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Patrick Byrne - who has written 227 posts on Deep Capture.
I am a concerned citizen who has been focused on systemic instability since 2004.
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What are the chances of you trying, with the change in attitude towards Wall Street across the land, of trying to change the Laws in Utah, again? You seem to have gotten very close to it back in 2006. It may be the time is right for you to make attempt #2. We’re still trying to put together a compelling case that the elected officials will understand here in Texas. It isn’t easy, and it won’t be, no matter which State we target. Pointing out what’s happening is only half the battle, as far as I can tell. We need to put something in their hands that will a;make the case for new State oversight, and b;give them the content they can use to get it done. I’m not sure what the Federal agenda is, but, I’m not seeing any real progress, from any quarter. Just a lot of lip service. We need more than that, and I think it just might be time for the states to step up to the plate. You take Utah, we’ll take the rest.
The solution can be found at http://www.investorprotectioncoalition.org
One avenue is that state debt is being directly failed to deliver, so the Utah taxpayer is being screwed directly by having to compete with counterfeiters when setting the interest rate on their bonds.
Their 2008 annual report isn’t out yet, but according to the 2007 one on pg. 61 shows fails doubled in only one year:
At the close of business on December 31, 2007, open positions
due to NSCC aggregated $7,454,648,000 ($3,749,160,000 at
December 31, 2006).
The NSCC brags that they net 98%, so the fails in the world should be about 50 times the disclosed number (50 times 2%).
50 times 7.5 billion is $3.75 trillion and you have to assume that most of that dollar value is debt.
(The equity portion needs to be multiplied by another 50 times because the clearing brokerages also net.)
All the buying and selling through the continuous net settlement system only totaled $5 trillion.
“Of 2007’s $283 trillion in equities
securities transactions, we netted down almost $278 trillion (98%),
so only $5.2 trillion actually changed hands.”
You’ll notice that their annual report is filled with photos of multi million dollar paintings. That answers the question, “Where does my money go when I lose to the fixed Wallstreet casino market?”
Further to my last post, the DTCC disclosed that equity transactions were $283 trillion out of a total of $1860 trillion, so 15.2% of transactions were equity.
It could be argued that equity is more likely to fail than debt, but to be conservative, I’ll stick with the 15.2% number.
15.2% of declared continuous net settlement fails is $1.133 billion. Multiplied by 50 for NSCC netting and another 50 for clearing brokerage netting, I get fails to deliver across the system for equities, not counting x-clearing of $2.8 trillion.
On pg. 24, they say they have 40 trillion on deposit at the DTC, including debt.
Sticking with the 15.2% number, that implies they have $6 trillion in equity securities registered to Cede & Co. compared to estimated fails to deliver of $2.8 trillion.
That would imply the non x-clearing fails to deliver is back of the envelope estimate that for every two shares of real stock, there is one IOU in the system. (approx $3 trillion fake to $6 trillion real).
I think the fails are dwarfed by fails from Canada and Europe and X-clearing, but just estimating from DTCC’s own numbers, at least 1/3 of the float of most public companies is counterfeit.
I may have made a math mistake and welcome correction to any errors in logic, but I believe this problem is way bigger than the SEC and regulators make out.
If Utah were to do a similar calc. on debt, I think they’d be shocked how much extra interest the taxpayer is paying on government debt, unnecessarily.
Thank you for the link…..
Here is a text copy of the letter vis OCR:
United States Senate
WASHINGTON, DC 20510
April 1, 2009
The Honorable Mary L. Schapiro
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, DC 20549
Dear Chairman Schapiro:
We were pleased to hear in January of this year that you were committed to a review of the uptick rule. More than two months have passed, and while we understand that the SEC has begun its review, the financial markets are still waiting to know if the SEC will restore an uptick rule, and whether it will take additional steps to address abusive short selling practices.
American investors are looking to the SEC’s meeting on April 8 to address these issues. It is urgent that we restore the integrity, efficiency and fairness of our securities markets by preventing manipulative short selling. Investors need to know that the market fairly values the actual shares issued by a company and that their transactions will not be distorted by manipulative naked short sellers creating “phantom shares.”
Because of our concern about abusive short selling practices, we were especially troubled by the response of the Division of Enforcement (the “Division”) to a recent report from the SEC’s Inspector General (the “IG”) entitled “Practices Related to Naked Short Selling Complaints and Referrals,” which detailed the results of an audit of the Division’s policies, procedures, and practices for processing complaints about naked short selling.
In the report, the IG found that despite receiving more than 5,000 complaints about abusive short selling, the Division had brought no enforcement actions. Further, the IG made eleven suggestions for improvements in processing and analyzing naked short selling complaints, yet the Division agreed with only one of those eleven recommendations.
Equally troubling is the Division’s reluctance to agree with the IG and the Commission itself that naked short selling is harmful. As the IG notes, the “SEC has repeatedly recognized that naked short selling can depress stock prices and have harmful effects on the market. In adopting a naked short selling antifraud rule, Rule 1Ob-21, in October 2008, the Commission stated, `We have been concerned about ‘naked’ short selling and, in particular, abusive ‘naked’ short selling, for some time.”
In response to the IG report, however, the Division stated “there is hardly unanimity in the investment community or the financial media on either the prevalence, or the dangers, of `naked’ short selling.”
As the new leader at the SEC, you have an opportunity to clarify the Commission’s commitment to end abusive short selling. We hope that your April meeting produces an unambiguous commitment to promulgate and enforce regulations that put an end to naked short selling. At a minimum, those regulations should address the need for an uptick rule, as well as a pre-borrow requirement to prevent naked short sellers from artificially depressing or diluting stock values.
To be clear, we are not opposed to short selling itself, which can enhance market efficiency and price discovery. But naked or abusive short selling has gone unaddressed for too long and simply must end if the SEC is to restore investor confidence in the markets. In the absence of a strong message from the SEC, we believe Congress will need to consider legislation that directs the SEC to do so.
Thank you for considering our views.
EDWARD E. KAUFMAN
United States Senator
United States Senator
United States Senator
SAXBY B. CHAMBLISS
United States Senator
CARL M. LEVIN
United States Senator
ARLEN SPECTER “uptick rule”
United States Senator
I suggest that anyone concerned with Naked Shorting (Counterfeiting) should contact your Senators and Representative to suggest they add their name to the letter above written to the SEC by six US Senators:
Congress and State Officials can be contacted via this website:
Taking a different approach, the SEC’s 2007 annual report discloses that in 2006 (the year before), the fails were $44 billion at the level of the clearing brokerage.
Multiplying by 50 (clearing brokerage netting), you get an estimate of:
44.7 billion x 50 = $2.235 trillion for 2006. The fails at the DTCC doubled from 2006 to 2007, so that would give an estimate of $4.47 trillion for 2008.
Using the SEC numbers as an alternate back of an envelope calculation, you get an estimate of $4.47 trillion fake to $6 trillion real.
The SEC numbers probably include domestic x-clearing, but not fails from Canada or Europe.
To summarize, my estimate is:
$6 trillion real stock registered to Cede & Co.
$2.8 trillion fake at NSCC
$4.47 trillion fake including NSCC fake and X-clearing put together
$? fake in Canada and Europe
We need to get some of these angry insiders on side as they will know where the bodies are buried.
It might seem a bit funny but investors actually “vote on” share price levels. This is part of the “price discovery” process. It is critical that ALL votes both positive and negative be tallied and that’s why LEGAL short selling involving a “pre-borrow” is a very good thing. Legal short selling also helps inject liquidity, aids in the price discovery process and creates hedging opportunities.
In a market with integrity this casting of negative votes (short sales) has some “natural” governors that deter abuses in the voting process. First of all there are a finite number of shares that are legally borrowable. Secondly, as that “supply” of legally borrowable shares dwindles the price to “rent” these shares which is part of the legal short selling process goes up due to the effects of supply and demand.
The share prices of corporations under attack by abusive naked short sellers are also determined by a voting process. The “natural” governors that deter abuses are missing, however. There is an unlimited number of “securities entitlements” that can be generated by those selling nonexistent shares and refusing to deliver that which they sell. Due to the wording of UCC Article-8 these readily sellable “securities entitlements” for all intents and purposes give rise to readily sellable “shares*” of a corporation. The only differences between a “share” of a corporation and a “share*” of a corporation is that a “share*” of a corporation has no TECHNICAL “legal owner” and is not TECHNICALLY “outstanding”. Oh and let’s not forget that other tiny difference being that real “shares” are “issued” by a company’s board of directors whereas “shares*” are essentially “issued” by those that absolutely refuse to deliver that which they sold. Other than that they are one and the same.
Since these differences have absolutely nothing to do with share price determination then in essence failures to deliver give rise to “securities entitlements” which give rise to the “issuance/release” of “shares”. Since both “shares” and “shares*” of a corporation are readily sellable then both depress the share price of a corporation from a dilutional point of view with equal effect.
What this results in during this “voting” process that determines share prices is that abusive naked short selling basically allows the “stuffing of ballot boxes” with an infinite number of extremely easy to generate negative votes. All you have to do is to refuse to deliver that which you sell!
Fortunately there is a remedy to these “voting” abuses. They are referred to as “buy-ins” and they are the ONLY cure available when the sellers of securities absolutely refuse to deliver that which they sold. In a “buy-in” the party refusing to deliver that which he sold is FORCED to deliver it to its purchaser. “Buy-ins” are another “natural” deterrent to these abuses as they can become rather expensive.
Unfortunately the party with 15 of the 16 sources of empowerment to execute “buy-ins” (the NSCC management) is employed by the parties refusing to deliver the securities that they sell and they as if on cue plead to be “powerless” to execute “buy-ins”. This is despite their having attained a monopoly on 15 of the 16 sources of empowerment to execute “buy-ins” and they have the congressional mandate “to act in the public interest, provide investor protection and to “promptly settle” all securities transactions. To put it mildly their pleading to be “powerless” is rather suspect especially when the financial beneficiaries of these thefts of investor funds are the abusive NSCC “participants” that are their bosses.
So what are we left with? We’re left with all of the “natural” deterrents to these thefts having been surgically excised from our markets and the share prices of corporations unfortunate enough to have been targeted for one of these attacks subjected to being easily manipulated into a self-propagating “death spiral”. Is the surgical excision of the “natural” deterrents to these thefts plus the refusal to provide the ONLY cure available purely happenstance or might there be an element of “central planning”? When the financial beneficiaries of this surgical excision and the refusal to provide the ONLY known cure when it is needed are the bosses of those doing the excising and the refusing then I might posit that the share prices in certain corporations have been essentially “rigged” to go nowhere but down due to this “stuffing of the ballot box” phenomenon.
The premise of the voting process determining share prices is based upon positive votes (buy orders) causing a price enhancing effect and negative votes (sell orders) causing a share price depressant effect. But note what happens in abusive naked short selling crimes. When a buy order is naked short sold into and the failure to deliver (FTD) procreates a readily sellable “securities entitlement” and UCC-8-501 converts this “securities entitlement” into what amounts to as a share price depressing readily sellable “share” then in essence the share price buoying effect of a buy order has been converted into a share price depressing readily sellable “share” as if by magic.
What are we left with in these attacks? We’re left with the anomaly that BOTH buy and sell orders will drive the share price of a targeted U.S. corporation down when the NSCC management does their surgical excision of natural market deterrents routine followed by their pretending to be “powerless” to execute buy-ins shtick. Now that’s one meticulously-designed “fraud on the market”.
One thing that I forgot to mention is that the larger a preexisting naked short position is the more likely it is that any new buy orders will be naked short sold into. This is because it is critical for the crooks to put a “blanket” of selling on corporations that they were unable to bankrupt AFTER amassing astronomic naked short positions. Unfortunately for U.S. investors the SROs and regulators refuse to reveal the levels of preexisting FTDs poisoning a corporation’s share structure. They can’t; doing so would give away the existence of this gigantic “industry within an industry” responsible for siphoning off the assets held in retirement and other accounts.
This need to keep naked short selling corporations with massive preexisting levels of FTDs is associated with the expense of collateralizing these “open positions” on a daily market to market basis because a tiny uptick in the share price of a corporation in which you have previously established a huge naked short position might get rather expensive.
Recall that Dr. Leslie Boni’s 2004 study revealed that large naked short positions were aggregated in certain corporations especially those trading on the OTC trading venues wherein the average of an FTD se found was an incredible 56.6 days. More recently we’ve seen the big attacks being more indiscriminate and going after a variety of corporations within a certain sector being viewed as an easy prey. The banking sector being based heavily on an easy to distort foundation of “confidence” was a particularly easy prey for these attacks as the graphs showing share price performance versus FTD levels clearly show.
Harvard Derivatives Whiz Fired For Emailing Larry Summers About “Frightening” Trades?
By Moe Tkacik – April 1, 2009, 1:31PM
Remember, when placing a value on fails you are only placing a mark-to-market value and not the shareholder value of the counter-party in the sale.
Perhaps we can look at things this way:
Imagine what corporations in this country could do, if they could have access to capital that is denied them because of Wall Street manipulation of the capital markets for their gain.
Imagine what it would do to the economy. I never saw Wall Street produce anything but boom, busts and frauds.
The capital markets could function on autopilot, with Payment VS Delivery, like when you buy a bag of grapes (and they better be fresh).
Thank God for the Germans and French who are yelling at the G-20 in London that – before anything else – much tighter regulation of the financial markets is a non negotiable requisite to solving the global economic crisis.
Imagine an economy free of the dead weight coming from Wall Street. Just keep the good parts of Wall Street, analysts, Ratings (need reform as well), investment advise to firms, etc…or anyone who wants to pay for their services.
But stop them from robbing mom and pop – or anyone for that matter.
Imagine the capital that would free up.
In my Dec 18 letter to the SEC I predicted that another shoe will drop at the DTCC, because even though brokerage firms are going BK, those fails are all still there and the DTCC does not have enough capital to cover them – unless the issuers go BK.
Perhaps the NSCC could step out of the liabilities by assigning the fails liabilities amongst brokerage firms?
This moves the fails ex-clearing and assigns the fails between two specific firms, stepping out of the picture.
So perhaps my prediction that the DTCC will have a problem is incorrect. In any case, all those fails do not vanish and they’re going to show up somewhere, even if they keep getting moved around. Eventually the music stops.
Patchie is correct in that those fails liabilities are based on mark to market values. Closing the naked short positions market by the “fails” will cost much much more than indicated.
It’s a house of cards built on fractional cash and securities than can never be made good on. Apparently Wall Street has done the same to precious metal accounts.
We need a big broom, if not start over. And Geitner did not impress me in his interview – he’s not our man. He does speak with conviction and projects an impression of experience, competence and confidence. Which I’m sure, the Captain of the Titanic did as well.
If someone can not answer a simple question that is asked of them, and instead drone on about something else to avoid answering, that’s a red flag right away for me. too bad journalists in this country have a bad habit of letting guests just get away with that all the time.
It’s not rude to force them to answer, like Jon Stewart does – it’s rude of the guest to respond that way, as it shows a lack of respect – even if couched in polite mannerisms.
The red flag for me was when he was asked if he drove an American car or not. God knows what else he’s snowballing us on if he’s capable of answering the way he did there without batting an eye.
No, Tommy, it’s not just you. It’s the 27,000 people who signed on to get Proposition 9 on the ballot in South Dakota, it’s the entire delegation to the Utah Legislature who overwhelmingly voted to curb the naked short selling option, but was out gunned by the SIFMA, threatening to pull the Discover Card business out of Utah, among other such nonsense. No, it’s not just you, although I’m sure it feels that way some times. Let’s keep pounding at the States. If the Federal Agencies care to do more than talk about it, we’ll welcome them in, too. I’m not going to hold my breath, though, but, that’s just me.
Why they crashed the system and are rebooting it with a new reserve currency which is bad for our standard of living.
Didn’t we suggest altering mark to market on illiquid fixed Income to anyone important enough alone the way??!!
I can’t believe that the new dollars poured into the spigot are going to blow a new inflationary economy all over again!
Oh this one’s going to be a beauty…Volker 20%+ here we come…
US jobless claims 26 year high
Patrick! These bastards are GOING TO DO IT ALL AGAIN. They will remove the blight of market to market, the Banks will quickly recover
there healthy balance sheets (we said that would happen).
The DTC and EX _ C will get buried under a new bull market “tangled hairball of risk & paper”….
The DTC haven’t learned a thing EXCEPT _
They evidently know how to hire reporter/writers to do dirty black ops __
they know WE KNOW about the DTC….
and I hope they know “many” have guesstimated the size of the DTC & Ex C holes.
The DTCC pr and self promotion is so awful.
Calcs. in post 3 and 7 above for estimates:
$6 trillion real stock at Cede & Co.
$2.8 trillion fake at NSCC
$4.47 trillion NSCC + x-clearing
$X hidden outside America
Compare that to the estimate of global output from every worker in the world: $47 trillion
If we had an honest market, it would be a simple thing for people to invest and for companies to access capital without having to pay a lot of interest from loans.
The greatest risk to investors is the corruption in the market and the excessive spending by government. If we could get rid of the blood-sucking manipulators, the market could function.
The SEC is completely culpable here. Pump and dumps couldn’t exist if the SEC kept track of legimate shares issued. When the fraudsters sell more shares than they legally issue, it should show up immediately in trading. The first day that more shares are in the system than legally issued, trading should be halted in that stock.
The slop in the system allows for both naked shorting and for pump and dumps. If the exemptions were rescinded and brokerages had to buy in the market, borrow real shares,
regulation would be much simpler.
The SEC bent over backwards to see how much changes in regulation cost the participants and ignored the risks and costs to the rest of the world.
The SEC is completely oblivious to what they have done.
If the brokers want to short a stock, instead of buying it in the market, they need to borrow it just like everyone else.
I believe that markets could function without shorting. More money would be available to companies for reinvestment instead of money being taken out by shorting. If a stock gets too high, people can take their profits and reinvest in something else. Shorting has been claimed to aid in price discovery. The cost of this price discovery isn’t worth the damage that shorting has done to our capital markets.
We have to get rid of the corruption and protect the money that is in the markets so that there will be access to capital.
HAY REGULATORS AND SROS: WHAT’S CURRENTLY RESIDING ON OUR NATION’S “CORPORATE ROOFTOPS”?
Let’s go back to our multi-trillion dollar set of equations supporting abusive naked short selling (ANSS) frauds. As you might recall this is associated with the phraseology utilized in UCC Article 8-501. The first is this:
FTDs → “SECURITIES ENTITLEMENTS” → “SHARES*”
The second is this:
“SHARES*” = “SHARES”: 1) That technically have no “legal owner”
2) That are technically not “outstanding”
3) That were in essence “issued” by naked short sellers and not by the BOD of the corporation
4) Whose “issuance” brought no money into the corporate coffers; only dilutional damages
5) That are “unregistered” as mandated by the ’33 Act
“Shares*” issued by abusive naked short sellers contribute directly to the “supply” of that which is readily sellable within the share structure of a given corporation. They have the exact same share price depressant effect from a dilutional point of view as legitimate “shares” issued by the BOD of a corporation have.
Try to picture these invisible “shares*” as lead disks residing on the rooftop of a U.S. corporation which weigh down on the share price and prognosis for success of that corporation and the investments made therein. Note that neither management nor prospective investors can scale a ladder to see how plentiful they are. Their numbers and their “issuers” are kept top secret from those incurring their damages.
To gain an understanding of what a “corporate rooftop” looks like mentally divide the flat rooftop into six sections. Every corporation has 6 separate stacks of lead disks/“shares*” weighing down on its share price and prognosis for success.
The first stack consists of the “shares*” issued by the NSCC’s “Automated Stock Borrow Program” or “SBP”. These are also referred to as “long positions” within “C” sub accounts. They are the result of good old fashioned SEC-approved “counterfeiting”. Due to the self-replenishing nature of the SBP there is really no other way to describe them.
The second stack consists of “shares*” issued due to the refusal of abusive NSCC “participants/co-owners” (non-market makers) to deliver the securities that they sold. The construction of this stack was greatly facilitated by the NSCC management’s pretending to be “powerless” to buy-in the delivery failures of its abusive “participants”.
The third stack of share price depressing “shares*” issued are associated with theoretically “bona fide” market makers (MMs) that have accessed the universally abused “exemption” from pre-borrowing or making “locates” of shares before making admittedly naked short sales. This is typically one of the taller of the stacks as oftentimes unregulated hedge funds are invited to “rent” space under this “umbrella of immunity” from making pre-borrows or “locates” before making naked short sales. The “rental fee” is typically paid via “order flow” that generates commissions and fees for abusive market makers willing to break the law.
The fourth stack consists of “shares*” issued by employees of a brokerage firm’s trading desk resulting from naked short selling into buy orders they have visibility of. This is also referred to as “desking” or “broker/dealer internalization”.
The fifth stack consists of “shares*” issued by naked short selling brokerage firms in other countries whose security depository systems are allowed to interface with our NSCC. A lot of these seem to have a Canadian accent, Eh!
The sixth stack of “shares*” is often a very large one. It consists of “shares*” issued by corrupt clearing firms via their entering into special “ex-clearing arrangements” outside of the DTCC proper. Ever since Reg SHO came into effect on January 5 of 2005 this stack became a very popular place to park these “shares*”. This is because Reg SHO only addressed “shares*” residing in a “registered clearing agency” like the DTCC.
There are other “shares*” that inhabit U.S. corporate rooftops that come from a variety of locations especially in countries that utilize securities depositories and clearance and settlement systems outside of that in use in the U.S. Although Section 17A of the ’34 Securities exchange Act mandated the formation of a “national clearance and settlement system” there is no exclusivity involved.
As these “shares*”/lead disks accumulate on the rooftops of U.S. corporations the share price of the corporation by definition has to go down. The “supply” and “demand” variables still interact to determine share prices via the “price discovery” process but these variables are subject to being manipulated. Share price “manipulation” involves the INTENTIONAL altering of the supply and demand variables that determine share prices usually done in an effort to achieve financial gains at the expense of others. Share price “manipulation” is a form of “fraud” forbidden by Section 10b-5 of the ’34 Exchange Act.
As the “supply” of readily sellable “shares” and or “shares*” is manipulated upwards by abusive naked short selling the “effective demand” is manipulated downwards. This is because the natural share price buoying effect of buy orders is cancelled out by being met with naked short sale orders. This reduces the “effective demand” for shares which is the “demand” that is allowed to interact with the “supply” variable to determine share prices.
When the “supply” of that which is readily sellable is manipulated upwards AT THE SAME TIME that the “effective demand” is manipulated downwards then the drop in share prices can be rather dramatic. This you can easily recognize in the charts at deepcapture.com graphing the share price of various banking sector stocks versus the level of delivery failures over time. As the level of FTDs goes through the roof the share price simultaneously falls off of a cliff.
Any clearance and settlement system with one iota of integrity would rigorously monitor for the accumulation of these “shares*”/lead disks on corporate rooftops and buy them in when their age exceeded the age of a delivery delay of a legitimate nature i.e. perhaps on T+6 or so. Corporate management obviously can’t fulfill its fiduciary duties of care to its shareholders when they are not allowed to envision that which is collecting on their own corporate rooftop. The allowance of these accumulations by the NSCC management empowered to execute buy-ins is one thing but the refusal by the NSCC, FINRA, and the SEC to allow the visibility of these accumulations by management and prospective investors is quite another.
From the SEC Enforcement Division’s reply to their Inspector General’s criticism of the job they’re doing in the NSS arena: “there is hardly unanimity in the investment community or the financial media on either the prevalence, or the dangers, of `naked’ short selling.”
I guess they didn’t see the Sears Holdings chart referenced above or the other half dozen we’ve seen at deepcapture.com!
I’m sorry and don’t mean to sound glib here but if THAT letter from our SENATORS from post number 5 does not tell the SEC to crap or get off the pot.. NOTHING WE SAY OR DO HERE WILL!!! There is no longer any plausible deniability. The truth is out for all to read and yet MOST in Mainstreet Media still will not report the happenings!!!! They know they don’t won’t or can’t do anything about it!!!
Please tell me this isn’t what I think it is.
“The RECAPS learning track introduces the National Securities Clearing Corporation’s (NSCC) Reconfirmation and Pricing Service, which facilitates the settlement of aged fails.”
Isn’t the only way to bring about “the settlement of aged fails” by delivering that which you sold?
I don’t think I like the looks of this at all.
“NSCC’s RECAPS service is a mandated service for all full-service Members that reconfirms and reprices Members’ aged fails in RECAP-eligible securities that represent positions that are currently failing outside of NSCC (i.e. non-CNS items). It thus provides a mechanism for reducing outstanding non-CNS member fails”
January 30, 2007
DIRECTOR OF OPERATIONS,
MANAGER P&S DEPARTMENT,
General Counsel’s Office
Rule Filing-SR-NSCC-2007-03— (Changes to RECAPs Procedures)
NSCC has made a rule filing (SR-NSCC-2007-03) for immediate effectiveness with the Securities and Exchange Commission (the “SEC”) to make technical and updating changes to NSCC’s procedures regarding its Reconfirmation and Pricing Service (“RECAPS”) (Procedure II, Section G).
NSCC’s RECAPS service is a mandated service for all full-service Members that reconfirms and reprices Members’ aged fails in RECAP-eligible securities that represent positions that are currently failing outside of NSCC (i.e. non-CNS items). It thus provides a mechanism for reducing outstanding non-CNS member fails. The proposed revisions to the procedures reflect enhancements to the service, conforming processing changes with current regular way processes, and deletion of obsolete reports. These changes are briefly explained below, and more fully outlined in Important Notice A#6323 P&S#5893 dated October 26, 2006.
The RECAPS service is currently offered quarterly, with a processing schedule as follows:
-On Tuesday, the first day of the processing cycle, Members submit CUSIP files for certain securities designated for processing through the service. The data on these files is used to obtain current prices for the designated securities.
-On Friday, Members submit eligible aged fails to NSCC up until a designated cut-off time.
-On Saturday, NSCC distributes RECAPS contract sheets, RECAPS CNS and Non-CNS Compared Trade Summaries, Balance Orders (for matched transactions in Balance Order securities), and a CNS RECAPS Projection Report and an Advisory Listing.
-On Monday, Members take action on unmatched items, and
-On Tuesday, the last day of the RECAPS cycle, all matched fails are scheduled to settle.
The process enhancements eliminate the need for early submission of securities CUSIP files, as current price information can be obtained on Friday when Members submit their aged fails for
reconfirmation and pricing. In addition, the process enhancements enable the distribution of reports at an earlier time on Saturday, and fails will settle on the next Settlement Day after they match (i.e. fails that are matched on Friday will settle on Monday (as opposed to Tuesday in the current schedule), and those that match on Monday will settle on Tuesday).
The CNS RECAPS Projection report is being eliminated because the relevant information will be provided on the existing CNS Projection Report. Similarly, to conform to current trade processing practices where NSCC has eliminated print image Balance Order and Receive and Deliver tickets–such information instead being shown on the Consolidated Trade Summaries, RECAPS Balance orders and RECAPS Trade-for-Trade Receive and Deliver Orders will now be evidenced by the information contained on the RECAPS Non-CNS Compared Trade Summary.
Finally, the RECAPS Procedure is being revised to clarify that reconfirmed fails in securities where the original fail price was less than one penny per share will settle on a trade-for-trade basis as a “Special Trade” with the RECAPS value being the original comparison value (as opposed to the system-generated price of one cent per share). Clarifying language is also being added to distinguish between information that appears on the RECAPS CNS Compared Trade Summary and information on the RECAPS Non-CNS Compared Trade Summary.
The full text of the rule change (SR-NSCC-2007-03) may be obtained by visiting our web site at http://www.nscc.com. Written comments on the proposed rule filing may be addressed to Lisa T. Siebold, Assistant Secretary, National Securities Clearing Corporation, 55 Water Street, New York, New York 10041, and your comments will be forwarded to the SEC. You may also address your written comments to the Secretary of the Commission, Securities and Exchange Commission, 100 F Street, NE, Washington D.C. 20549-1090. We request that you provide NSCC with a copy of your comments.
Questions regarding this Important Notice should be directed to Ed Fanning, Director Product Management at (212) 855-7623, or the undersigned at (212) 855-3208.
Vice President and Deputy General Counsel
I don’t want to sound too pickie but how can the institution with the congressional mandate to “promptly settle” all securities transactions be recommending to their participants a program to dispose of “aged fails”.
Mary Schapiro seems to be getting it. I know she is listening and trying to make the right changes as quickly as she can. She comes with high regards from people I trust as does the new Director of Enforcement.
THE CRITICAL ROLE OF THE “BUY-IN”
As many of you know the single most important deterrent to abusive naked short selling crimes is FEAR of an untimely buy-in. Qualifying as an “untimely” buy-in would be one executed in the midst of a “short squeeze”. The “buy-in” is also the ONLY cure available when the seller of securities absolutely refuses to deliver to the buyer that which he sold. The “buy-in” or the fear thereof is the ultimate provider of investor protection and market integrity when it comes to abusive naked short selling frauds.
Over the years the NSCC management has rather curiously attained a monopoly on 15 of the 16 sources of empowerment to execute buy-ins. The 16th source of empowerment belongs to the brokerage firm of the buyer that failed to get delivery of that which he paid for. Unfortunately for investors NSCC policies essentially “bribe” the buying brokerage firm into not opting to exercise his empowerment to execute a buy-in when he does not receive delivery of that which his client purchased. This is done via allowing the buying brokerage firm to earn interest off of the funds of the investor UNTIL delivery occurs. This makes the buying brokerage firm the last party in the world wanting to execute a buy-in of a fellow NSCC participant.
Further to this the NSCC has introduced a failsafe mechanism to further circumvent buy-ins. They expressly forbid their participants from executing open market buy-ins on fellow NSCC participants. What they do is to mandate any NSCC participating brokerage firm contemplating executing a buy-in to file an “Intent to buy-in” with NSCC management. Management than has the right to deal with this “Intent” filing in any manner they so choose. They could deal with the associated delivery failure by utilizing their self-replenishing “stock borrow program’s” lending pool of securities. They could also just “RECAP” the delivery failure out of existence as if by magic. They could also opt to just sit on it and do nothing.
Why is the NSCC management so obsessed with circumventing buy-ins? The 2003 study of Evans, Geczy, Musto and Reed revealed that only one-eighth of 1% of even mandated buy-ins ever occurs on Wall Street. For one reason or another NSCC management has gone to an awful lot of trouble to make sure that the crime deterrent effect as well as the mechanism to provide the only cure available when the sellers of securities refuse to deliver that which they sell do NOT get provided when they’re needed to provide investor protection and market integrity. This is very questionable behavior for a “self regulatory organization” (SRO) acting as “the first line of defense against market frauds” like abusive naked short selling.
The question becomes why would the NSCC with the congressional mandate “to act in the public interest, provide investor protection and to “promptly settle” all securities transactions as well as the party holding 15 of the 16 sources of empowerment to execute buy-ins mysteriously plead to be “powerless” to provide this crime deterrence and only cure available for intentional FTDs. Could it be that they are only doing the bidding of their employers namely the abusive NSCC participants that are the financial beneficiaries of all of these investor thefts and are the parties refusing to deliver that which they sold?
Judd, can you explain the message of the FTD regions in easy to follow terms? The scale is way too small for what I need.
The increments anong the bottom are periods of two months. Can I assume correctly that this is made up of approximately 42 business-day events?
For example, take the period July 2 to Sep 2 2008. where the FTDs peaked to around 8,300,000
Would I be correct in saying there were an average of ~ 6,000,000 shares/day traded in this 42 business day period which weren’t delivered to the buyer’s broker, and each share had a value averaging $85 at the time?
42 x 6,000,000 x $85 is over $21 Billion stolen from the economy over a 2 month period using Sears Holding Corp as the vehicle. This was happening to many other targetted companies. Tommytoyz has a 9 pages of similar graphs accompanying his recent letter to Ms. Schapiro (SEC).
This figures can’t be correct. Please help me decipher the message of these charts.
ginger, these are aggregate fails not number of fails per day. If were to have say 10 Million fails on day 1 and on day 2 you covered 2 million fails but added 3 million more the net report on day 2 would be 11 Million. The net being only 1 million additional fails not 11 million fails time the price for that day.
Thanks for the clarification Dave.
In other words in the end all FTDs are repurchased to mask the fact that they didn’t really exist and couldn’t be delivered?
Who’s concealing the names of the people responsible for this fraud?
If what you mean is, in the end the fails are covered the answer would be yes – for the most part. These fails are never covered when a company shuts down.
Who has the names? SEC, DTCC
The other issue is the tax code. If, as Patchie points out, the company shuts down, the money collected by naked short selling might never be taxed as the short position is never closed by the naked short seller – it’s open indefinitely. But the mark to market rules allow the naked short sellers to pull the cash out on worthless securities to spend as they please without paying taxes on the “open” positions.
Someone correct me if I’m wrong.
For further clarification….
Based on the above chart, how much money was looted from the shareholders of SearsHoldings between January and December of 2008?
I estimated that 3.8 Billion was looted from the shareholders of Verasun, but that was easy, ’cause they were shut down completely through bankruptcy.
How much did they get away with, from Sears?
How much did they get away with, from GM?
But, let’s not get carried away. Let’s just concentrate on Sears….
At your convenience…
Apparently we have a mutual friend. He is a pilot that had the pleasure of flying you recently. He related my appreciation for your site, your work, and the work of your friends at Deep Capture.
I always knew you were dead on. It’s a shame the crooks had to collapse the economy to prove it.
Keep It Coming! They can’t ignore it now.
As you know, I am not some great wall street financier nor am I an economist. However, doesn’t the recent failings of Wall street affirm what you have been trying to say for years?
Being vocal about misconduct and corporate espionage once cost me a job. I turned in a group of people for reading the CEO’s and COO’s email. The harassment that followed by the CTO and his son was so bad I finally just quit. However, I am sure it is nothing compared to the insults and harassments you have received by pointing out the obvious.
In the end, my tormentors lost their Jobs too, even their stock options.
I am sure those who have harassed and harangued you are some of the folks getting blasted and resigning from their positions in disgrace.
Karma it always comes around..sometimes it just takes a bit.
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