February 7, 2022
I thank Chairman Gensler and staff for advancing this important rule again.
The SEC champions short selling for the role it plays in exposing fraud and systemic risk in markets. For the same reasons, the SEC must enact proposed rule S7-32-10 and provide swap transparency for all market participants.
It is beyond shocking that rules do not already exist to prohibit the fraudulent activity detailed in the proposed rule.
Retail investors widely believe that equity prices are being manipulated by securities lending and large, unreported swap positions in small cap companies. The DTC system today appears entirely predicated on DTC members' ability to prey on retail investors who are at an unsustainable information disadvantage. Why would any company or investor want to fall victim to the DTC system that allows brokers, swap dealers, market makers, authorized participants and others to be de facto underwriters able to dilute equities without limit and then simply hide that activity in unreported swaps?
Chairman Gensler has stated that 90-95% of all retail trades today are routed to wholesalers or internalized. How can price discovery in the underlying security exist if those internalized trades are then simply held in unreported swap positions? Why has the supposed importance of liquidity superseded price discovery in equity markets? The DTC system is losing credibility and must be reformed, including by enacting the proposed rule.
Hundreds of thousands of retail investors who have lost faith in the DTC system are transferring their shares from their brokerages to transfer agents in order to withdraw their shares from the DTCC and hold those shares in their own name in direct registration (DRS). This is a form of protest against DTC which has gained momentum quickly. Large, unreported swap positions in small cap companies may thus become a systemic risk when it becomes obvious that those swap positions could not possibly be hedged by the underlying security because too many shares are demonstrably in DRS at the transfer agent, obligated in call options, loaned by OCC, or reported by FINRA as increasing short interest or Failures To Deliver. Reporting of swap positions is necessary to market efficiency so that the swap counter-party may properly assess default risk under such circumstances in order to price the swap accordingly.
Thank you again to Chairman Gensler and everyone else advancing this very important rule that will strengthen markets, prevent fraud, and level the playing field for retail investors and other market participants.