Comment Text:
Dear Commissioners,
I firmly take the perspective of Chairman Christy Romero's comment posted at the following link.
https://www.cftc.gov/PressRoom/SpeechesTestimony/romerostatement062823
The potential new vertical integration of clearinghouses with the customer facing intermediaries will not promote market stability, investor protection, or reduced market risk. This new regulatory framework should NOT be implemented under any circumstances. It only serves to hand over the ability of substantially more risk and leverage to a vertically integrated (i.e. monopoly) clearinghouse, with a significant reduction in seeing both the level of risk and the ability of a naturally occurring disciplinary feedback mechanism to be in place.
Again, this new market structure and regulatory proposal should NOT be implemented in any fashion.
A quote from Romero's comment is especially revelatory: "Our clearinghouse rules were not set up to protect customers, because they were written with the idea of a separate intermediary that interacted with customers and had regulatory obligations for customer protections."
Within this framework, the intermediary is being eliminated, the regulatory rules in place for clearinghouses reduces protection for customers and allows abuse of investors through lack of investor protection. Without regulatory oversight and public consumer protections, public investors CANNOT have confidence in the US market. Confidence is essential for functioning markets. Aside from the lack of confidence, it has been proven on multiple occasions that the clearinghouses are not looking out for the public investors or putting the interests of the household investors first when there is a conflict of interest. See the SEC Report on Equity and Options Market Structure Conditions in Early 2021.
https://www.sec.gov/news/press-release/2021-212
"January's events gave us an opportunity to consider how we can further our efforts to make the equity markets as fair, orderly, and efficient as possible," said SEC Chair Gary Gensler. "Making markets work for everyday investors gets to the heart of the SEC's mission. I would like to thank the staff for bringing their expertise to this important report, and for their ongoing work on to address the issues that January’s events raised."
The actions of the professional institutions failed the household investors throughout the entire investing relationship. Failure to complete trades, failure to appropriately locate shares to short, mismarking short securities and long, front running trades with the use of high-speed algorithms, use of false narrative paid for media, failure to manage risk, failure to maintain separate amounts for investor and institutional funds, tokenization of shares, internalization of household investor purchases, hidden swaps, lobbying regulatory bodies for reporting extensions, lobbying regulatory bodies for rules that would ultimately harm the investor, falsely claiming to act the household investors best interest, failure to pay fines in full, moving information outside the us markets to avoid regulatory scrutiny and circumvent reporting requirements, implementing dilution, short and distort, bust out and bankruptcy schemes, cellar boxing, using derivatives to take shareholder voting rights, ETF creation and abuse, moving to position close only, improper use of family offices to hide risk, not to mention lying under oath to congress about communicating to harm household investors.
'U.S. House Committee on Financial Services Report On GameStop'
https://democrats-financialservices.house.gov/uploadedfiles/6.22_hfsc_gs.report_hmsmeetbp.irm.nlrf.pdf
Released Friday June 24, 2022 (138 pages)
The US Committee on Financial Services called this continuous waiving a "...moral hazard that undermines the deterrent value of the Excess Capital Premium charge."
a. The NSCC [Subsidiary of The DTCC] regularly waives Excess Capital Premium charges on its member firms and, in particular, for certain member firms that tend to be repeat offenders in attracting this charge
"As part of the Committee’s investigation, we reviewed historic trends associated with DTCC’s waiver of Excess Capital Premium charges. From January 1, 2019 through February 12, 2021, 22 of the NSCC’s 147 member firms had incurred one or more Excess Capital Premium charge.572 In aggregate, Excess Capital Premium charges were incurred on 307 occasions in thistimespan.573 Approximately ninety percent (90%) of these charges were incurred by eight member firms (LEK Securities, Corporation, Instinet, LLC, Wedbush Securities, Inc., ITG, Inc., Vision Financial Markets, LLC, Velox Clearing, LLC, Axos Clearing, LLC, and Virtu Americas, LLC (277 of the 307 charges)) and approximately seventy-five percent (75%) were incurred by threemember firms (LEK Securities, Instinet, LLC, and Wedbush Securities, Inc. (229 of the 307 charges)).574 Of these 307 occasions when an Excess Capital Premium charge was incurred, the charge was ultimately applied without modification approximately seventy-eight percent (78%) of the time, was applied in a reduced amount approximately ten-percent (10%) of the time, and was not imposed at all in approximately twelve percent (12%) of the time.575 The waiver or modification of Excess Capital Premium charges comes into play more often during periods of acute volatility; the higher the calculated Excess Capital Premium charges for a particular day, the more likely the NSCC is to waive it, as illustrated in the chart below.
Most of the occasions when the NSCC did not impose the Excess Capital Premium charge at all took place either during the market volatility events of March 2020, which were associated with the outbreak of the pandemic and the rollout of lockdowns and other social distancing restrictions across the United States and the world, or during the period from January 25, 2021 through February 1, 2021, which was the height of the Meme Stock Market Event. The NSCC’s regular waiver of Excess Capital Premium charges disproportionately benefits clearing brokers that attract the largest aggregate Excess Capital Premium charges."
Of the 277 times these firms received an Excess Capital Premium charge during the period from January 1, 2019 to February 12, 2021, the Excess Capital Premium charge was either not applied or reduced 63 times.580 In interviews with Committee staff, NSCC officials stated that at least one member firm made a business decision to engage in trading activities that will result in the application of the charge because they are either comfortable that the amount of the charge itself will be manageable or feel confident that it would likely be waived. For instance, consider Robinhood Financial President and Chief Operating Officer, David Dusseault’s comment “we are to(o) big for (the NSCC) to actually shut us down.
The Excess Capital Premium charge is meant to be easy to understand and simple to implement–—a one-size-fits-all for all of NSCC member firms and the diverse business models among them.582 Nevertheless, the Meme Stock Market Event exposed a lack of understanding ofthe Excess Capital Premium charge regime and/or a failure to take it seriously by several NSCC member firms which, in turn, led to a failure to adequately prepare to fund such charges and to capitalize their businesses accordingly.
This represents a moral hazard that undermines the deterrent value of the Excess Capital Premium charge. --
Specifically, these firms may not be deterred from riskier trading practices because they are comfortable that the Excess Capital Premium charges that they incur may be modified or waived, particularly when the risk of default is greatest. As NSCC officials explained to Committee staff, part of the purpose of the Excess Capital Premium charge is to encourage member firms to maintain reasonable excess capital buffers.583 In other words, by maintaining an excess capital buffer, individual firms will avoid the application of the Excess Capital Premium charge as a penalty.584 The effectiveness of this policy and the positive result that it is designed to achieve could be undermined by what appears to be the regular, nearly predictable, waiver of Excess Capital Premium charges during periods of acute volatility in the two years before the Meme Stock Market Event. The existence of repeat offenders may act as a signal to other member firms to not take the Excess Capital Premium charge as seriously as they should. It is worth noting that the Committee reviewed Excess Capital Premium charges as calculated and assessed in a period that includes both the heightened volatility brought about by the onset of the pandemic and the acute volatility of the Meme Stock Market Event. While these events may not be representative of periods of lower market volatility prior to March 2020, many experts the Committee spoke with over the course of its investigation expected to see periods of acute volatility more regularly going forward."
PGS 104-107 US House On Financial Services Report GameStop
With an objective view of what SRO's have been doing to combat criminal behavior by their members on a global scale, we can conclude that SRO's are a big part of the reason why the entire global household investors are turning to the SEC in droves for rules to make the market more transparent and STOP enabling criminal behavior endorsed by SRO's, e.g. FINRA fining mass scale fraud with amounts and that is not consistent with the profit made on the infraction.
These institutions and companies have been effectively stealing from the world's population for their own enrichment.
See:
Prohibition Against Fraud, Manipulation, or Deception in Connection with Security-Based Swaps; Prohibition against Undue Influence over Chief Compliance Officers; Position Reporting of Large Security-Based Swap Positions
https://www.sec.gov/comments/s7-32-10/s73210.htm
See how these same institutions lobby for rules that benefit themselves over the markets and household investors.
Trade execution can NO longer be guaranteed to favor or look out for the household investor. There is now less competition, less regulatory oversight here, and NO need for the clearinghouses to abide by fair trade execution practice.
Per Romero's next comment, a vertically integrated market eliminates competition. NOT only are investors NO longer protected under regulatory constraints imposed on the clearinghouses for this purpose, but the vertical integration puts the power in the hands of a sole entity. Competition can NO longer be used for the market to self-regulate to the degree that it is able. This is also outlined in her comment here as well:
"The traditional market structure contains inherent bumper guards—market discipline resulting from differing interests of different entities—that promote financial stability. Expanding to a novel vertically integrated market structure for example, for clearinghouses raises particular concern because the resilience of our clearing system depends in significant part on the disciplining effect that clearing members can have on clearinghouses. Because clearing members may be asked to mutualize losses and accept risks in a default waterfall, they have much at stake in the decisions made by clearinghouses. They often have a different perspective, and do not always have fully aligned interests with the clearinghouses. What happens to that disciplining effect where the clearing member (the futures commission merchant (FCM)) is owned by the same parent company as the clearinghouse?"
The answer is that there will be no disciplining effect, and accepted risks and potential losses will be set by the new clearinghouse monopoly. There will be no regulatory oversight, competition, or disciplining effect. As much risk can be taken as desired by the new vertically integrated system, with no ability by outside entities to intervene or set risk limits. In a similar fashion, we saw what the result of the then novel credit default swaps and mortgage-backed securities - where the risk of these assets was ill understood and were virtually unregulated. If we fail to remember history, it will repeat itself. I hope we remember 2008, and what the result was of blinding ourselves to increased risks through lack of regulation lead us towards. This new vertically integrated clearinghouse environment is obviously not an ill-packaged security, but the lack of insight into the risks it poses, the ability of the clearinghouse to leverage risk substantially more (and without any risk insight, disciplinary feedback loop, or competition) is an ill-advised and potentially disastrous market environment.
Another comment by Romero that I would like to bring forth: "Conspicuously absent from this request for comment is a discussion of vertical integration of crypto platforms. This market structure has come up the most in that context, given that many crypto companies are vertically integrated in the unregulated space. Appropriate regulation does not mean that we automatically port over to regulated markets a structure that exists in the unregulated space."
This is an incredibly important concern. This new proposal is simply mimicking the market structure in the unregulated crypto space, which has significantly less protections for investors. As we saw with FTX, it was completely fraudulent. I do not believe following the market structure of an unregulated space that has proven to become fraudulent when and where possible is a wise course of action.
Romero also said the following, in a speech prior to the fall of FTX: "Crypto-related companies may serve multiple functions that are separated into different entities in traditional finance. An exchange may also be a market maker, clearinghouse, lender, and/or custodian. These conflicts present significant risk that in a regulated environment would be disclosed and resolved. In an unregulated environment, the full extent of these conflicts may not be disclosed or resolved, which could lead to cascading losses and contagion risk.”
It is incredibly prescient that the risks she laid out in this speech immediately came to fruition in the binance space. Now we are changing our own regulatory structure to mimic the market structure of binance - which has clearly shown massive risks in their space. By the nature of the commodities space, the risk of cascading losses and contagion is far, far greater.
Romero also testified to congress in 2009, addressing the 2008 financial crisis: "In my Congressional testimony, I cited to then-Treasury Secretary Timothy Geithner who told Congress on June 18, 2009, that the rise of new financial instruments “that were almost entirely outside of the Government’s supervisory framework left regulators largely blind to emerging dangers.”[11] The same could be true of a vertically integrated market structure. Without visibility into the risks, we would be largely blind as to emerging dangers to customers and financial stability. Public comment can help give visibility. However, we may still lack visibility into unregulated affiliates."
This new proposed vertically integrated market structure now brings additional risks to the marketplace, less regulatory oversight, less visibility and reporting from these consolidated clearinghouses. As history has clearly shown - as identified in my comments here - any leverage and risk that can be taken to make more money - will absolutely be taken.
This vertical integration poses additional risks with absolutely no benefit.
This new regulatory proposal should not be implemented in any fashion, and only serves to hand over more power to clearinghouses, eliminate their competition, and allow them to make more money through poor trade fulfilment and questionable margin requirements or structure, at the expense of additional risk, contagion, and cascading losses that investors and customers will ultimately take the losses for.
Thank you for your time and consideration on this matter.
Household Investor,
USA
