Apr. 19, 2022
This proposed amendment hurt retail investors who trust their shares with their custodians (“Members” as defined in the proposed amendment), by enabling members to more-easily lend their customer’s shares overnight. While it is claimed that this would “provide liquidity,” when considering “fire sale” conditions later, it is not mentioned that increased rehypothecation of shares leads to more volatility in fire sale conditions. Further centralization of clearing like this amendment proposes leads to more opacity in the markets, which evidently hurts the market as a whole (see: Dark pools, synthetic positions). We should absolutely not be encouraging increased centralization or share lending by large firms. The proposed benefits of this amendment would most certainly not outweigh the terrible costs -- to retail; I’m sure large institutions would benefit tremendously well. If the aim is to alleviate “fire sale” conditions, then that is best achieved through increased transparency in the market. This is so that all participants in the market can accurate assess risk themselves. If liquidity risks arise when “borrowers or lenders concerned about their counterparties’ creditworthiness seek to unwind their securities lending transactions and obtain the return of their cash collateral or securities,” especially with respect to 2008, then we should work to prevent such inordinate risk from being undertaken. Moreover, it is the philosophy of a free market that each investor should adequately assess their own risk *or face the consequences*. Neither of these were happening in ’08, nor are they happening now, nor can they because of the ability for large institutions to hide the extent of their true risk (see: Archegos collapse). This proposed amendment is poorly considered and is not even a good band-aid on what it claims to try to solve. It should NOT be approved.