The FINRA 21-19 filing is a long overdue step in the right direction. However, given the current rules set in place, which allows prime brokerages to give their clients, hedge funds, an ability to essentially circumvent any short position reporting through what they call 'short arranging products' or 'arranged financing programs', the regulations proposed in FINRA 21-19 will most certainly not have the desired effect. FINRA, SEC and other regulatory bodies absolutely MUST give a hard look on these programs, as they are a threat to U.S markets' stability, transparency and integrity. They absolutely exist, are actively used and are not a myth. These programs, or procuts, is why reported data is not accounting for an adequate number of fails of U.S. securities - large short positions are book-entered with special financing conditions (which is the aforementioned enhanced lending, enhanced or arranged financing programs, with re- hypothecation as a transactional component). Most special financings are book-entered in offshore jurisdictions and accounted for outside of the U.S. national clearance and settlement system (DTCC/NSCC). The risks from re-hypothecation and similarly named practices have been building since the last financial crisis. These types of transactions appear to have been misunderstood by regulators, perhaps because they were misled regarding the nature and magnitude of the activity. The re-hypothecation process is well understood by sophisticated U.S. clearing firms and was developed to evade U.S. laws, rules and regulations. For example, For such arrangements, a PB often deploys its European arm to extend additional finance. Such arrangements, though they can increase the ability to run leverage, change the counterparty risk and regulatory environment that the fund faces vis-à-vis a U.S. broker dealer subject to 15(c)(3)(iii) 140% rehypothecation, to a UK entity which has no regulatory rehypothecation limit. Arranged and enhanced financing are typically executed through divisions of the same clearing firm and entail loaning/borrowing synthetic assets/shares to/from another affiliated branch. Re-hypothecation and arranged/enhanced financing are common practices for some clearing firms with the specific purpose of transferring positions out of the U.S. records into foreign jurisdictional books/records where they are not under U.S. regulatory scrutiny. It is absolutely the duty of financial regulators to stop the abuse of these programs/products before even correcting the infinitely smaller problems like short reporting methodology.
Anonymous-DS Comment On Regulatory Notice 21-19
The FINRA 21-19 filing is a long overdue step in the right direction. However, given the current rules set in place, which allows prime brokerages to give their clients, hedge funds, an ability to essentially circumvent any short position reporting through what they call 'short arranging products' or 'arranged financing programs', the regulations proposed in FINRA 21-19 will most certainly not have the desired effect. FINRA, SEC and other regulatory bodies absolutely MUST give a hard look on these programs, as they are a threat to U.S markets' stability, transparency and integrity. They absolutely exist, are actively used and are not a myth. These programs, or procuts, is why reported data is not accounting for an adequate number of fails of U.S. securities - large short positions are book-entered with special financing conditions (which is the aforementioned enhanced lending, enhanced or arranged financing programs, with re- hypothecation as a transactional component). Most special financings are book-entered in offshore jurisdictions and accounted for outside of the U.S. national clearance and settlement system (DTCC/NSCC). The risks from re-hypothecation and similarly named practices have been building since the last financial crisis. These types of transactions appear to have been misunderstood by regulators, perhaps because they were misled regarding the nature and magnitude of the activity. The re-hypothecation process is well understood by sophisticated U.S. clearing firms and was developed to evade U.S. laws, rules and regulations. For example, For such arrangements, a PB often deploys its European arm to extend additional finance. Such arrangements, though they can increase the ability to run leverage, change the counterparty risk and regulatory environment that the fund faces vis-à-vis a U.S. broker dealer subject to 15(c)(3)(iii) 140% rehypothecation, to a UK entity which has no regulatory rehypothecation limit. Arranged and enhanced financing are typically executed through divisions of the same clearing firm and entail loaning/borrowing synthetic assets/shares to/from another affiliated branch. Re-hypothecation and arranged/enhanced financing are common practices for some clearing firms with the specific purpose of transferring positions out of the U.S. records into foreign jurisdictional books/records where they are not under U.S. regulatory scrutiny. It is absolutely the duty of financial regulators to stop the abuse of these programs/products before even correcting the infinitely smaller problems like short reporting methodology.