Oct. 17, 2022
October 17, 2022 Thank you for reopening the comment period on this Proposed Rule. As an individual investor, I welcome the opportunity to comment on this Proposed Rule which greatly impacts investors in the US financial markets. The importance of this proposal is highlighted by the number of financial institutions and investors commenting on this proposal. As the proposal seeks \"to increase transparency and efficiency of the securities lending market by requiring any person that loans a security ... to report the material terms of those securities lending transactions...\" and \"make available to the public certain information concerning each transaction and aggregate information on securities on loan and available to loan\", its focus is on reporting and public disclosure. In essence, transparency particularly with respect to the securities lending market. Per PWC on Securities lending transactions (1), \"The borrower of securities frequently uses them to make delivery on a short position or to settle a customer sale transaction that has failed.\" Consistent with that understanding, the proposed rule states \"A primary reason for borrowing equity shares is to facilitate a short sale\" (pg 110) and \"Equity security loans can also occur to close out a failure to deliver (FTD). FTDs occur when one party of a transaction is unable to deliver at settlement the security that they previously sold.\" (pg 111). Securities Lending Transactions are thus related to short sales and closing out a Fail to Deliver by shifting a short liability to another party. Notably, there is no situation outside of Wall St where a fail to deliver would be tolerated. Would a consumer be ok purchasing a widget from a retailer, fully pay for it, and fail to receive it? No. Yet that is exactly what happens with a fail to deliver. Would a consumer accept a shipping company borrowing a widget from someone else to make delivery? No, consumers expect to own what they paid for. Yet, that is exactly what happens with securities lending transactions -- a recipient receives delivery of a security borrowed from someone else because the seller was not in possession of the security sold. How and why is this allowed in our financial system? You Can't Regulate What You Can't See The SEC acknowledges the need for visibility into Securities Lending Transactions within the proposal: The lack of public information and data gaps creates inefficiencies in the securities lending market. The gaps in securities lending data render it difficult for borrowers and lenders alike to ascertain market conditions and to know whether the terms that they receive are consistent with market conditions. These gaps also impact the ability of the Commission, RNSAs and other self-regulatory organizations (SROs), and other Federal financial regulators (collectively regulators) to oversee transactions that are vital to fair, orderly, and efficient markets. (pg 9) While many of the comments against this proposal emphasize costs for compliance, they are submitted by market participants prioritizing short term profits for themselves over the overall market efficiency and stability. In short, most commenters against this proposal fail to recognize the cost of a systemic failure because systemic failure is neither a cost nor concern for them as demonstrated throughout recent history. See, for example, the aftermath of the 2008 financial crisis where Too Big To Fail led to taxpayer funded bank and insurance bailouts as summarized in both the book and movie titled \"The Big Short\". To quote Dr. Vicki Bogan (Professor of Economics, Cornell University) from Netflix's Eat the Rich, \"Historically, when we look at financial crises, who are the big losers? It was the households. The Wall St banks they did poorly for a little bit, but then they recovered.\" And, the expectation is \"eventually, the public will forget and everything will go back to nor mal. We'll (referring to Wall St) go back to getting the same bonuses we were getting. It will just be the way that it was.\" (quoting Alexis Goldstein, Director of Financial Policy Open Markets Institute from Netflix's Eat the Rich). As with Rel. 34-94313 S7-08-22 where the Commission highlighted information gaps for both market participants and regulators, it is simply impossible for the Commission to regulate without visibility into the market. Thus, the SEC should err on the side of collecting and making public more data to increase transparency and close those information gaps for both market participants and regulators to reduce inefficiencies in the market. To do otherwise would be willfully regulating blindly leading to uninformed decision making, ineffective regulations, and fostering unseen systemic risks. Transparency is CRITICAL for Price Discovery The SEC has highlighted how \"the securities lending market lacks public information regarding securities lending transactions, which creates inefficiencies in the securities lending market\" where \"making more comprehensive information regarding securities lending transactions publicly available ... could better protect investors by eliminating certain information asymmetries that currently exist in the securities lending market\" (pg 22) As Securities Lending Transactions are related to short sales and FTDs, it is imperative to note the underlying unlimited risk potential and the ability to manipulate stock prices. (See Rel 34-9313 S07-08-22 pgs 5 and 163). Full transparency into the securities lending market would enable market participants and investors to properly and effectively effectuate market price discovery. A common rationale for short selling is that short sellers are incentivized to seek out fraud and bet against their success. Transparency into short positions highlighting these types of situations can improve price discovery by more quickly revealing short selling activity and revelations of negative or inappropriate business behaviors thus securities lending transactions related to \"short selling could help investors better value securities\" (Rel. 34-93613 S7-18-21 pg 154). Similarly, more transparency into securities lending transactions would facilitate capital formation through \"improved price d iscovery in securities markets and improved balance sheet management by financial institutions to facilitate improvements in the provision of capital\" (Rel. 34-93613 S7-18-21 pg 152) thus \"facilitating more effective discovery of negative information that in turn could lead to more efficient allocation of capital\" (Id.). In addition, full transparency would promote stronger risk management. To quote Mark Baum from the movie The Big Short, \"this guy walks into my office and says those same banks got greedy, they lost track of the market, and I can profit off of their stupidity? [REDACTED], yeah, I want him to be right\". A key condition for efficient markets (per the efficient market hypothesis) is the perfect, complete, costless, and instant transmission of information where prices in an efficient market fully reflect all information available to market participants. Moving towards full transparency promotes stronger risk management by incentivizing market participants to avoid losing track of markets whereby others can profit off their stupidity. As this proposal seeks to reduce information asymmetries, it seems prudent to not only reduce but instead minimize to the fullest extent possible any information asymmetries between market participants -- which includes full transparency into the securities lending market reducing inefficiencies in the securities market. In pursuit of an efficient market, I support frequently reporting and making public all data, both directly and indirectly, related to securities lending market. And, due to the underlying unlimited risk potential, that the Commission err on the side of more reporting with higher frequency to promote an efficient market, promote greater and more effective risk management, and reduce systemic risk. Reporting Securities Lending Fails To Address The Fundamental Problem: Failures To Deliver As discussed above, Securities Lending Transactions are related to short sales and closing out Fails to Deliver by shifting a short position to another party by borrowing from one to deliver to another. The growth in securities lending transactions very likely reflects the growth in short sales and fails to deliver. As short sales have theoretically unlimited risk, their growth raises very important questions about whether facilitating a growing number of these unlimited risk positions may be promoting greater systemic risk in the long term. In light of the unlimited risk potential for short positions, heightened transparency into securities lending transactions promoting stronger risk management is of the utmost importance. As failures to deliver occur when a party is unable to deliver at settlement a security previously sold, they have no place in a trustworthy and efficient market. Outside of Wall St and the financial sector, there is no other market in the world where a failure to deliver on a fully paid for item would ever be tolerated. Why do we allow a party to use securities lending transactions to, effectively indefinitely, borrow for delivery a security that they previously sold? Not only is the unlimited risk potential for a growing number of indefinitely open short sales risky to the financial system as a whole, but these securities lending transactions serve as a bandaid encouraging parties to take on increasing risk with increasing leverage leading towards another inevitable financial crisis. If a fully paid for security fails to deliver, there must be a hard requirement to buy-in and close that transaction. This is clearly within the regulatory power and scope of the SEC, who in the midst of the 2008 crisis issued new (interim) rules against abusive naked short selling primarily to protect troubled financial institutions. See 2008-204 SEC Issues New Rules to Protect Investors Against Naked Short Selling Abuses (Sept 17, 2008). The SEC should bring our financial markets in line with every other market and completely eliminate failures to deliver. When we pay for something, we expect to receive it and own it. Our financial system should not tolerate market participants selling assets they don't own. Lastly, I am also supportive of comments submitted by We The Investors, Better Markets, and Dr. Susanne Trimbath who (quite literally) wrote the book on these issues underlying our financial markets (\"Naked, Short and Greedy: Wall Street's Failure to Deliver\"). Thank you for your time and consideration. (1) https://viewpoint.pwc.com/dt/us/en/pwc/accounting_guides/transfers_and_servic/transfers_and_servic_US/chapter_5_accounting_US/57_securities_lendin_US.html