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Naked Short Selling The Euro

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Published : April 05th, 2010
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The US financial institutions have a history of using short-selling as an instrument to attack foreign currency. For example, reports about the naked short selling of Brazilian bonds.

(emphasis mine)
[my comment]

The Russian debt payment moratorium caused deep financial turbulence in other emerging markets, including Brazil, and had a larger impact on Brazil than the 1997 East Asian financial crises. The fact that Russia had defaulted implied a radical reassessment by different investors about risks of investing in developing economies. In these circumstances of significantly increased risk aversion by international investors, Brazil was seen as especially vulnerable given its exchange rate (which was seen as overvalued), large and growing current account deficit, deteriorating fiscal position and short maturity of its public debt. It could be argued that the lessons of the Mexican crisis, which had showed that the costs of currency appreciation increase slowly, but explode suddenly, were to some extent ignored by the Brazilian economic authorities (Cardoso, 2000).

However, Brazil was also deeply affected by the fact that it represented around a 40% share in emerging market portfolios, as well as by specific hedging strategies used by investors suffering losses in Russia and elsewhere.
A new unanticipated channel for contagion – not too much discussed in the literature – was through the Brady bonds. Goldfajn and Gupta (2003) gives econometric evidence that the most likely location of transmission of contagion from Russia to Brazil was the short-selling in offshore Brady markets. An interesting parallel can be drawn with Hong Kong, where short-selling in the stock exchange by offshore speculators was used as an instrument to attack the currency during the East Asian financial crisis.

Goldfajn and Gupta (2003) also shows that foreign investors' withdrawals from Brazil played a major role during the Russian crisis, and that they were not reversed; this was in contrast with the period during the Asian crisis where withdrawals from Brazil by foreign investors were smaller and reversed a few months later.

Important regulatory points can be made drawing on this Brazilian experience. Though US securities law includes
restrictions on repeated use of short-selling by a broker by limiting the price ("tick") at which the second short sale of a security can be made (through the "Tick Rule"), this could not be applied off-shore, as no reference price is fixed to any exchange. Similarly, margins on short sales, also repeatedly tend not to apply to offshore trading. This creates, as Franco highlights, a specific regulatory asymmetry, between domestic and offshore markets that amplified contagion from the Russian crisis.

the aggregate short-selling of Brazilian bonds seemed very high relative to amounts of bonds available. Indeed, reportedly a number of actors – including large international banks – were selling short bonds that they did not have. Brazilian investment banks complained that when they attempted to follow provisions approved under International Securities Market Association Rules to force delivery – which would imply short sellers having to buy the bonds to cover their positions,- they were threatened by these large international banks that if they did this, their credit lines would be cut. It can be argued that another regulatory asymmetry arises here as a large market maker (an international bank) is favored over a small player (a national bank) challenging a short sale that was damaging to market integrity.


In August 2008, The DTCC formed EuroCCP, the perfect vehicle for naked short selling the European equities and the euro


Wapedia reports about the Depository Trust & Clearing Corporation and its subsidiaries.


Wiki: Depository Trust & Clearing Corporation

The Depository Trust & Clearing Corporation
(DTCC), based primarily at 55 Water Street in New York City, is the world's largest post-trade financial services company. It was set up to provide an efficient and safe way for buyers and sellers of securities to make their exchange, and thus "clear and settle" transactions. It also provides custody of securities.

2. Controversy over naked short selling

Several companies have sued the DTCC over delivery failures in their stocks, alleging culpability for naked short selling. Furthermore, the issue of the DTCC's possible involvement has been taken up by Senator Robert Bennett and discussed by the NASAA and in articles-disagreed with by DTCC-in the Wall Street Journal and Euromoney Magazine. The DTCC contends that the suits are orchestrated by a small group of lawyers and executives to make money and draw attention from the companies' problems.

Critics blame
DTCC as being in charge of the system where it happens, say that DTCC turns a blind eye to the problem, and that the Securities and Exchange Commission has not taken sufficient action against naked shorting. [3] DTCC says that it has no authority over trading activities, cannot force buy-ins of shares not delivered [4] , and suggests that naked shorting is simply not widespread enough to be a major concern.

In July 2007, Senator Bob Bennett, Republican of Utah, suggested on the U.S. Senate floor that
the allegations involving DTCC and naked short selling are "serious enough" that there should be a hearing on them. [7] The committee's Chairman, Senator Christopher Dodd, indicated he was willing to hold such a hearing. [7] The North American Securities Administrators Association, representing state stock regulators, filed a brief in a suit against the DTCC, arguing against federal preemption as a defense to the suit. NASAA said that "if the Investors' claims are taken as true, as they must be on a motion to dismiss, then the entrepreneurs and investors before the Court have been the victims of fraud and manipulation at the hands of the very entities that should be serving their interests by maintaining a fair and efficient national market."

Critics also contend that
DTCC and SEC have been too secretive with information about where naked shorting is taking place. [3] DTCC says it has supported releasing more information to the public. [4]

3. Subsidiaries

The DTCC has several subsidiaries:

National Securities Clearing Corporation (NSCC) - The original clearing corporation, it provides clearing and serves as the central counterparty for trades in the US securities markets
[The clearance and settlement system of the US securities markets has been so badly corrupted that it is currently dysfunctional. See *****Wall Street Addicted To Selling Non-existent Shares*****].

Fixed Income Clearing Corporation (FICC) - Provides clearing for fixed income securities, including treasury securities and mortgage backed securities
[The settlement system for the US government bond market is broken. See *****Wall Street Selling Imaginary Treasuries*****]

EuroCCP - European Central Counterparty Limited (EuroCCP) is the European subsidiary of DTCC that provides equities clearing services on a pan-European basis. Headquartered in London, EuroCCP is a UK-incorporated Recognised Clearing House regulated by the UK's Financial Services Authority (FSA).

EuroCCP began operations in August 2008, initially clearing for the pan-European trading platform Turquoise. EuroCCP has subsequently secured appointments from additional trading platforms and now provides central counterparty services for equity trades to Turquoise, SmartPool, NYSE Arca Europe and Pipeline Financial Group Limited. EuroCCP clears trades in more than 6,000 equities issues for these trading venues. In October 2009 EuroCCP began clearing and settling trades made on the Turquoise platform in 120 of the most heavily-traded listed Depositary Receipts. Citi Global Transaction Services acts as settlement agent for trades cleared by EuroCCP. EuroCCP now provides clearing services in 15 major national markets in Europe: Austria, Belgium, France, Denmark, Germany, Ireland, Italy, Finland, Netherlands, Norway, Portugal, United Kingdom, Switzerland, Sweden and Spain. Trades are handled in seven different currencies: the Euro, British Pound, U.S. Dollar, Swiss Franc, Danish Krone, Swedish Krona, and Norwegian Krone.


Given the DTCC's history of enabling naked short selling and the US's history of attacking foreign currencies, I obvious that:1) EuroCCP will be used to aggressively attack the euro.2) Since the EuroCCP's opportunity to naked short sell the euro is limited by the volume of trades it settles, any increasing in EuroCCP settlement activity is bearish will be bearish for the euro, and any decrease in EuroCCP settlement activity is bearish will be bullish for the euro.

Link between EuroCCP settlement activity and swings in the euro

(when looking at the chart below, remember that the dollar is under constant downward pressure. If EuroCCP settlement activity (naked short selling of euro) stays at a constant level, the dollar will continuously sink simply because of the US’s terrible economic fundamentals (trade deficit, collapsing economy, etc).)


The Wall Street Journal reports that Turquoise Trade Volume Falls as Contracts Expire.


MARCH 23, 2009
Turquoise Trade Volume Falls as Contracts Expire

Trading volumes at European stock market Turquoise fell by more than half last week after agreements signed by its nine shareholder banks to trade on the system expired.

Turquoise, founded by nine of the world's largest investment banks to increase the competitive pressure on Europe's main stock markets, has been doing well since its launch. The London system has expanded its market share in all of Europe's main share indexes and earlier this month was handling nearly 7% of the U.K.'s FTSE 100 trading, 8.2% of the French CAC-40 index and 9.4% of Dutch blue chips.

Last week's slowdown came after Turquoise's investment-bank backers were released from contracts requiring them to make markets in certain stocks for six months, an arrangement designed to draw liquidity to the system as it found its feet.

The value of shares traded on Turquoise between
Monday and Thursday last week slid to €3 billion ($4.1 billion), down 51% from €6.1 billion the same period in the previous week, according to Bats Trading. The system's share of European stock trades averaged 3% last week, compared with 5.6% the previous week.

Meanwhile, rival Chi-X Europe, majority-owned by agency broker Instinet Europe, traded shares valued at €10.4 billion in the first four days of last week, down 6% from the previous week, although its European market share rose to 10% from 9.7%.

Turquoise's slump follows a period of growth. Turquoise had a record month in February, with stock volumes rising 11% from the previous month to €29.1 billion, even as volumes at many other European markets declined, according to financial software group Fidessa.

Eli Lederman, Turquoise's chief executive, said the drop-off in volumes had been significant but less than the market had anticipated.
"We knew there would be some drop-off in volumes when the liquidity agreements ran out," he said.


1) The dollar's rally beginning in 2008 coincides with a rapid increase in EuroCCP settlement activity.


2) The end of the dollar's rally coincides with a sharp drop in EuroCCP settlement activity.


The time frame correlation between EuroCCP settlement activity and the rise and fall of the dollar is so chronologically close it can’t be entirely dismissed as coincidence.

In October 2009, EuroCCP again increased settlement activity

In October 2009, DTCC reports that EuroCCP Launches Clearing and Settlement for Depositary Receipts.

EuroCCP Launches Clearing and Settlement for Depositary Receipts

New service offering will clear a wide selection of Europe's Depositary Receipts, and provide most convenient settlement location

London, 13 October 2009European Central Counterparty Limited (EuroCCP) today announced that on 16 October it will begin clearing and settling 120 of the most heavily-traded listed Depositary Receipts. With its new central counterparty service offering, EuroCCP extends to Depositary Receipts transactions the efficiency, cost-saving and counterparty risk protection benefits it already provides to clients' equities transactions.

Turquoise will be the first multilateral trading facility (MTF) to offer trading in Depositary Receipts cleared through EuroCCP.
Virtually all of these issues are priced in US dollars.

Depositary Receipts are transferable securities that represent ownership of a specified number of shares in a foreign company.
Listed and traded independently from the underlying equity, Depositary Receipts enable traders to invest directly in high-growth economies in an easy and cost-effective way. They comprise a significant segment of the international securities markets business today.

The new service marks
the latest addition to EuroCCP's ongoing programme of innovation, which includes a significant restructuring of fees and expansion into further financial instruments and market sectors. EuroCCP, which currently clears and settles trades for four MTFs, in January 2010 will extend its services to the national exchanges owned by NASDAQ OMX in Denmark, Finland and Sweden.

Effective 1 October, EuroCCP implemented a new, tiered fee structure that leverages the company's economies of scale to deliver
Europe's most competitive pricing [If it seems too good to be true, it is.]. Volume discounts are calculated at the participant level, which provides significant value to high-frequency trading firms now operating across multiple markets.

About EuroCCP

European Central Counterparty Limited (EuroCCP) is a UK-incorporated, FSA-regulated Recognised Clearing House.
It is the European subsidiary of The Depository Trust & Clearing Corporation (DTCC) and is headquartered in London. EuroCCP was formed to provide clearing and settlement services for a wide range of trading venues across Europe, offering the scale economies of the US market to European market participants.

Investopedia explains How Does the Depositary Receipts Work.

How Does the Depositary Receipts Work?

The DR is created when a foreign company wishes to list its already publicly traded shares or debt securities on a foreign stock exchange. Before it can be listed to a particular stock exchange, the company in question will first have to meet certain requirements put forth by the exchange. Initial public offerings, however, can also issue a DR. DRs can be traded publicly or over-the-counter. Let us look at an example of how an ADR is created and traded:


a gas company in Russia has fulfilled the requirements for DR listing and now wants to list its publicly traded shares on the NYSE in the form of an ADR. Before the gas company's shares are traded freely on the exchange, a U.S. broker, through an international office or a local brokerage house in Russia, would purchase the domestic shares from the Russian market and then have them delivered to the local (Russian) custodian bank of the depository bank. The depository bank is the American institution that issues the ADRs in America. In this example, the depository bank is the Bank of New York. Once the Bank of New York's local custodian bank in Russia receives the shares, this custodian bank verifies the delivery of the shares by informing the Bank of New York that the shares can now be issued in the United States. The Bank of New York then delivers the ADRs to the broker who initially purchased them.

Based on a determined ADR ratio, each ADR may be issued as representing one or more of the Russian local shares, and the price of each ADR would be issued in U.S. dollars converted from the equivalent Russian price of the shares being held by the depository bank. The ADRs now represent the local Russian shares held by the depository, and can now be freely traded equity on the NYSE.

After the process whereby the new ADR of the Russian gas company is issued, the ADR can be traded freely among investors and transferred from the buyer to the seller on the NYSE, through a procedure known as intra-market trading.
All ADR transactions of the Russian gas company will now take place in U.S. dollars and are settled like any other U.S. transaction on the NYSE. The ADR investor holds privileges like those granted to shareholders of ordinary shares [like privilege of naked short solling, for example], such as voting rights and cash dividends. The rights of the ADR holder are stated on the ADR certificate.

On October 16, 2009, EuroCCP gained the ability to naked short sell the 120 of the most heavily-traded listed Depositary Receipts in Europe. European investors who think they are indirectly buying shares foreign companies (ie: gas companies in Russia, agricultural companies in Brazil, etc…) are now unknowingly receiving IOUs through EuroCCP, and their money is going into dollars and US treasuries.

In addition to the move to settle Depositary Receipts, EuroCCP overall integration into European settlement process is also increasing, as the flow charts below show. EuroCCP and its settlement bank (Citibank) are highlighted in red rectangle.


1) EuroCCP’s expanding settlement activity (and related short selling) is the most likely reason the euro is getting killed since last November, not default fears about Greece. There is no economic reason for the dollar to be rallying against. Yes, some EU states are insolvent, but most of states in the US are in far worse condition. California makes Greece looks good.

2) European investors are being defrauded. When the EuroCCP collapses with the dollar, they will be left with nothing.

3) The EuroCCP’s increasing integration with the European settlement process magnifies the damage the dollar’s collapse will do to Europe.

4) When the 2010 Food Crisis kicks into full swing this summer, it will put an end to the EuroCCP’s nonsense.

Eric de Carbonnel

 Market Skeptics

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