FINRA 21-19 is a long overdue change. It is clear that the integrity of the United States market has been strained to the edge of disaster, in large part due to systemic risk developed under the regulatory authority of FINRA's outdated short interest reporting policy. While many of the policies mentioned in Regulatory Notice 21-19 address the general breadth of exploitable and ineffective reporting, they also leave significant specific gaps that could compromise the entirety of 21-19's purpose. It is critical for the restoration of both the stability of the US markets and the confidence of the investors within it that any and all regulation changes regarding short interest reporting be effective in every known circumstance where effective short positions, synthetic or not, can go unaccounted for for any length of time greater than any other short position reporting deadline. Additionally, the cost of operations necessary for applicable market members to accommodate these standards cannot be reasonably compared to the cost of a compromised market with systemic risk or the loss of investor confidence and participation in the US economy. -Proprietary and Customer Account Categorization: FINRA members must report short interest differentiated by proprietary and institutional/retail accounts, instead of aggregate by member. The wording is unclear whether institutional vs retail customer SI must be reported. Institutions can easily spread short positions amongst multiple broker-dealers, effectively hiding concentrated short positions amongst retail customers. Therefore, retail vs institutional customers must be reported as separate units at a minimum, not even considering granulated institutional SI per broker-dealer. -Account-level Position Information: granular (by account) SI reporting for enforcement only. I believe that granular information should be disseminated of proprietary accounts of significant broker-dealers at a minimum. Broker-dealers have inherent information advantages as they can see their client's positions. Customers have the right to examine whether or not their broker dealer is actively competing against their client's positions based on that advantage in a conflict of interest. -Synthetic Short Positions: report synthetic positions, open ended. Only two methods are mentioned in this doc, but 2+ more are referred to as being known to exist as "less-traditional". FINRA is aware of non-specified methods of hiding SI and MUST be held to the same enforcement and regulatory standards for ALL known effective short positions, synthetic or not. Any regulation filed regulating only partially a library of known synthetic short instruments is malfeasance of Reg SHO compliance and FINRA mission. -Loan Obligations Resulting From Arranged Financing: Broker-dealers can lend internally to close a short position and create a loan instead. FINRA is ~considering~ regulating this. FINRA MUST be held accountable to treat a defined intra-member SI-defeat mechanism the same way it would treat its effective position: a synthetic short. This dichotomy must not be allowed to coexist alongside "synthetic SI reporting improvements. " Additionally, it should be made illegal to use synthetic short positions to facilitate the closure of another synthetic short position. This is a regulation defeat mechanism. -Frequency and Timing of Short Interest Position Reporting and Data Dissemination: Shorten reporting timeframe from bi-monthly to weekly OR daily. Shorten dissemination deadline to (implied 6:00ET T+1) independent of reporting timeframe. The difference between one week and one day is huge. Clearly, one day is the better option for reporting, and even this still puts short data t+2 of settlement. I'm requesting complete dissemination 6:00ET next day, minimum. -Information on Allocations of Fail-to-Deliver Positions: report daily granulated FTD's automatically rather than waiting for a FINRA inquiry, including trade date and T+n obligation. This is a significant step forward for regulatory ability as long as it does not override the current public dissemination of aggregate FTD's per security. However, given reporting will be done on a daily basis regardless of the quantity of FTD's, it stands to reason that public dissemination of aggregate FTD's should ALSO be done on a daily basis rather than the current bi-monthly. I think there is a good argument to be made that any security on the threshold list, given "complete" SI reporting of all effective short positions, should be subject to daily granular FTD dissemination in addition to aggregate.
Adam Comment On Regulatory Notice 21-19
FINRA 21-19 is a long overdue change. It is clear that the integrity of the United States market has been strained to the edge of disaster, in large part due to systemic risk developed under the regulatory authority of FINRA's outdated short interest reporting policy. While many of the policies mentioned in Regulatory Notice 21-19 address the general breadth of exploitable and ineffective reporting, they also leave significant specific gaps that could compromise the entirety of 21-19's purpose. It is critical for the restoration of both the stability of the US markets and the confidence of the investors within it that any and all regulation changes regarding short interest reporting be effective in every known circumstance where effective short positions, synthetic or not, can go unaccounted for for any length of time greater than any other short position reporting deadline. Additionally, the cost of operations necessary for applicable market members to accommodate these standards cannot be reasonably compared to the cost of a compromised market with systemic risk or the loss of investor confidence and participation in the US economy. -Proprietary and Customer Account Categorization: FINRA members must report short interest differentiated by proprietary and institutional/retail accounts, instead of aggregate by member. The wording is unclear whether institutional vs retail customer SI must be reported. Institutions can easily spread short positions amongst multiple broker-dealers, effectively hiding concentrated short positions amongst retail customers. Therefore, retail vs institutional customers must be reported as separate units at a minimum, not even considering granulated institutional SI per broker-dealer. -Account-level Position Information: granular (by account) SI reporting for enforcement only. I believe that granular information should be disseminated of proprietary accounts of significant broker-dealers at a minimum. Broker-dealers have inherent information advantages as they can see their client's positions. Customers have the right to examine whether or not their broker dealer is actively competing against their client's positions based on that advantage in a conflict of interest. -Synthetic Short Positions: report synthetic positions, open ended. Only two methods are mentioned in this doc, but 2+ more are referred to as being known to exist as "less-traditional". FINRA is aware of non-specified methods of hiding SI and MUST be held to the same enforcement and regulatory standards for ALL known effective short positions, synthetic or not. Any regulation filed regulating only partially a library of known synthetic short instruments is malfeasance of Reg SHO compliance and FINRA mission. -Loan Obligations Resulting From Arranged Financing: Broker-dealers can lend internally to close a short position and create a loan instead. FINRA is ~considering~ regulating this. FINRA MUST be held accountable to treat a defined intra-member SI-defeat mechanism the same way it would treat its effective position: a synthetic short. This dichotomy must not be allowed to coexist alongside "synthetic SI reporting improvements. " Additionally, it should be made illegal to use synthetic short positions to facilitate the closure of another synthetic short position. This is a regulation defeat mechanism. -Frequency and Timing of Short Interest Position Reporting and Data Dissemination: Shorten reporting timeframe from bi-monthly to weekly OR daily. Shorten dissemination deadline to (implied 6:00ET T+1) independent of reporting timeframe. The difference between one week and one day is huge. Clearly, one day is the better option for reporting, and even this still puts short data t+2 of settlement. I'm requesting complete dissemination 6:00ET next day, minimum. -Information on Allocations of Fail-to-Deliver Positions: report daily granulated FTD's automatically rather than waiting for a FINRA inquiry, including trade date and T+n obligation. This is a significant step forward for regulatory ability as long as it does not override the current public dissemination of aggregate FTD's per security. However, given reporting will be done on a daily basis regardless of the quantity of FTD's, it stands to reason that public dissemination of aggregate FTD's should ALSO be done on a daily basis rather than the current bi-monthly. I think there is a good argument to be made that any security on the threshold list, given "complete" SI reporting of all effective short positions, should be subject to daily granular FTD dissemination in addition to aggregate.