From: Suzanne Shatto
17 CFR Part 240 Release No. 34-78962; File No. S7-22-16 RIN 3235-AL86 Amendment to Securities Transaction Settlement Cycle
i support shortening the T+3 settlement cycle to T+2. in fact, i think there should be nothing preventing trades from settling the same day as the trade occurred. we have an excessive amount of regulation because of shortselling. if securities were actually owned by the seller, then there would be much fewer regulations needed. buyers would be assured of owning their portfolio and brokers would only be an agent. brokers, in an effort to take possession of their customer's title, would not be able to sell order flow nor accept IOUs instead of their customer's property.
i differ with the history in page 11 of this rule proposal. the cause of the "paperwork crisis" was that there was a failure to deliver the securities in a timely manner. this situation has not improved over time but now the clearinghouse and brokers accept IOUs instead of delivery of securities that have been sold short. and now the clearinghouse and brokers do not force a buy-in of securities that have been sold short.
"There are no general rules regarding how long a short sale can last before being closed out. A short sale is a transaction in which shares of a company are borrowed by an investor and sold on the market. The investor is required to return these shares to the lender at some point in the future. The lender of the shares has the ability to request that the shares be returned at any time, with minimal notice. In this event, the short sale investor is required to return the shares to the lender regardless of whether it causes the investor a gain or a loss on his or her trade.
However, requests to return shares are rare, as the lender of the shares is a brokerage firm that has a large inventory of stock. The brokerage firm is providing a service to investors; if it were to call shares to be returned often, investors would be less likely to use that firm. Furthermore, brokerage firms benefit greatly from short sales through interest and commissions on the trades. And there is limited risk for the brokerage firms due to the restrictive margin rules on short sales."
Read more: When short selling a stock, how long does a short seller have before covering?http://www.investopedia.com/ask/answers/05/shortsaleclosed.asp
regarding page 21-22: "Debits and credits in the participant’s settlement account are netted intraday to calculate, at any time, a net debit balance or net credit balance, resulting in an end-of-day settlement obligation or right to receive payment."
the clearinghouse netting forces the investors/long positions to fund the shortselling. instead, separate accounts should be maintained by the clearinghouse, reported publicly in aggregate for all trades in the clearinghouse. no transactions should be refused after one of the parties is in default, but instead should be bought in promptly according to market deadlines.
IOUs should never be accorded the same bundle of rights as physical stock certificates because there is risk. risk is not zero. borrowed equities should also not be deemed as having the same bundle of rights because then 2 entities would own the same bundle of rights.
the problem with shortselling is that the clearinghouse, which is the agent for the member, is accepting an IOU in place of the securities. part of this difficulty is that the bookkeeping is recording the end of day price as equal to the security. shortselling is increasing the authorized shares of the security "temporarily", however by equating the amount to a dollar figure, the authorized shares may be temporarily increased by as many dollars as the shortseller wishes.
worse, the regulator has allowed shortsellers to produce "shares available to borrow but not borrow the shares". i do not see how this is different than imaginary shares. if this shortselling was being bought in promptly, there would be no failure to deliver and not transactions would be kicked out of the clearinghouse to make private arrangements. further, margin would not be restored, once a trade was declined.
which would be the appropriate method to verify title of securities? the auditor of the broker? the auditor of the clearinghouse? there should be no tolerance of error in determining title. title should be verified by the gross # of shares that all customers own in that member broker, not just the shares that one customer owns. which would be the appropriate method to handle counterfeit securities? currently, the clearinghouse can transfer counterfeit securities to a buying broker. i don't know if the customer's $ is given to the counterfeiter or held permanently by the clearinghouse. but i should not have securities in my account that cannot be sold again due to the fact that someone accepted counterfeit securities without my knowledge. the value of counterfeit securities is $0, so transfer of said securities would violate the principals of contract law.
the clearinghouse should produce the securities, in the event that false securities were transferred to a customer. the broker, as agent, and the clearinghouse, as agent of the broker, are liable to produce the broker's customer's property. the broker and the clearinghouse cannot decline this obligation. presently, both are able to decline, and the broker's customer must accept that they cannot sell property for which they paid cash. this is quite amazing to me.
i disagree that long sales on page 70 should be allowed additional days. these are securities that are presumed to be on the account of the member broker and no additional days are necessary to effect such a sale.
you can see that there are several pages required to discuss shortselling rules and procedures. if shortselling was not allowed on the basis that only an IOU can be given at any point instead of transfer of title, that shortselling expands the stock float without authorization or notice to any market participant.
investors/buyers are not notified that they have only received an IOU, that they do not have their portfolios. yet, auditors are supposed to verify that all broker customers have their portfolios.
Suzanne Hamlet Shatto