Apr. 21, 2022
Reaction to WHY to the new proposed NSCC File Number SR-NSCC-2022-003 should not be allowed. When a retail investor buys a share in a company, they are purchasing a legal right to proportional ownership of that company. Not a ‘notional’ claim, a direct legal claim of property.The broker exists only as the intermediary in the transaction, AND IS NOT THE BENEFICIAL OWNER. It follows that the SEC is there to protect the PROPERTY RIGHTS of the retail investor, not the false and illegal ability of the broker or market maker to rehypothecate the beneficial owner’s rights to a third party, without the beneficial owners knowledge or explicit INFORMED consent. Now, just as in surgery, it is not enough to say the patient signed a piece of paper giving the surgeon permission to operate on them: for consent to be valid, the surgeon must show that the patient has given INFORMED consent. I.e. that the procedure itself, the expected benefits, risks and complications have been explained and understood by the patient. In terms and using language a lay person can understand, not the technical jargon of medicine. In this respect alone, the Rule falls down: it is excessively long, couched in obscure and technical language and impenetrable to the average retail investor. Even well versed retail investors are not seeing clarity, but obfuscation, vague terms and no explanation of why the new Rule is beneficial to RETAIL INVESTORS, not brokers or market makers. The new Rule effectively rehypothecates the retail investor’s property rights as a shareholder to third parties without the investor’s participation, knowledge or informed consent. The Rule makes the legal error of assuming that the broker or market maker can interpret what the investor WOULD do, not what the investor actually WANTS to do with their property: their shares. The word ‘novation’ is used in a particularly egregious fashion here: it is, in common parlance, a weasel word for what is actually happening: rehypothecation. The broker or market maker is USURPING the investor’s legal rights. Transforming a legal right of ownership and the inalienable right to decide what to do with their share EVEN IF THE DECISION appears illogical, foolish or unwise, into a financial transaction measured solely in dollars and cents. The Rule gives the broker or market maker illegal rights to enter into financial transactions with third properties, using property THEY DO NOT OWN, ONLY HOLD IN TRUST. Worst of all is that the proposed Securities Financing Transaction vehicle or entity is effectively allowing the NSCC to become a shadow bank. Assuming risks and obligations that it was never chartered or understood to undertake. The NSCC is designed to be a clearing, settlement and ‘netting’ body ON A DAILY or AT MOST T+2 time cycle, not one involved in the rehypothecating or exchanging of debts and obligations on longer time cycles - which is what the new Rule will permit. The functions of providing credit, establishing the conditions, contracts and time frames for obligations between brokers and market makers should never be taken out of the ambit of the major banks and other accredited, surveyed, monitored and audited financial institutions.This problem is not obvious from a superficial perusal of the long and complex document, yet that is the operational impact. The NSCC is attempting to act as a buffer, lender of last resort or systemic capacitor with poorly defined limits. IT IS NOT THE REMIT OF THE NSCC TO SEEK TO NEGATE SYSTEMIC MARKET RISK. only to settle, net and clear SECURITIES transactions between MEMBERS. Speaking of which, the NSCC and DTCC should NOT be permitted to involve non member third parties in the foregoing, ‘sponsored’ or not. It remains undefined who these sponsored non members might be and who regulates what are essentially credit or debt obligation swaps. Finally, it is disappointing to see yet another attempt to introduce a complex, obscure Rule that will have an undefined effect in operation, regardless of the THEORETICAL case outlined by the DTCC/NSCC. Which has all the hallmarks of being introduced for the comfort and sustenance of brokers and market makers, to the detriment of all other participants. This is a clear function of the DTCC’s unresolvable internal conflict of interest: it is a private, for profit company owned by the market participants it serves and does not have any mechanism to force it to serve any interest of retail investors. It is the best example I know of an institution where the supposed gamekeepers are employed by the poachers. Best regrds, Non-US Investor Hurt by endless list of new DTCC-, NSCC- rules allowing FTD & Naked Short to be tugged away from visibility and stealing my money.