April 27, 2022
I thank you for this opportunity to offer comments and suggestions in regards to the proposed rule under file no. S7-05-22: Shortening the Securities Transaction Settlement Cycle.
I wholly support the Commissions proposed rule.
It is time to replace legacy infrastructure and systems, technology has swiftly advanced, we cannot afford to take little steps in reducing risks and increasing efficiency. The same hurdle and pushback present in the cost-benefit analysis from T+3 to T+1 may be once again present for T+2 to T+1 and even T+0. As stated in the BCG Study commissioned by the DTCC in 2012: T+0 was ruled out as infeasible for the industry to accomplish at this time, given the exceptional changes required to achieve it and weak support across the industry.
Infeasible? That is quite a firm stance at that time. However, in this day and age, we have to set a higher standard in the consideration of shorter settlement cycles. Once again, we must look at the long-term case and not adhere to short-term goals, lets not recycle the same arguments from a decade ago where it poses too many challenges, or require higher investment, or has a longer payback period.
I support the Commissions initiative to invest in operational and technological improvements, and the exploration of solutions to support real-time settlement.
One must also consider tangible behavioral changes, a fundamental overhaul, and process redesign as T+0 would greatly impact many securities processing functions such as ETF processing, options and margin investing, and securities lending.
Improvements through automation would significantly reduce behavioral risks, promote efficiency, and reduce costs. It is imperative that changes are enacted to deal with current market structure complexities. As well as upgrades for market participants infrastructure.
Furthermore, I would recommend the Commission to inquire into the EUs CSDR regulation including the required closure of failed trades and settlement discipline measures (mandatory cash penalties and buy-ins for settlement fails, settlement fails reporting).
For too long, monetary fines have proven to be not enough of a deterrent to rule violations and financial abuse through securities lending practices. Exceptional behavioral changes would be required from securities firms that engage in kiting with securities, and other illegal predatory activities. Markets must be simplified, and the unnecessary complexities added from trade settlement failures must be mitigated or completely removed. It is in my utmost belief that securities lending should not partake under a real-time gross settlement system.
75) Throughout the trading day, cash and securities would be continuously moving in a real-time gross settlement system. It would require all transactions to be pre-funded on a gross basis and therefore lose the multilateral netting benefits.
76) Real-time gross settlement lessens settlement risk which is one of the most prevalent issues within the current market structure where a counterparty fails to deliver the underlying asset or cash value of a contract.
77) The elimination of multilateral netting would reduce margin requirements completely as trades will be completed based on shares and cash on hand. Therefore, a real-time gross settlement would incur higher costs on market participants due to the volume of transactions, the amount of cash and securities moving around.
112) In a T+0 settlement system, the relationship between broker-dealer and its customer as well as investor and its custodian will result in increased trust, safety, and efficiency due to reduced settlement risk.
123) Reducing securities lending activity would also reduce the overall liquidity in the markets. However, the intrinsic value of an asset will truly be discovered through the price that buyers and sellers are willing to trade for, and not by artificial, borderline controlled price movement caused by short hedge funds hiding under the pretext of improved price discovery which is impaired by the false liquidity that they create.
137) It is necessary to proceed with the dematerialization of securities certificates to achieve T+0 to its fullest as it provides efficient portability to investors and will reduce risks and costs associated with physical certificates.
138) To facilitate a T+0 settlement cycle, it is necessary to eliminate paper certificates given that the dematerialization offers more security, increases processing speed, and allows accounts to be updated through automation thereby reducing unnecessary paperwork risk and expenses.
139) A rule proposal that mandates the dematerialization and/or immobilization detailing its purpose and benefits to market participants and investors. Ideally, it would apply to any form of investment applicable within the market.
Also, brokers should be mandated to not only support DRS transfers but also provide a clear and visible section on their trading user interface extensively describing its purpose and functionality not in a single line of an obscure page where administrative fees are mentioned.
The request for a DRS transfer should be automated and should not require an investor to call, send an email, or chat with a representative to confirm that the process was initiated or to permit the process initialization. A confirmation number should always be provided to the investor after such request.
The process to execute investors instructions needs to have a clear and set deadline, it should not take several weeks or months to process these requests, and any longer should incur penalties.
140) Any potential requirements regarding dematerialization should be comprehensive from the outset. However, it could be implemented in phases to facilitate the transition.
142) The Depository Trust Company Rulemaking Order Granting Approval of a Proposed Rule Change Concerning Requests for Withdrawal of Certificates by Issuers (Release No. 34-47978 File No. SR-DTC-2003-02) presents an outrageous barrier to achieving complete dematerialization.
DTC states that by purporting to exercise the rights of the shareholders, issuers are interfering with the legal and beneficial rights of DTC and its participants with respect to securities deposited at DTC and with DTC's obligations under Section 17A of the Act. This effectively prohibits issuers from encouraging or promoting the rights of shareholders regarding the dematerialization of securities process through DRS transfers. It is implicitly prohibiting shareholders to learn about book-entry form ownership unless they randomly stumble upon it or actively research it. Investors that may own paper certificates wouldnt be aware of this concealed process. And therefore, this rule presents a barrier to achieving complete dematerialization.
Why does this rule even exist? It is absolutely egregious that shareholders arent allowed to learn about individual ownership from their issuers. Are the overwhelming majority of investors supposed to be intentionally kept in the dark regarding the book-entry form ownership and the transfer agent mechanism like it is now? How could we expect retail investors to know about this system when Lisa Braganca, former Branch Chief and Enforcement Attorney of the SEC didnt know about DRS until early March 2022?
The Commission has conveyed its commitment to protecting retail investors, however, this rule opposes the Commissions ultimate goals. Ownership of securities in book-entry form absolutely provides benefits against nefarious market participants in the current markets. It notably prevents brokers to lend shares to short-sellers, who may lend shares without authorization or without noticing the beneficial owner, it prevents orders to be routed via Payment for Order Flow to wholesalers and dark pools. Instead, orders will directly be sent to lit exchanges as they should be.
Given the current market structure and the existing complexities that directly impact retail investors in nefarious ways carried out by market participants, particularly short hedge funds, I highly urge the Commission to revoke this ruling or at least bring forth amendments to allow issuers to share information, promote and encourage the rights of shareholders about the transfer of ownership in book-entry form DRS, and transfer agents.
Sincerely,
J.T.