From: Suzanne Shatto
Sent: January 24, 2017
Subject: Rule comment:Release No. 34-78963; File No. S7-23-16 RIN 3235-AL48 Definition of "Covered Clearing Agency"

17 CFR Part 240
[Release No. 34-78963; File No. S7-23-16]
RIN 3235-AL48
Definition of “Covered Clearing Agency”

any clearinghouse that is associated with a financial entity needs separate assets in order to guarantee transfer of assets between counterparties.

clearinghouses should actually clear transactions. they should not kick a trade out and keep other trades by the defaulting counterparty.  in other words, if a defaulting counterparty is unable to settle a trade, that counterparty should not be eligible to be a counterparty in other trades.  there should be no contract/arrangement to continue trades past securities set out in the rules and regulations.  if any trades are in default (past the settlement date), this should impact that counterparty's margin.  the counterparty's margin should only be restored if a trade is settled.  therefore, clearinghouses should not be permitted to kick trades out after their settlement date without settling the trade.

lack of settlement is often caused by securities sold but not produced.  clearinghouses should complete all trades by their deadlines, else they risk fines or losing their license to clear trades.  the shortselling is selling imaginary shares to a buyer that the buyer cannot verify that they have received.  the buyer's proxy, the broker, accepts these IOUs in place of shares.  this means that the broker does not have the customer's portfolio.  shortselling is a debt to the buyer and also a debt to the market because the shortselling impacted market price.

"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?

clearinghouses must maintain a record of uncleared transactions that impact the margin requirements of the counterparties.  

netting transactions to reduce the margin of the counterparties causes the investors/long positions to fund the shortselling.  the transactions should not be netted.  rather, the transactions should be recorded separately as a long position and a short position in aggregate for that counterparty.

members should be able to protect their customer's portfolio from liquidation, if that member fails.  however, this protection also means that the customer's portfolio should be excluded from the broker's operating margin because the broker is only an agent for the broker's customer and not the owner of the customer's portfolio.  brokers should be unable to take possession of the bundle of rights of the customer's portfolio. this may mean that no one can sell what they do not own.  shortselling is not a right.  in any other industry, shortselling would be deemed fraudulent.


Suzanne Hamlet Shatto
​, investor
seattle, WA​