptions, and an inability to satisfy redemptions are a significant signal of potential stress at a qualifying hedge fund.

Now i wonder, which hedge fund and also linked market maker recently suspended or restricted their withdrawals and redemptions clearly that hedge fund and related market maker are showing signs of potential stress, and it says, qualifying hedge funds, under stress or in periods of volatility, may have difficulty Selling certain assets in an orderly manner to meet large redemption requests now. This is why citadel had to basically suspend or restrict their withdrawals, because they knew that they had to dump massive amounts of assets into the open market. It would crash the market as well as bankrupting citadel. Now.

I think this basically proves just how close to a market crash we really are and the fact there are absolutely many over-leveraged hedge funds trading in the market right now, and these massively over-leveraged hedge funds that are also most likely shorting amc as well, are in big Big trouble due to the current volatility, but the ruling also wants to facilitate an understanding regarding how long a liquidity fund has held a position and the maturity of the position and when the liquidity fund first acquired it basically to get an understanding if they're. Currently, in a position in a trade where they are absolutely screwed and have no escape i'll, be posting a video tomorrow morning at the open that talks about why hedge funds are currently trapped and how they have absolutely no escape. This proposed ruling also wants to include the name of the counterparty of a repo or a total return, swap basically, they can see which hedge funds are in bed with each other. Now i think the sec has really hit the nail on the head.

With this talk here about hedge funds. They've said, hedge funds are one of the largest categories of private funds and they play an important role in the us financial system due to their ability to mobilize large pools of capital, take economically important positions in the market and the use of extensive leverage. Derivatives, complex structured products and short selling, it says, while these features may enable hedge funds to generate higher returns as compared to other investment alternatives. The same features may also create spillover effects in the event of losses.

It says those losses could lead to significant stress or failure, not just at the affected fund, but also across entire financial markets, and the sec have basically said here exactly how the market crash is going to happen. They've said: first, when a large hedge fund experiences significant losses, a margin default or faces large redemptions, it may be forced to deleverage and liquidate its position at substantially depressed prices, and that's exactly what's going to happen when these hedge funds that are shorting amc, get liquidated. They'll be forced to cover their amc position at significantly higher prices, because obviously they're shorting and not going long on assets like amc, and this is forced liquidations of assets by the hedge fund at depressed prices, may affect other investors and financial institutions holding the same or Similar assets and again exactly the same with the amc shorting scenario when a hedge fund is forced to cover that amc short position at significantly higher prices. Other hedge funds will also be forced to cover their shorts on amc as well and they've said.

Consequently, more investors and financial institutions may then face increased stress from margin, calls and creditor concerns. This could lead to more sales at depressed prices, potentially causing stress across the entire financial system, and it says, secondly, large hedge funds that use leverage through loans, derivatives or repurchase agreements with other financial institutions, as counterparties may cause significant problems at those financial institutions. In times of stress, this in turn may force those institutions to scale back their lending efforts and other investment and financing activities with other counterparties, thereby potentially creating stress for other market participants. So, therefore, when some of these larger hedge funds that are lending out massive amounts of securities end up in financial concern or under financial stress, they may end up recalling all of these loaned out securities and less likely to do business with other counterparties and again, when That happens.

Some of these hedge funds that are shorting amc will be absolutely screwed, as they'll be forced to cover their shorts due to a share recall now, obviously, don't get a share recall confused with a share recount a share recount is just a counting of the number of Legally issued shares in the flow, whereas obviously a share recall is the recalling of any shares on loan that have been shorted or just generally loaned down and obviously, when you recall a share that is being loaned out and shorted, the short is forced to cover their Short position and return the share that they borrowed now at the moment, i'm under the impression that this would include synthetic shares and synthetic shorts as those synthetic shares have been created and then lent out and shorted. But i think i need to do a bit more research into share recalls and exactly how they impact on synthetic shares and shares that supposedly don't exist. So this ruling was proposed on january. The 26th and comments are due 30 days after publication in the federal register.

At which point that ruling will become final and potentially could become immediately effective or could become effective two weeks to a month after this 30-day date, so we're potentially looking at a maximum of two months until this ruling actually becomes effective. I think this ruling really goes to show just how worried the sec actually are of a market crash, because they want to be kept up to date on a daily basis. Guys be sure to. Let me know down in the comments below what you think about over leveraged hedge funds being absolutely screwed and as always guys, if you enjoyed this video, be sure to check out some of my others.

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