July 20, 2008
The market maker exemption is key." http://www.deepcapture.com/
Yes, the problem for the system is contained in fact that the that SEC does not enforce nor interpret the market maker exemption as the plain text of their own rules read. Keep the mandatory 3 day settlement cycle rule in mind as we go through this, it's not complicated:
The market maker exemption in REG SHO, exempts market makers in these ways (and only in these ways):
1. They do not have to pre-borrow, locate or have the securities on hand before selling them or putting on a short sale. This is a type of naked short selling that is legal - so long as they settle within T+3.
2. They are given another 13 days to settle their fails, once their trades fail (after T+3, total 16 days after the "trade") and option market makers are given T+infinity.
However, #2 above has problems:
- It conflicts with the already existing and mandatory 3 day settlement cycle rule, 15c6-1
- It alters the voting rights of investors and securities - exceeding the SEC's authority, encroaching on state jurisdiction
- It alters the form of securities into one not legally defined anywhere in federal nor state laws or rules - exceeding the SEC's authority, encroaching on state jurisdiction
- It alters the established rules adopted by the states for the transfer of securities - exceeding the SEC's authority, encroaching on state jurisdiction
- There was never a cost benefit analysis done on this to examine the cost on those most affected - violating the APA
- the T+3 delivery rule was not exempted in REG SHO in any way - keeping it in effect
- Naked short sales that last beyond T+3 are not even legally defined, much less can they be authorized
There simply is no legal authority that allows fails or to naked short sales to settle beyond T+3, there is not even a legal definition of this activity. Why else are they called "fails"? These are the abusive or illegal fails, because even market makers must deliver within T+3 or 3 days after they sell, due to 15c6-1 - the T+3 settlement cycle rule. Again, they can legally naked short sell for 3 days, but not for longer. Those are the legal naked short sales. Fails or naked short sales beyond T+3 are illegal naked short sales.
However, the SEC fails to enforce the 3 day settlement cycle rule for market makers and interprets and enforces the market maker exemption in REG SHO as giving market makers the authority to settle within T+16 and option market makers and a few others a settlement cycle of T+infinity.
Cox's statement that investment banks have only fractions of the investment they are supposedly holding for customers and that they are representing to customers that they care holding - is frightening. The Silver issue is indicative. How can the U.S. houses owe an entire years worth of Silver production, which they do not have on hand, to their customers, while representing to these customers that they have it? No wonder some withdrawal will cause these houses to collapse.
It's the same with equity securities and even U.S. Treasuries. The problem is far worse than most think, IMHO. That's why they are panicking at the FED and SEC. One the house of cards starts falling, everyone knows that it will be difficult and expensive to stop, if that's possible.
That's why I focused on customer accounts in the NIPC rule petition and the custody of customer assets. The entire raid on the system by Wall Street firms is only made possible by misrepresenting customer accounts and holding only a fraction of the assets they are representing to be holding.
Wall Street firms take customer money in return for broker issued securities worth less, and the real value and nature of which are misrepresented.