NSCC-2022-003 has been APPROVED.
The filing replaced NSCC-2021-010 which was withdrawn on March 25th of 2022.
The rule aims at providing a more stable environment for market participants and I’m going to break it all down below.
Let’s get started.
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NSCC-2022-003 SFT clearing service
NSCC-2022-003 would implement the SFT clearing service (securities financing transactions).
This means the NSCC would act as a third party to clear FTDs (failure-to-delivers) from various institutions.
The NSCC would also collect margin from both the lender and borrower to mitigate any risk.
Here the NSCC essentially acts as a referee, preventing overleveraging, naked shorting, and FTDs in the market.
Predatorial short selling strategies could potentially be eliminated due to this filter.
The NSCC believes it can reduce market disruption from fire sales by liquidating positions in small batches.
I’ve stated in recent articles and on my channel that a squeeze in AMC and GameStop will likely occur in sequences.
A ‘controlled squeeze’ so to speak to avoid systemic risk in the market.
It’s very possible NSCC-2022-003 was created to unwind this mess in a manner that would prevent the stock market from collapsing.
Does the rule help hedge funds?
Yes, but it also helps retail investors.
While NSCC-2022-003 provides a safety net for overleveraged institutions, it will also create more balance in the market for retail investors.
The NSCC is requiring all SFT members to provide a $250,000 margin minimum amount.
And with DTCC B16845 already raising margin requirements, I think it’s fair to say hedge funds are being put on a leash.
Investors have been asking me, what happens if a hedge fund defaults?
Will they be held accountable for their short positions?
Assuming a hedge fund becomes an SFT member, under NSCC-2022-003, the NSCC would take all responsibility and be obligated to meet all settlements.
Although the proposal requires a $250,000 margin minimum, the NSCC is requiring members to hold sufficient liquidity to cover the largest settlement obligation.
In other words, every short position will be obligated to get closed.
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