It gets a little more complex than that
and the more complex it gets the easier it is to obfuscate the fraud. Let’s say a failure to deliver of 1 million shares of “Acme” occurs at the NSCC. The NSCC reaches into the “Automated Stock Borrow Program” (SBP) “lending pool” of securities and they grab 1 million shares of “Acme” and electronically transfer it to the “participants share account” of the buying party broker “B”. The FTD is “cured”.
They then debit the 1 million shares from the “participant shares account” of the loaner broker “L” that “donated” the shares into the lending pool at the SBP. They then credit broker L’s cash account with the cash value of the 1 million shares. He makes out nice because he just converted an electronic book entry gathering dust into cash that counts towards his net capital reserves and earns interest. Now you can see why everybody wants to donate their client’s shares into the SBP.
So “L” loses 1 million shares in his share account but gains the cash equivalent in his cash account. OK, so far so good. Since “L” can theoretically at any time can call back in that loan from the selling firm the NSCC deems it proper to credit “L” with a “long position” in a special NSCC “C” sub account. Thus a “long” position is created out of thin air and a “long” position at the NSCC now becomes equivalent to a mere “right to demand loaned shares back”. The “long position” awarded to the buying firm “B” represented real shares with a paper certificate in existence in a DTC vault. So all “long positions” are not alike at the NSCC.
The loaning broker “L” will never voluntarily call in that loan because he’d rather have the cash equivalent of those shares to make interest off of. So now a “long position” at the NSCC becomes “the right to demand back loaned shares which will never get voluntarily exercised” or maybe it represents a real share of Acme. We’re not allowed to learn which it is on any particular investor’s month end statement. Both will be represented on Acme’s shareholders’ monthly brokerage statements as “securities held long”, however. You can sense the bogus nature of “C” sub account “long positions” as an Acme shareholder would never in their wildest dreams that they paid full retail value for one of these.
If Acme used to have 100 million shares at the NSCC being held in “street name” they now have 101 million there but an investor or a corporation can never learn what is held in the “C” sub accounts pertaining to Acme so when asked they’ll say that there are 100 million shares held in “street name”. Apparently it’s none of our business because it’s a debt between 2 parties that deserves secrecy and it might reveal some “proprietary trading methodologies” of a hedge fund or market maker.
Above and beyond these shenanigans and of much greater importance is what goes on in “ex-clearing arrangements”. That term “arrangements” even sounds crooked. The NSCC does not know nor do they want to know about the massive amounts of FTDs housed there. It’s “none of their business” they say yet as an SRO or self-regulatory organization they are mandated to monitor the “business conduct of its participants” wherever it is being “conducted”. The SEC tells us that the SROs are the first line of defense against abusive naked short selling frauds. Yeah right, hand me my blindfold so I can stand guard on behalf of the investing public.
When you take into account all of the hiding places for FTDs on Wall Street you can see why the SEC admitted that the number of FTDs and the “securities entitlements’ they have procreated is too large to address with buy-ins lest there be issues with “market volatility”. That’s Latin for “short squeezes”. Yet to this day the DTCC insists that 99% of all trades “settle” on time and that the majority of the other 1% “settle” within 5 days. Yeah, that’s why BCIT has 4.7 million real “shares” outstanding and 350 million “securities entitlements” poisoning their share structure.
You can see the bogus nature of these “long positions” generated by the NSCC’s SBP. Now you have to keep in mind that after the buying broker “B” receives the electronic transmission of the shares donated to the SBP by “L” he is allowed by NSCC policies to place the same parcel of shares used to “cure” the FTD to place them right back into the same lending pool from whence they just came as if they never left in the first place. It’s a self-replenishing counterfeiting machine.
Not only can a certain parcel of shares generate these bogus “long positions” but any particular parcel of shares can generate dozens of them if they keep getting selected time after time to “cure” different delivery failures. But wait it gets even worse. Theoretically only shares held in margin accounts wherein the owner has signed a margin agreement to allow the “hypothecation” (loaning) of their shares but the NSCC refuses to monitor for the types of shares that are being “donated” into their SBP despite the huge financial temptation to cheat and put any old shares into these lending pools whether they be qualified retirement plan shares of type 1 cash account shares. Instead the NSCC puts all of their participants on the “honor system” in this regard. Once again this theoretical “first line of defense” against ANSS frauds says pass me the blindfold so that I can monitor my participant’s “business conduct”.
To top off all of this the SEC that had to approve of the SBP before it went into effect to this day refuses to make the NSCC change despite what it has morphed into over the years. When we’ve asked the NSCC to get rid of its corrupt counterfeiting nature they have four comments. Firstly, they can’t change it because the system is “automated”. Secondly, they say that they can’t change it because they have no “discretion” in the matter (even though they designed it and administer it). Thirdly, they remind us that the SEC signed off on it a couple of decades ago. Fourthly, they say that if anything were wrong with it then the SEC would make us shut it down and they haven’t told us to so we won’t. Hopefully the first job on Mary Schapiro’s task list is to get rid of that and many other counterfeiting programs. Keep in mind that for every single bogus “long position” they park in their “C” sub accounts since they procreate readily sellable “securities entitlements” that’s that many more “securities” they can buy and sell and earn commissions and fees off of.
AI
