Subject: Petition - File No. 4-842
From: J. Miles

Dear Ms. Countryman,
I am writing to you as a retail investor to formally submit this petition for rulemaking in accordance with Rule 192 of the Securities and Exchange Commission’s (“SEC”) Rules of Practice. My request is for the SEC to amend Rules 18 and 22 of the National Securities Clearing Corporation (“NSCC”) Rules & Procedures. The aim of this amendment is to enhance clarity and certainty regarding the settlement of guaranteed transactions, bolster the resilience of registered clearing agencies (such as the NSCC) in their capacity as central counterparties (CCPs), and promote stability within our financial markets by encouraging sound risk management practices among market participants.
This petition aligns with the guidance provided on the SEC’s website for Petitions for Rulemaking, which states that “[a]ny person may request that the Commission issue, amend or repeal a rule of general application” and that “[p]etitions must be filed with the Secretary of the Commission.” I am submitting this petition electronically to Secretarys-Office@SEC.GOV, as recommended. It fulfills the requirement of containing the proposed text or substance of any rule or amendment, as well as a statement of interest and reasons for the request.
Background
Retail investors, myself included, have observed that NSCC Rules and Procedures do not establish rigorous protocols for closing out positions, particularly in the event of a member default. According to NSCC’s Disclosure Framework, “[a]s a cash market CCP, if a Member defaults, NSCC will need to complete settlement of guaranteed transactions on the failing Member’s behalf.” However, NSCC Rule 18 SEC. 6(a) permits discretion for the Corporation to decide whether closing out a position would lead to a disorderly market, raising concerns about potential market distortions and manipulations based on unverified opinions.
We must consider several critical questions:
1.	What are the root causes of disorderly markets?
2.	How do these causes lead to market distortions and manipulations?
3.	Who bears the costs associated with closing out positions that may disrupt the market?
4.	What solutions can we implement?
1. Identifying the Root Cause
The root cause can be traced back to NSCC Rule 18, where a member's accumulation of positions may create a disorderly market if they are closed out. Members with increasingly disruptive positions risk becoming de facto Too Big To Fail entities, as their failure could trigger systemic risks.
As the likelihood of a member’s default increases, they may be incentivized to escalate their risk exposure, thereby ensuring that potential losses are socialized among investors and taxpayers. Should a member default, the associated risks and costs are covered by CCPs, including the NSCC.
2. Impacts on Market Integrity
Misaligned incentives lead members to accumulate positions that may create disorderly markets upon closure, resulting in market distortions and manipulations. For instance, a naked short position not closed due to fears of market disruption can artificially inflate the supply of a security.
CCPs prioritizing price stability to maintain a façade of market order may inadvertently perpetuate these distortions. Accumulating guarantees on disruptive positions could overwhelm a CCP's risk management capabilities, posing systemic risks to our financial system.
3. Accountability for Costs
Certain members are clearly responsible for building risky positions that threaten market integrity. The lack of real-world analogues to these practices, where selling something one does not possess is tolerated, raises fairness concerns. The current system allows for privatized profits while imposing the costs of failures on the CCP and, by extension, the public.
4. Proposed Solutions
To address these issues, we must realign the incentives within our regulatory framework to ensure that financial market participants bear the costs associated with their risky positions. This includes amending the loss allocation waterfalls to require executives of defaulting members to compensate the CCP for the costs incurred in closing out disruptive positions.
I propose the following amendments to NSCC Rules 4, 18, and 22:
(a) Establish strict procedures for the settlement of guaranteed transactions, (b) Remove ambiguity and discretionary power, (c) Enhance the liquidity and resilience of systemically important financial market utilities, (d) Support the overall stability of financial markets, and (e) Encourage prudent risk management among financial participants.
Proposed Changes
Below, I outline specific changes to the relevant NSCC rules, using brackets for additions and dashes for deletions.
NSCC Rule 4 Proposed Change SEC. 4. Loss Allocation Waterfall, Off-the-Market Transactions.
Each Member [including its executives] shall be liable for any loss or liability incurred by the Corporation due to a Defaulting Member Event. If this loss is not covered by the Member, all executives (past or present) shall be liable for an amount equal to their preceding five years of compensation.
NSCC Rule 18 Proposed Change SEC. 6. (a) After the Corporation notifies that it has ceased to act for the Member, the Net Close Out Position for each CNS Security shall be closed out by the Corporation, unless it is deemed that doing so would create a disorderly market.
NSCC Rule 22 Proposed Change The time fixed by these Rules may not be extended, and any required acts may not be waived or suspended. Any deviation must be reported and published on the Corporation’s website within one business day.
Final Remarks
I believe that these enhancements to NSCC Rules 4, 18, and 22 will protect investors, maintain fair and orderly markets, and support capital formation in line with the SEC's mission. By codifying clear procedures and removing discretion, we can foster a level playing field for all participants. Of the two options for NSCC Rule 22, I advocate for Option B—"No Exceptions"—to ensure consistent enforcement of rules.
I appreciate the opportunity to submit this petition and respectfully request the Commission to act on it promptly, with similar adjustments for the DTC, FICC divisions, and other relevant entities.
Thank you for your attention to this matter.
Sincerely,
J.Miles