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to the edge of disaster, in large part due to systemic risk developed under the regulatory authority of FINRA's outdated short interest reporting policy. I understand FINRA is attempting to create a fairer and transparent market but without strict reporting policies in place you will inevitably give rise to loopholes and further manipulation. 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. My core concerns to the following are outlined as follows; "Arranged financing" programs that allow members to loan other members shares in order to close out short positions, resulting in a loan that is totally uncounted as a short position. My concerns; Is there anything to prevent members using other synthetics to turn these short positions into "loans?" Despite being aware of "arranged financing" agreements for turning shorts into inter-member loans, FINRA seems to have no idea who are using them. And, though FINRA is aware of married puts and their synthetic short product, FINRA doesn't even ASK that they be reported and without this data a full picture of short positions is not disclosed which I believe goes against the ideals of a fair and transparent market. It is critical for the restoration of both the stability of the US markets and the confidence of the investors within it globally 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. Following on from my core concerns I propose amendments to the following proposed rule changes: FINRA'S PROPOSED RULE CHANGES "Proprietary and Customer Account Categorization: FINRA is considering requiring firms to segregate the total reportable short interest into two categories—short interest held in proprietary accounts and short interest held in customer accounts. ...firms also would be required to specify the short interest held across all proprietary accounts and across all customer accounts (for both retail customer and institutional customer accounts) for each equity security as of the close of the designated reporting settlement date." "Account-level Position Information: Alternatively, FINRA is considering requiring firms to report (for regulatory purposes only; not to be disseminated publicly) short interest position information with more granularity by reporting at the account level for all equity securities" "Synthetic Short Positions: In addition, FINRA is considering requiring firms to reflect synthetic short positions in short interest reports. For example, enhanced short interest reporting could include synthetic short positions achieved through the sale of a call option and purchase of a put option (where the options have the same strike price and expiration month) or through other strategies. FINRA believes this information would assist FINRA in understanding the scope of market participants’ short sale activity, specifically regarding the use of less-traditional means of establishing short interest. " "Loan Obligations Resulting From Arranged Financing: FINRA understands that members may offer arranged financing programs (sometimes called “enhanced lending” or “short arranging products”) through which a customer can borrow shares from the firm’s domestic or foreign affiliate and use those shares to close out a short position in the customer’s account. FINRA is considering requiring members to report as short interest outstanding stock borrows by customers in their arranged financing programs to better reflect actual short sentiment in the stock" "Frequency and Timing of Short Interest Position Reporting and Data Dissemination: ...FINRA is considering reducing the reporting timeframe to daily or weekly submissions… short interest reports [would] be due by 6:00 p.m. ET one business day after the designated reporting settlement date…" "FINRA also is considering reducing the FINRA processing time involved in disseminating short interest data… The proposed reduction in FINRA processing time could apply where firms report short interest to FINRA on a daily or weekly basis, as described above, and also could apply to the current twice a month reporting cycle (with or without a reduced firm turnaround time). " "Information on Allocations of Fail-to-Deliver Positions: Regulation SHO permits a member that is a participant of a registered clearing agency to allocate a portion of its Rule 204 fail-to-deliver position to another broker-dealer based on that other broker-dealer’s short position. FINRA is considering enhancing its short sale reporting program by adopting a new rule to require members to submit to FINRA (for regulatory purposes only; not for public dissemination) a report of daily allocations of fail-to-deliver positions to correspondent firms pursuant to Rule 204(d) of Regulation SHO. The proposed allocation report may include the following fields: Security, Identity of correspondent firm, Amount allocated to correspondent firm (number of shares), Trade date(s), Allocation Date, Close out Date, Applicable close out obligation (T+3, T+5 or T+35) …Obtaining daily information on fail-to-deliver allocations would allow FINRA to directly identify the member that is responsible for a close-out obligation (without first requesting this information from the clearing firm), and, therefore, would allow FINRA to conduct more efficient investigations." "Account-level Position Information: Currently, short interest is reported by a firm on an aggregated basis across all accounts. By requiring firms to report short interest positions at the account level, FINRA believes it will obtain insight into the identities of individuals or entities with large short interest positions that would enhance its reviews for compliance with Regulation SHO and other short sale obligations. To obtain the full benefit of this data, FINRA is also considering possible ways to identify account holders across firms." MY PROPOSED AMENDMENTS -Proprietary and Customer Account Categorization: FINRA members must report short interest differentiated by proprietary and institutional/retail accounts, instead of aggregate by member. Wording unclear whether institutional vs retail customer SI must be reported. Institutions can easily spread short positions among multiple broker-dealers, effectively hiding concentrated short positions among retail customers. Therefore, retail vs institutional customer 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 clients positions. Customers have the right to examine whether or not their broker dealer is actively competing against their clients 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 think we should ask for 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 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 current public dissemination of aggregate FTD's per security. However, given reporting will be done on a daily basis regardless the quantity of FTD's, it stands 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. As I understand, FINRA makes the point that they haven't decided exactly how much of any of these proposals' reported data will be publicly disseminated, and how much will be kept internally for enforcement purposes. It is my personal belief that the more transparent the markets are, the truer and healthier competition can be. It is also my belief that any entity and FINRA members should have all position data that is subject to reporting also be subject to dissemination. To me, there is no distinction between enforceable and public corporate data in a fair market. 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. I sincerely do hope you consider all above while amending xxx and implore you consider the impact on the global markets and a lack of future participation in the US markets by foreign investors if regulations do not completely eliminate loopholes in your current proposals and proposed amendments. The world it watching and I look forward to the day your rulings finally stamp out out of date rules and loopholes that allow manipulation. Yours sincerely, Mr K Nunn
Kevin Nunn 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. I understand FINRA is attempting to create a fairer and transparent market but without strict reporting policies in place you will inevitably give rise to loopholes and further manipulation. 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. My core concerns to the following are outlined as follows; "Arranged financing" programs that allow members to loan other members shares in order to close out short positions, resulting in a loan that is totally uncounted as a short position. My concerns; Is there anything to prevent members using other synthetics to turn these short positions into "loans?" Despite being aware of "arranged financing" agreements for turning shorts into inter-member loans, FINRA seems to have no idea who are using them. And, though FINRA is aware of married puts and their synthetic short product, FINRA doesn't even ASK that they be reported and without this data a full picture of short positions is not disclosed which I believe goes against the ideals of a fair and transparent market. It is critical for the restoration of both the stability of the US markets and the confidence of the investors within it globally 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. Following on from my core concerns I propose amendments to the following proposed rule changes: FINRA'S PROPOSED RULE CHANGES "Proprietary and Customer Account Categorization: FINRA is considering requiring firms to segregate the total reportable short interest into two categories—short interest held in proprietary accounts and short interest held in customer accounts. ...firms also would be required to specify the short interest held across all proprietary accounts and across all customer accounts (for both retail customer and institutional customer accounts) for each equity security as of the close of the designated reporting settlement date." "Account-level Position Information: Alternatively, FINRA is considering requiring firms to report (for regulatory purposes only; not to be disseminated publicly) short interest position information with more granularity by reporting at the account level for all equity securities" "Synthetic Short Positions: In addition, FINRA is considering requiring firms to reflect synthetic short positions in short interest reports. For example, enhanced short interest reporting could include synthetic short positions achieved through the sale of a call option and purchase of a put option (where the options have the same strike price and expiration month) or through other strategies. FINRA believes this information would assist FINRA in understanding the scope of market participants’ short sale activity, specifically regarding the use of less-traditional means of establishing short interest. " "Loan Obligations Resulting From Arranged Financing: FINRA understands that members may offer arranged financing programs (sometimes called “enhanced lending” or “short arranging products”) through which a customer can borrow shares from the firm’s domestic or foreign affiliate and use those shares to close out a short position in the customer’s account. FINRA is considering requiring members to report as short interest outstanding stock borrows by customers in their arranged financing programs to better reflect actual short sentiment in the stock" "Frequency and Timing of Short Interest Position Reporting and Data Dissemination: ...FINRA is considering reducing the reporting timeframe to daily or weekly submissions… short interest reports [would] be due by 6:00 p.m. ET one business day after the designated reporting settlement date…" "FINRA also is considering reducing the FINRA processing time involved in disseminating short interest data… The proposed reduction in FINRA processing time could apply where firms report short interest to FINRA on a daily or weekly basis, as described above, and also could apply to the current twice a month reporting cycle (with or without a reduced firm turnaround time). " "Information on Allocations of Fail-to-Deliver Positions: Regulation SHO permits a member that is a participant of a registered clearing agency to allocate a portion of its Rule 204 fail-to-deliver position to another broker-dealer based on that other broker-dealer’s short position. FINRA is considering enhancing its short sale reporting program by adopting a new rule to require members to submit to FINRA (for regulatory purposes only; not for public dissemination) a report of daily allocations of fail-to-deliver positions to correspondent firms pursuant to Rule 204(d) of Regulation SHO. The proposed allocation report may include the following fields: Security, Identity of correspondent firm, Amount allocated to correspondent firm (number of shares), Trade date(s), Allocation Date, Close out Date, Applicable close out obligation (T+3, T+5 or T+35) …Obtaining daily information on fail-to-deliver allocations would allow FINRA to directly identify the member that is responsible for a close-out obligation (without first requesting this information from the clearing firm), and, therefore, would allow FINRA to conduct more efficient investigations." "Account-level Position Information: Currently, short interest is reported by a firm on an aggregated basis across all accounts. By requiring firms to report short interest positions at the account level, FINRA believes it will obtain insight into the identities of individuals or entities with large short interest positions that would enhance its reviews for compliance with Regulation SHO and other short sale obligations. To obtain the full benefit of this data, FINRA is also considering possible ways to identify account holders across firms." MY PROPOSED AMENDMENTS -Proprietary and Customer Account Categorization: FINRA members must report short interest differentiated by proprietary and institutional/retail accounts, instead of aggregate by member. Wording unclear whether institutional vs retail customer SI must be reported. Institutions can easily spread short positions among multiple broker-dealers, effectively hiding concentrated short positions among retail customers. Therefore, retail vs institutional customer 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 clients positions. Customers have the right to examine whether or not their broker dealer is actively competing against their clients 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 think we should ask for 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 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 current public dissemination of aggregate FTD's per security. However, given reporting will be done on a daily basis regardless the quantity of FTD's, it stands 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. As I understand, FINRA makes the point that they haven't decided exactly how much of any of these proposals' reported data will be publicly disseminated, and how much will be kept internally for enforcement purposes. It is my personal belief that the more transparent the markets are, the truer and healthier competition can be. It is also my belief that any entity and FINRA members should have all position data that is subject to reporting also be subject to dissemination. To me, there is no distinction between enforceable and public corporate data in a fair market. 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. I sincerely do hope you consider all above while amending xxx and implore you consider the impact on the global markets and a lack of future participation in the US markets by foreign investors if regulations do not completely eliminate loopholes in your current proposals and proposed amendments. The world it watching and I look forward to the day your rulings finally stamp out out of date rules and loopholes that allow manipulation. Yours sincerely, Mr K Nunn