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Faulking Opinions - Mar 6, 2006 - Printable Version
- DTCC Claims are Smoke and Mirrors
by Dave Patch
(Editor's note: This is a letter from Dave Patch of www.investigatethesec.com to Amanda Lang of Report on Business TV, after she quoted the DTCC as saying that Fails to Deliver on stocks were only $6 billion per year. The interview with Overstock.com's Dr. Patrick Byrne can be seen at http://www.robtv.com/shows/past_archive.tv , fast forward to the 24 minute mark.) I listened to your Squeeze Play telecast Monday night and was impressed by the overall interview with Dr. Patrick Byrne.
If I may, I would like to reply to the comment from the DTCC regarding Fails to Deliver and the issue of $Quadrillions settled with only $6 billion in FTD’s.
This number is a smoke and mirrors figure and I will explain why. You then must ask yourself why they would mislead you as they have and to continue to deceive the overall investing public.
The quadrillion figures that the DCC touts is an aggregate total figure of trades settled in a one year period. What is not understood is whether this quadrillion figure includes fails that are covered through the stock borrow program and at what magnitude these fails covered through the SBP are within the quadrillion figures presented. The DTC should be presenting data that separates out the total value of trades that settle through the legal seller delivery process and what percentage of overall trades fail for one reason or another. That would be the first valued snapshot of the market settlement system.
Furthermore, the DTCC claimed that they have only $6 Billion in Fails to Deliver compared to a quadrillion in settled trades. That is again a misrepresentation of facts.
That $6 Billion is a figure representative of mark to market daily fails and changes daily. It cannot be equated to the quadrillion as the quadrillion is a summation of all trades executed through the course of a year where the $6 Billion is only an aggregate snapshot of any given trade day.
As an example, Lets say that on Monday the DTCC carries $6 Billion in aggregate FTD’s on the books and on Tuesday $1 Billion of those FTD’s becomes settled but another round of fails is entered into the system with an equal $1 Billion in market value. The aggregate $6 Billion remains on the books on Tuesday but by direct comparison to the quadrillion figures presented, we now have $7 Billion in FTD’s based on a rolling aggregate total. For the DTCC to use apples to apples comparison, they need to identify the aggregate sum total of fails that crossed the DTCC settlement system through the course of the year. I can guarantee you it is far greater than $6 Billion.
In addition to this type of accounting, the DTCC relies on mark-to-market calculation of a FTD. The Settlement system was intended to insure prompt settlement to not have great disparity and liability between trade date and execution date. It was this liability that reduced the trade settlement guidelines from T+5 to T+3 and now is being evaluated for T+1.
In the case of a settlement failure (lets use Overstock as an example), An FTD that took place in August 2005 occurred at $46.00/share value. A 1000 share FTD represented $46,000. A similar 1000 share trade executed that same day and settled also carries a $46,000 value. But because that FTD remains on the books today, the FTD is now being carried at a liability of only $23,000 (1000 shares at $23.00/share). The DTCC booked the high cost of the trade in calculating their quadrillion settled but has allowed the settlement failure to diminish in value mark to market.
It is therefore imperative that the DTCC presents figures in real time dollar values at the time of the trade date when comparing the value of the fails executed annually to that of trades settled annually. Allowing for trade value depreciation in an oversold manipulative market only allows for the problem to be masked. From data obtained through court order, we know that the DTCC carried FTD’s in a company called Eagletech for over a calendar year where the trade origination price was $11.00/share and the trade was ultimately settled at $.50/share. How the DTCC book kept this trade in their comparative analysis would be interesting.
As for whether any of this is a small number or a large number, we live in a technology sector where supercomputers can track nearly everything and where a trade can be settled in nanoseconds if the shares are legitimately available. You would not allow your bank to have a 2, 3, 4% error in their processing and thus neither should the stock markets. Industries strive for 6 sigma quality and the DTCC is far from that achievement.
The funny thing about accounting and numbers is that it is very easy to pull a fast one if you simply stick to your guns. The DTCC has been pulling a fast one by creative accounting that has ultimately misled the investing public. If they were a publicly traded company they would be under investigation by the SEC for fraud in the dissemination of information.
I would hope that the DTCC would have the honesty and courage to reply to you with appropriate figures as they have turned down so many others seeking such accuracies in information. If it is really not a problem they should not be concerned with providing such information.
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