The Depository Trust and Clearing Corporation (DTCC) today commended—and expressed full support for—the Securities and Exchange Commission’s (SEC) decision to give the public greater access to aggregate information on Fails to Deliver (FTDs).
DTCC's comments follow the SEC's recent decision to change short selling regulations, including eliminating the 'grandfather' clause and the 'uptick' requirement for short selling. In conjunction with these rule changes, the SEC announced it would consider releasing two-month-old, aggregated FTD data on a quarterly basis.
Currently, the SEC does not provide fails information to the public on a regular basis and releases fails data only under Freedom of Information Act (FOIA) requests, provided the released data is at least two months old. This policy was intended to safeguard confidential investor trading information that, if disclosed, could be used by others to gain competitive advantage or manipulate the market. Under the SEC's new plan, aggregated data on fails would be released to the public, without the need for a FOIA request.
DTCC had recommended in a comment letter to the SEC last September on Reg SHO reform, that such data could be released publicly without putting at risk the confidentiality of participant securities holdings and trading or risking market manipulation.
DTCC and its subsidiaries play a critical role in the clearance and settlement of virtually all equity and fixed income trades in the U.S. While their systems will identify many failed trades, DTCC's clearing subsidiary does not have access to the underlying reasons for the fail, which is only known to the firm involved.
The SEC has pointed out that most fails are usually temporary in nature due to administrative error by the end investor or the broker/dealer, though fails can also be caused by abusive trading activity. For that reason, the SEC and marketplaces monitor and investigate fails data to help uncover such activity.
"Our position is that disclosing aggregated historical data in each security on a regular basis, especially now that the grandfathering of fails is ending, would demonstrate convincingly the relatively low level of failed trades that actually exist, st, and that such information would end much of the speculation about the level of fails in our system," said Larry E. Thompson, DTCC's general counsel.
Since the inception of DTCC's subsidiaries in the late 1970s, great attention has been paid to ensuring the confidentiality of information these subsidiaries possess about a financial firms' specific securities holdings and securities trading activity. To preserve this confidentiality, the ability to release information is sharply restricted by DTCC's subsidiary rules, and the financial firms, institutional investors and others who participate in the capital markets.
"Notwithstanding this history," said Thompson, "DTCC believes it is both possible and beneficial to address the public's interest in FTDs while continuing to protect the legitimate privacy concerns of our participants—and investors.
"DTCC also believes that greater transparency will build confidence in our system for clearing and settling securities trades and thus create a greater appreciation for the benefits of the system's efficiency and effectiveness," said Thompson.