April 20, 2022
Dear Sir or Madam,
The NSCC believes that with proposed rule changes if will positively address the risks resulting from security lending.
It is absurd to believe that overcoming capital requirements imposed by Basel III by letting the NSCC becoming the counterparty for any security lending will be something positive for the market. Who will actually benefit from that? The proposed change will only increase the leverage potential for members of the NSCC and not add any significant advantage for the market itself. It is just a way for those institutions to decrease their capital cost, increase leverage and therefore add more systemic risk which is actually a disadvantage in the market (page 4ff).
In page 6ff the outcomes of such risk are written out: Defaulting borrowers or lenders that create fire sales and market turmoils. Instead of addressing those situations with proper risk management mechanisms like Basel 3 is meant to be, the NSCC believes that netting out obligations in their books will solve the problem.
As a retail investor I am very concerned with this proposal: Firstly, I do not believe that security markets need more leverage and added risk through reduced capital requirements that do not add any benefit other than those institutions being able to borrow more aggressively. Secondly, as retail investor I am at the receiving end of one of those transactions that the NSCC is looking to net out in their books. If I bought a share that somebody borrowed that is netted out by my agent in the book of the NSCC, I AM STILL OWED THAT SHARE. The security lending business does not seem to need more netting capabilities in my opinion, especially when we have seen securities with short interests exceeding 100% already now.
Netting out obligations does not wipe them out, they are still there. Giving the possibility to settle those obligations by netting does not help capital formation or transparency in the market, in the contrary: Risk is increased by making obligations appear smaller as they actually are (increasing risk) and also reducing transparency in the market, since cash might be borrowed endlessly to settle obligations in cash, but securities have typically a limited supply that cannot be reflected with netting out obligations for such securities.
I hope that the SEC will make the right choice here and stop this proposal of being adopted. I do not see any benefit as a retail investor participating in the market, only disadvantages and increased risk for market participants like me.
Sincerely yours,
Karl Mauerbach