March 6, 2011
to DTCC and NSCC:
i would like to know which day in the clearing cycle that these things happen: (T, T+1, T+2, T+3, T+4, every day, can be chosen by a buying broker, can be chosen by a buying broker because it is an internally settled transaction)
let us say that someone sold shares in the market that they didn't own, didn't borrow.
1) when do you look at their account for shares of this stock that might be owned by their cash customers and use those shares to deliver to the buying broker? i know the selling broker can ask that this shouldn't happen.
2) when do you look at their account and determine that the shares were not borrowed and borrow the shares for three days?
3) when do you look at their account and "net" the position (which does not force a buy in, but simply makes an accounting entry), which presumably uses that day's current price to determine the worth of the transaction.
4) when does the selling broker have to buy in shares after the clearinghouse has netted the position?
5) when does the broker have to buy in those shares?
6) when does the clearinghouse have to buy in?
7) when a transaction is internally settled, when do these things occur? it is not in the buying customer's best interest to turn this contract into a futures contract. i know that the buying broker can buy the shares in themselves and give the bill to the selling broker. it seems like clearing by internal settlement can allow the selling broker to choose a due date sometime in the future. although the buying customer thinks that they "own" the shares, they really only have a claim on these shares. worse, they do not benefit from any interest nor can the buying customer force any buy in. instead, if there is a short siege on the price of the stock, the buying customer suffers the longer that the buy in does not occur. it would seem that if a buy in is not forced by the third day after the trade, that the buying broker is ducking their fiduciary/legal responsibility to the buying customer.
8) what is the reason we have a 13 business cycle for clearance/settlement? why shouldn't transactions settle by day four, even if they fail by day three?
9) when do you determine that the selling broker might be insolvent, due to naked shares sold?
10) when do you refuse to allow the broker to sell shares that they don't own without borrowing shares? do those borrowed shares have to cover previous naked shorted shares first? can they just "internally settle" transactions and avoid this requirement?
11) how does the buying broker determine the financial position and the outstanding shorted position of the selling broker?
12) can the buying broker refuse to settle the transaction "internally" because of the risks involved?
13) in an internally settled transaction, does the buying broker cause the selling broker to borrow shares to deliver to the buying broker, which means that now there is a new buying broker because the borrowed shares change the payee of the shares. does this transaction go back to the T/T+1/T+2/T+3 cycle? does the clearinghouse then get re-involved in this process by being the collection point for shares available to borrow? if there are no shares available to borrow, does this cause a selling broker to buy in?
14) what if the buying broker does not agree to settle the transaction internally?
15) will the clearinghouse release a tally of the day's transactions by symbol to the public? will this include those trades marked by the selling broker as wanting to go through the internal settlement process? where will this appear on your website?
it would seem to me that since naked shortselling has been illegal for some time, that interest is charged for an illegal transaction, that due dates are moved to accommodate this fraud. naked shortselling "temporarily" increases the # of shares of a stock but the clearing/settlement process of moving due dates gives life to these naked shortselling transactions. all of this is deterimental to the buying broker's customer. this allows naked shortsellers to manipulate the price, move the supply and demand curve so that they can benefit but the due dates cause the selling broker to avoid buying in the shares.
in addition, i would like to hear about the debt/equity swaps that have been created by these naked shorting transactions. are you allowing debt/equity swaps to be created under your new accounting system? how are you going to force customers to redeem these debt/equity swaps before 7/15? can they just move this debt/equity swap transaction to an internally settled status? do the internally settled transactions have the same timeline for clearing as if they were cleared by the clearinghouse? it would seem that an aging process would be helpful here. there should be industry standards and clearinghouse, debt swap facilities must all meet the same guidelines. can an IOU for debt swaps be transferred to cover transactions, in either a clearinghouse transaction or a internally settled transaction?
i am cc'ing my broker, commenting to rules of the SEC, and copying this email to my congressional representative, and a newspaper, because i think the industry still has loopholes that can be driven through with a truck. frankly, i question whether the financial industry has actually agreed with the current SEC rules. naked shortselling is a financial crime and should be punished with financial penalties, as well as risk possible imprisonment. this is robbery without a gun.
if the SEC says transactions must be cleared/settled, and the financial industry fails to do this because they make more $ through the process that they have created to allow naked shortselling, then severe penalties should be imposed. i realize that a transaction with naked shortselling pays much better to all parties, however, this transaction is fraudulent because the originating seller does not own what they sell. no buying broker should be agreeing to internally settle a transaction because it is not in their customers' best interest.
this process pulls money out of our retirement, out of our investments and many times sends it out of the country. you cannot run an economy on shortselling stocks. shortselling is a parasite on a capitalistic system and cannot be the major economic activity. the SEC is actually saving the financial system from themselves. if shortselling is done, it should be forced to settle with the shares that are available on the market, that can be borrowed to cover.
suzanne hamlet shatto