Mar. 14, 2022
Greetings,
This is my best attempt to participate in an extremely confusing, convoluted process. I have taken time to read through the proposed rule changes and contribute, to the best of my ability, my constructive opinion. If there are formatting errors or occasional mistakes in the topic focus (on my part), please know that my goal is to contribute something more meaningful than "yes" or "no;" however, I'm not well versed in this process. Thank you for understanding any errors I may make!
p. 49, Q 3: Hedging Information: When reporting on Proposed Form SHO, Managers would be required to identify whether the gross short position reported is fully hedged, partially hedged, or not hedged.
Managers should report whether or not they're hedged, and to what extent, along with understanding what that means. Information like this is valuable (crucial) in determining a manager's position with regards to the risk associated, e.g. a particularly poorly hedged position can result in a volatile event with ripple effects.
p. 50, Q5: Reporting Thresholds: Under Proposed Rule 13f-2, only Managers that meet a stated Reporting Threshold would be required to report on Proposed Form SHO through EDGAR. This approach is intended to focus reporting by Managers with substantial gross short positions.
My opinion is every gross short position should be reported without any threshold. My concern is several positions will be opened, concurrently, among several different subsidiaries to mask a larger (aggregate) short position. If 1% is spread out among 10 different subsidiaries (or cooperating allies), it seems plausible that opening a much larger position, while avoiding reporting, is possible.
p. 52, Q6: Securities Covered: Under Proposed Rule 13f-2, Managers would be required to report to the Commission certain short sale related data, as described above, for equity securities consistent with the Commission’s short sale regulations (i.e., Regulation SHO).
Every short position should be reported, regardless of its nature ("universe of securities"). I believe short positions are routinely abused and leveraged to manipulate price and I have a difficult time understanding why the practice is allowed at all. Regarding ETFs, my understanding is Authorized Participants have extremely flexible options in how they stack an ETF (ref. XRT) in order to indirectly short a stock to avoid normal reporting functions. For example, if an ETF contains 10 securities and a fund wants to short one, they'll short the entire ETF and go long on the 9 securities they're not interested in manipulating. Because of this, ETFs should absolutely be included in every reporting function as it relates to short positions.
p. 53, Q7: Economic Short Positions: Proposed Rule 13f-2 requires that a Manager calculate its gross short position in the equity security in determining whether it meets the Reporting Thresholds.
Regarding options and their relation to reporting threshold, yes, every derivative position should be disclosed and calculated as part of the gross short position. Synthetic long positions, as I understand them, are routinely used to cover short positions with shares that only exist as a notional value. For example, a large put position two years out, representing two million shares, can be used to cover short positions indefinitely, tantamount to "I might have these shares in the future, but will use them as collateral today." If I'm not representing this mechanic correctly, I'll return to my fundamental opinion: all short positions should be reported and represented, regardless of how they're formulated.
p. 53, Q8: Short Position Information: Under Proposed Rule 13f-2, Managers that meet a Reporting Threshold are required to report their end of month gross short position in the equity security.
Yes, managers should be required to report their end-of-month short positions represented in all derivatives, without exception, including (and especially) options. Because options are used as an avenue to create additional short positions, they're intimately related and will act as another tool to skirt the reporting threshold, e.g. a 2% short position could be opened on the security while another 2% is pushed through via options manipulation. When scaling this among subsidiaries or cooperating parties, a substantial short position can be opened while avoiding the threshold to report. This is why I think no threshold should exist and all short positions should be disclosed, regardless of their size or origin.
p. 54, Q10: Indirect Short Positions or Short Activities: Managers meeting a Reporting Threshold would be required to report a gross short position in an ETF, but would not be required to consider short positions that the ETF holds in individual underlying equity securities that are part of the ETF basket in determining whether the Manager meets a Reporting Threshold for such underlying equity securities that are part of the ETF basket.
ETFs should be included in all reporting requirements related to aggregate short positions. As stated above, my understanding is ETFs provide an easy tool to circumvent traditional reporting requirements while indirectly shorting a specific security. If these are not counted as part of the reporting threshold, I suspect the abuse of ETF shorting will not only continue, but increase, to offset the threshold limits outlined in this proposal. Regardless of the avenue used, an aggregate short position should be considered as it relates to any threshold reporting requirements.
p. 55, Q11: Frequency of Reporting: Under Proposed Rule 13f-2, a Manager that meets a Reporting Threshold must file Proposed Form SHO with the Commission within 14 calendar days after the end of each calendar month.
Given the automated nature of today's world, I believe daily reporting should be required. I imagine there would be severe pushback to this from the managers interested in remaining as insulated as possible. 14 days after the end of the month, along with the number of days each month provides, effectively gives managers the ability to find new ways to game the system. They have the most sophisticated computers and networks in the world, along with the most capable mathematical minds. Daily reporting is not only possible, I imagine it's easy. In case I'm ignorant to what it takes and it's much more complicated, I believe reporting should be done every week; this would limit the time available to manipulate the system while giving a reasonable time to generate a report (due no later than ons day after each seven day reporting period).
p. 59, Q14: Managers and the Potential Alternative Approach: Under the potential alternative approach presented, the reported information by a Manager would be published at the Manager level, without aggregation with other reporting Managers, with the reporting Manager’s identifying information, including any active LEI, being removed prior to publication.
I agree with The Commission's (included) benefit analysis of implementing this amendment.
Thank you for your time. These are the questions I feel comfortable sharing an opinion about. Regarding the other proposals/amendments I don't feel qualified to comment on, I'll apply my sweeping opinion to them all: anything calling for greater market transparency is something I support. Whether it's reporting deadlines, thresholds, or details of a manager's position, this information should be readily and abundantly available. I strongly believe that any objection to these measures will only come from parties interested in abusing them.