April 20, 2022
I was alarmed upon reading SR-NSCC-2022-801 and seeing that SFTs would allow Clearing Members to meet their obligations to settle failing trades and naked short sales (a term used in the rule, despite assurances from the DTCC NSCC that the practice does not exist).
This is a clear way for Clearing Members to violate the spirit of Reg SHO while staying within the letter of the law. Use of SFTs to settle trades only qualifies within the legal abstractions created by the rule and the industry lawyers that authored it - not within normal commercial practices.
As an individual investor, my broker has still failed to deliver on a trade if, at the time of settlement, shares are not held in their account at the DTCC to back my beneficial ownership claim. SFTs may give me some comfort about the liquidity of their clearing account, but I would still not have received the securities that I had paid for.
This has the potential to create fungibility among securities that are not (and should not be) fungible, and allow bad actors in the market to abuse individual issuers securities. The additional liquidity created by SFTs is clearly only for the benefit of Clearing Members, and not the general public market - especially if the use of SFTs to meet settlement obligations delays or otherwise prevents the buy-in of failed trades mandated by Reg SHO.
As an individual retail investor, I strongly object to SR-NSCC-2022-801 and do not recommend the Commission approve the rule or it's contents. It is fundamentally flawed and only serves to harm price discovery and the ability of individuals to meaningful participate in equity markets.