Apr. 22, 2022
I am writing to object to this proposed rule. This rule creates a market mechanism that is ripe for abuse, especially by short sellers and naked short sellers trading at high volume. This proposal is shocking to the extent that it eviscerates Reg SHO (which is not strong enough or enforced properly to begin with). This proposed rule would also lead to excess liquidity, and would further degrade the US market's already compromised ability to provide true price discovery. This proposed system of "novation" and the use of Securities Financing Transactions are nothing more than a shell game to allow major market entities to hide FTD and naked shorts, and acts to create a plethora of synthetic shares as the DTC credits the lenders with the shares while leaving the SFT open. This has a high potential for abuse by short sellers and market makers by making shares seem to be available when they really are not. There is no prohibition against firms using these shares to satisfy FTD requirements or to short sell them on the market, using this fake liquidity to drive down share prices. The proposed Customer SFT Clearing exacerbates this problem by creating a derivative market that would allow even more shares to be available for short selling. The provisions of the rule that provide that the NSCC is not responsible for the completeness or accuracy of the SFT transaction data is completely inadequate to ensure that this proposed system is not abused. The only limitations are the discretion of the NSCC and the accurate SELF reporting of SFT transactions by involved parties. Large institutions with sufficient capital would be able to exchange shares without them being passed through the market. This proposal would open a pandora's box of share dilution. Large institutions would have the ability to abuse this proposed SFT system and cause a potentially infinite number of shares to be available. There is no mechanism to prevent a share from being transferred as an SFT and then being transferred again as another SFT, ad infinitum. This proposal threatens to destroy price discovery completely, at a time when a large percentage of trades do not reach the lit markets. It is easy to see that the share dilution that this system would cause would drive down share prices. This is in the best interests of short sellers, as they realize profits and their collateral requirements would be reduced as the share price falls. The result of the near infinite share dilution possible under this proposal will be absolutely destructive to the US markets. The potential for abuse of this proposed system is extreme, and it should not become a rule. Joseph Brown