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SEC to Hold Roundtable to Address The Lack of Transparency in Securities Lending
Not to get too personal, but I know a thing or two about Securities Lending; you may know it as "stock loan," or it's older brother "bonds borrowed." The premise is simple- do a favor, make a loan in assets to cover what was surely a short position somewhere else. Get some collateral for it, put it to good use. Make a spread. Look like a big-shot. Go out for dinner.
For many a Wall Streeter, this gig was a sure thing. Many large custodian banks would earn extra revenues for lending securities that would be idle in an account- making tons of potential return with very little downside risk.
Today and tomorrow, the Securities and Exchange Commission is holding a roundtable on securities lending and short sales, shedding light in an area of the industry that is considered "opaque."
According to an article written by Nina Mehta of www.tradersmagazine.com; co-acting director of the SEC's Division of Trading and Markets, James Brigagliano is quoted as saying, the purpose of the roundtable is "not to front-run a discrete retulatory initiative;" but "the lending market is opaque... And the SEC is putting the little niche market in a taste of the limelight.
Securities lending refers to the loan of securities by large institutions with large portfolios to prime brokers among others. These firms need to borrow securities to support short sales by their customers/trading desks. These customers include hedge funds, trading firms and retail investors. Securities lending programs are often managed by custodian banks, with BNY Mellon and State Street among the largest, pioneering players.
The SEC is concerned about the lack of transparency with pricing, supply, collateral and compliance requirements. Hinting that new models or platforms may add "trasparency."
Speakers at the roundtable will consist of six panels, some 39 panelists, representing every facet of the operation. Investors, banks, prime brokers, regulators, etc, etc.
Truth remains- the once sure game of Sec Lending has lost its luster after the fall of the markets just last year. Less brokerage houses to service, and where are you making your money? In what form of collateral? Overnight Repo? The clients just don't want the risk anymore.
It's just not worth it to the institutional client, many of which are pension funds, retirement funds and local/State governments.
So, alas, the pinky-ring wearing, big luncheon/dinner "trader," really just a gatekeeper; may just have to revert back to their roots.
A glorified operations analyst, pushing paper (stacks of paper that is) for a money center bank. Maybe in a cage too. I don't know. Easy come, easy go.
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Is it an open or a closed meeting?
From the recent FDIC proposal - of course the banks extracted risk based concessions as a tradeoff to the prepayment. TGLP backed debt goes to risk weighting of zero. Deposits also go to zero or as the FDIC states below:
"Upon further consideration, for the same reasons, the FDIC believes that
Temporary Liquidity Guarantee Program (TLGP) nondeposit debt obligations should also
receive a zero percent risk weight consistent with the risk weight proposed for prepaid
assessment assets. When the FDIC determined that a depository institution may apply a
20 percent risk weight to debt covered by the TLGP, the determination referenced the 20
percent risk weight that has traditionally been applied to assets covered by the FDIC’s
deposit insurance. Insofar as insured deposits are fully backed by the full faith and credit
of the United States government and no insured depositor has ever or will ever take a
loss, the FDIC will also review reducing the risk weight on insured deposits to zero
percent consistent with the treatment of other government backed obligations. The FDIC
requests commenters to provide their views on the appropriateness of a different risk
weight and the effect that any change would have on risk-weighted assets."
Perhaps the term "circlejerk" would be more appropriate to describe tomorrow's "roundtable":
Note the comment from Zero's article that preceded what you have posted:
Congress has long ago given up all moral authority on this issue. But, go figure. When you lay down with whores, expect to wake up with STD's.
Goldman and Bank of Amerika run the markets along with Geithner, and beagle boy Ben. There is no free markets, only welfare capitalism and socialism for capitalism.
good articles; good articles 4 slow news day ..http://www.. hat tip: finance news & opinion updated daily
There is an incredibly simple solution for this.
All securities can be electronically tagged on a
de-fragmented direct access exchange....
It would be a first come....first served basis....
Stock supply is not infinite....thus stock demand is capped....
On a de-fragmented exchange the whole number for supply
is a known....and the supply is electronically tagged
first come first served....
That's it....
Better yet.....this would require that there be no
black pools or any other form of "non-public price discovery" for public securities....
Also a de-fragmented exchange is easily electronically regulated....
The issue with the SEC/Corp. job revolving door "capture" is a real issue....and the sole reason for a failed SEC....
A new modern regulator with no incestual job prospects has to be created anew....
"Stock supply is not infinite....thus stock demand is capped...."
Should be that way, but it isn't.
The SEC delegated responsibility for prompt settlement of all trades to Wall St. owned and controlled Depository Trust and Clearing Corp which, through its counterfeit friendly stock borrow program, permits same "shares" to be borrowed over and over again leading to an infinite supply of "share entitlement IOU's" (ie. counterfeit shares that may show up as long on your monthly statement but which do not have the same bundle of rights attached to real shares), which supplant supply and demand reality with a criminal fraud that has led to destruction of many companies who have had worthy business plans, products and assets, etc.-- but insufficient to withstand onslaught of huge number of naked shorted shares enabled by SEC and DTCC.
TD or whomever is egregiously mistaken when postulating that naked shorting is only potentially pernicious for financial stock.
For comprehensive analyses of the issues involved, see: http://www.deepcapture.com
Not to date myself but, does anyone remember rebates??
You mean Cash For Clunkers?
CNBC’s Charles Gasparino is reporting this afternoon that the Securities & Exchange Commission’s head Christopher Cox is investigating naked short selling of shares of Morgan Stanley (MS) and Goldman Sachs (GS) after receiving calls from Morgan Stanley CEO John Mac about improper short-selling that was responsible for the stock’s nearly 30% decline today. Says Gasparino, citing un-named sources, the SEC is this afternoon holding a meeting to “determine if they need to take further steps to curtail what both Mac and [Goldman Sachs CEO Lloyd] Blankfein characterize as improper short selling that is really causing damage to the share price of Morgan Stanley and Goldman Sachs.” Blankfein also spoke with Cox to complain of short selling of their stock, as did New York senators Chuck Schumer and Hillary Clinton, according to Gasparino’s sources.
New Robo posting.
http://www.zerohedge.com/article/cit-last-ditch-dash-trash
I have an Freedom of Information Request and its appeal pending with the SEC regarding Short Selling during the emergency period 12 months ago. This FOIA is 6 months old and not fulfilled. AMAZING.
The emergency order last year required Market Makers to provide "written attestations" as to WHY short positions were allowed to go past the 3 day lending time without the positions being covered. I have personally spoken to an attorney at the SEC but they just keep telling me the FOIA will be dealt with. The average FOIA at the SEC usually takes 20 days.
The bottom line is this...the sec either won't produce these written atteestations as to why the market makers allowed naked shorting OR the SEC never ask for the written attestations and therefore never looked into the naked shorting. Either way, the SEC did not do its job.
Here is a link to an SEC webpage explaining the emergencey order requiring the written attestations a year ago (see question #4 on the page):
http://www.sec.gov/divisions/marketreg/204tfaq.htm
Here is a the relevant quote:
"In addition, any Market Maker to which a fail to deliver position at a registered clearing agency is attributable must attest in writing to the market on which it is registered that the fail to deliver position at issue was established solely for the purpose of meeting its bona fide market making obligations. In addition, such written attestation must describe the steps the Market Maker has taken in an effort to deliver securities to its registered clearing agency."
So, with my FOIA the SEC needs to produce these written attestations from the market makers for the multi-million shorts executed at this time (with the explanation from the MM why they allowed this) or the SEC never bothered to follow up to see who naked shorted and why and if it was illegal. All this during the market crash 12 months ago.
Still waiting for the SEC's reply.
I'm impressed, anon.
What is the venue for ensuring that FOIA requests are received in a timely manner?
The great thing about filing FOIA requests is that some of them can be done online, which is something you can do with the SEC.
They are required by law to respond. The appeal I have pending went all the way to the top of the agency, I was told this by a staff attorney which is the excuse they are using for the delay.
What is interesting is the first request I filed resulted in them saying they did not have these documents. In my appeal, which I cc'd to the Mary Schapiro, I pointed out the crazy nature of requiring the written attestations and then not actually asking for them to see the results.
One of two things will come out of this:
1. I will get the written attestations and post them on the internet (the public will want to see what excuses the MM gave for allowing the naked short positions to not be covered. Should be entertaining).
or
2. If the SEC does not have the documents or cannot get them it will point out their continuing incompetence. I will then reach out to several reports, and ZEROHEDGE, with the non-results.
Isn't it a bit late for such move,after all the money to be made shorting the market has already been made shorting the market during the last two years?. I would dare say that the purpose of this excercise,especially since we are in what is called"building back confidence in the market".is finding ways to limit short sale. And since we are comming towards the end of QE(overtly at least),there is the worry that all the trillions spent proping up the market has gone in vain.
Normal lending (2003-2006): If you're long a stock, you pay long interest, if you're short a stock, you collect interest.
Negative rate lending (2006-2007): If you're long a stock, you pay long interest, if you're short a stock, you receive no interest because it is hard to borrow. Clearing firm matches up long/short positions and keeps a risk-free 5% (or whatever the current fed funds rate is)
Bizzaro lending: (2008-current) If you're long a stock, you pay long interest, if you're short a stock, you pay negative interest. Clearing firm keeps the full spread. JPM is currently a -11% rate, so a clearing firm keeps .5% from the longs, and -11% from the shorts.
This rule has made securities lending highly lucrative and risk-free for the clearing firms. They are allowed to keep 50% annualized interest on certain stocks, just for matching up long/short positions.
I didn't even mention the major clearing firms, but you know who they are.
I don't see why people think stock loaning is a bad business to be in going forward. There are many ways to screw up any sound business model (i.e. not all mortgage businesses are bad, but if you run high LTV with no doc, you are an idiot).
Just this week, I borrowed several thousand shares (6 different equities, 1K each), so that I could short them intra-day. The price for $0.015 cents per share (per day).
If you've got the inventory, have systems in place to properly manage that inventory, and deal with clients (directly or indirectly) that have proper margin controls in place, it is a fantastic business.
peterpeter - i think the problem was that custodians were investing the proceeds of the short sales in assets that turned out to be not-riskless, or taking assets as collateral that turned out to be not-riskless.
peterpeter
but who received $0.015 cents per share that you paid?
Probably not the entity (state local govt investment pool, pension fund) that 'lent' the securities. Because those participants in the Sec Lending biz (the one's who actually provide the securities under loan) don't receive any direct compensation for making the loan. instead, they receive collateral (usually 'cash') which they must reinvest into other instruments in the hope of making extra money. If they (or, more exactly, the bank that administers the SecLending program in the first place) lose money in the cash collateral pool, the risk falls on the state/local govt pool, pension fund.
Shorting stocks is not the worst thing to do-as long as there is real borrowed assets behind it. The problem with shorting today is the brokerages LOAN you stock they have not acquired. They are supposed to get the stock onoan within 4 days right? A whole bunch of posts about people's short positions getting sold out from underneath them at big losses because the banks, brokers et Al. are not going to lend to each other.
This is to prop the market up, which may work for a time.
I don't think there are a lot of long positions in this market that are independent of FED and Primary Dealer control. So the selling pressure is very weak and the PPT can easily blow that pressure away right now. I mean really? Who owns all this toxic equity? POMOs. primaries, the USG who exchanged toxic debt for cash for equities. They are not going to sell the rally out from underneath the FED. They would be OUT of the club if they did that. All this stock and futures buying is locked up and not for sale. The piddly few people or funds that do own shares have sold or selling into this rally right now. It's a plane without a pilot.
Intelligent service provision to customers to ensure and improve quality of service around algorithm-selection, execution quality, market structure, technical advice etc.
Goldman and Bank of Amerika run the markets along with Geithner, and beagle boy Ben. There is no free markets, only welfare capitalism and socialism for capitalism.
good articles; good articles 4 slow news day ..http://www.. hat tip: finance news & opinion updated daily
I did security lending for the old Boston Company.
What I find interesting is that to go short now you not only DON'T get any "rebate" on the collateral you put up that is invested (in, what? 90 day t bills?) you likely have to pay interest unless you're a big trader and playing in only big names. Anything off beat you're likely paying a huge interest rate on top of the collateral you put up.
So, to go short, you have to be really, really, REALLY, convinced.....maybe this accounts for the rising market on falling volume yet little or no, meaningful declines.
You can't count on much participation from short sales without CLEAR negatives, can you? Simply costs too much to wait.
Good point here
Goldman and Bank of Amerika run the markets along with Geithner, and beagle boy Ben. There is no free markets, only welfare capitalism and socialism for capitalism.
good articles; good articles 4 slow news day ..http://www.. hat tip: finance news & opinion updated daily