Subject: File No. S7-12-06
From: J Moretz

August 7, 2006

After observing the effect (or lack thereof) of the current incarnation of Reg SHO, I must say that it appears quite obvious what changes need to be made. In a nutshell, the regs need to be much tighter.

There should be a universal locate requirement and a pre-borrow requirement for short sales - this change also makes a true universal delivery requirement simple. There should be no exceptions to this requirement. The current exceptions for options market makers provide a substantial loophole that has proven nearly big enough to swallow the entire regulation tapestry.

In addition, on the enforcement side, thee should be substantial penalties for failures to deliver. Such penalties should be built into the clearing process and should include up-front penalties that are a substantial percentage of the value of the trade plus a daily penalty for unresolved fails. If the penalties associated with fails are not significant and ongoing, there is ample incentive for continuing to fail to deliver.

Finally, the grandfathering of prior fails is unacceptable. Perhaps there should be some (short) grace period for closing existing fails, but indefinite grandfathering only benefits those attempting to game the system to the detriment of legitimate traders and of the entire system. One solution is to waive the up-front penalties on prior fails, but to assess the daily penalties until the fails are resolved.