Nov. 09, 2021
The mission of the SEC is to protect investors; maintain fair, orderly, and efficient markets; and facilitate capital formation. At the current time, it is my view and the view of many investors that the SEC does none of these items listed in its mission, with perhaps the exception of facilitating capital formation, which then undermines all of the others. Page 4 https://www.sec.gov/rules/sro/nscc/2021/34-92570.pdf "NSCC understands that SFTs provide liquidity to markets and facilitates the ability of market participants to make delivery on short-sales, and thereby avoid failures to deliver, “naked” shorts, and similar situations." Currently, historically and with intent, Market Makers and Hedge Funds but not limited to have utilized naked shorts and failures to deliver (FTDs) to game the system. Key examples of this would be Gamestop (Ticker $GME), AMC Theaters (Ticker $AMC), Overstock (Ticker $OSTK). For example, AMC Theatres regularly records FTDs in excess of 6-700 times of other stocks with far higher market capitalization, It is well known that an FTD graveyard (warehouse) exists, that it is used maliciously as a loophole. While it is understandable that in certain small situations, naked shorting should be permissible to effect liquidity, at the current time it is far far far too open to abuse by industry insiders utilizing loopholes in the system. NSCC-010-2021 is a first step in ensuring that a fair, orderly, efficient market that protects investors is maintained. "The Basel III6 capital and leverage requirements, as implemented by the U.S. banking regulators, constrain the ability of agent lenders and brokers to intermediate and facilitate SFTs.7 NSCC believes central clearing of SFTs would be able to address these constraints, which may otherwise impair market participants’ ability to engage in SFTs." The NSCC is quite correct that agent lenders and brokers are constrained in the ability to facilitate SFTs. Given that central clearing exists already, it is a logical step that such clearing, especially as it relates to Naked Shorts and FTDs, given the ability of market participants to abuse them be created. Objection to this from market participants, especially those with SRO designation is if not a direct conflict of interest, so close to it that in fact it is one. The history of rules being added and market participants objecting is fairly well documented, one need only look at the consolidated audit trail system (CATS) to see how long it has been in development and how it has once again been delayed over something which should have been addressed long ago or Naked Short reporting, which was introduced in Dodd-Frank, which is still not anywhere in site. If the mission of the SEC is to truly protect investors and maintain fair orderly markets, then NSCC-010-2021 is again a step in that direction. Failure to adopt the rule, will most certainly result in a loss of trust by investors in the ability of the SEC to actually fulfill its mandate. Page 6 https://www.sec.gov/rules/sro/nscc/2021/34-92570.pdf "In addition to creating capital efficiency opportunities for market participants, NSCC believes that broadening the scope of central clearing at NSCC to SFTs would also reduce the potential for market disruption from fire sales." Whether the SEC or the NSCC wish to acknowledge it, the risk of fire sales at the current time is significant. This has many causes, not the least being over leveraging by Hedge Funds and the systemic creation of Naked Shorts by Market Makers utilizing loopholes. Failure to adopt the rule, will allow the continued use of these loopholes and exacerbate the current problem. Given the current economic position, previous economic positions, previous abuses and violations, it is paramount that steps be taken, including NSCC-010-2021 if fair, orderly and efficient markets are to be maintained in a changing investment climate. Page 10 https://www.sec.gov/regulatory-actions/how-to-submit-comments "NSCC considered all of this input, as well as the recent experiences of FICC in expanding the suite of both transactions and participants eligible for FICC’s Sponsoring Member/Sponsored Member Program,19 and ultimately decided to incorporate both the sponsoring/sponsored membership type" It should be noted, that while the NSCC references the FICC as a model for implementation of programs, the FICC was recently fined by the SEC for failures in risk management. NSCC-010-2021 while overly broad and requires that loopholes be closed, helps to address risk management on a number of levels, not the least being protecting investors. It is an obligation on the part of market participants and those crafting rules to protect the market, learn from the past cases and history, otherwise such will be repeated, with equally negative outcomes. Furthermore it is within the mandate of the NSCC to implement NSCC-010-2021 and given part of that mandata is mitigating risk, this bolsters the need for this rule given recent failures by Market Makers and Broker-Dealers to do so independently. Page 28 https://www.sec.gov/rules/sro/nscc/2021/34-92570.pdf "The proposal would also provide that NSCC could further delay its satisfaction of Final Settlement obligations to non-defaulting SFT Members beyond the normal settlement cycle for the purchase or sale of securities to the extent NSCC determines that taking market action to close-out some or all of the defaulted SFT Member’s novated SFT Positions would create a disorderly market in the relevant SFT Securities." While notable that no participants wish to see a disorderly market in a given security. It should be accepted that some disorder may exist and that a threshold be set to determine an acceptable level. As it stands, the text is overly broad in scope and determination without what constitutes what may or may not be disorderly. The market has many well known thresholds already implemented and this represents another loophole by which inside actors may game the system unless it is appropriately defined, either by threshold or maximum length of delay. Without definition it is entirely possible that sale or buy-in would be impossible to effect, simply because it may move the market or that it would not occur in an efficient, timely manner and in doing so, fail to protect investors. Furthermore, securities involved in defaulted SFT Member's novated SFT Positions should be made public in no less than 14 regular days. This information should be particular, including but not limited to dates, times, amounts and the affected security. Page 47 https://www.sec.gov/rules/sro/nscc/2021/34-92570.pdf "Section 2(i) of proposed Rule 2C would provide that a Sponsoring Member shall promptly inform NSCC, both orally and in writing, if it is no longer in compliance with the relevant standards and qualifications for applying to become a Sponsoring Member set forth in the proposed Rule 2C" Such notification should also be made public no longer than 5 regular days after receipt. Transparency and the ability to protect investors cannot solely be relied upon by the NSCC, the DTCC or even the SEC. Page 49 https://www.sec.gov/rules/sro/nscc/2021/34-92570.pdf "Section 2(l) of proposed Rule 2C would provide that a Sponsoring Member may voluntarily elect to terminate its status as a Sponsoring Member, with respect to all Sponsored Members or with respect to one or more Sponsored Members from time to time, by providing NSCC with a written notice from a Sponsoring Member to NSCC" Such notification should also be made public no longer than 14 regular days after receipt. Transparency and the ability to protect investors cannot solely be relied upon by the NSCC, the DTCC or even the SEC. Page 70 https://www.sec.gov/rules/sro/nscc/2021/34-92570.pdf "Section 14(b) of proposed Rule 2C would set out the process by which a Sponsoring Member or NSCC may cause the termination of a Sponsored Member’s positions. It would provide that on any Business Day, the Sponsoring Member or NSCC may cause such termination by delivering a notice to NSCC or the Sponsoring Member, respectively. NSCC anticipates that each Sponsored Member and Sponsoring Member would agree in the bilateral documentation between them as to what circumstances or events give rise to the ability of the Sponsoring Member to deliver a notice to NSCC terminating the Sponsored Member’s positions." Such documentation would be publicly available no less than 14 regular days after receipt. Transparency and the ability to protect investors cannot solely be relied upon by the NSCC, the DTCC or even the SEC. In closing, any sections of the document, which may or may likely contain loopholes, should be examined and such loopholes should remove or be specifically addressed so that the following criteria are met: 1. If a loophole is used, it is documented, the transaction or occurrence be made public. All too often we see loopholes such as covering an FTD with a borrowed security to 'kick the can' or utilizing CNS to escape notice. 2. Such usage should be specific, timely and not regular and that abuse of such loopholes be a quality by which a member, sponsored member or agent may be terminated and positions closed. 3. The NSCC should regularly audit transactions and make public a report, in sufficient detail that investors are capable of determining or suspecting that abuse may be occurring. 4. The NSCC should implement a method by which an investor can publicly submit a complaint, that such complaint be available publicly and a public resolution method.