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GAO-09-318R 1 (2009-02-26)

handle is hein.gao/gaobaanmg0001 and id is 1 raw text is: im Am,GA 0 T N IAccountability * Integrity * Reliability United States Government Accountability Office Washington, DC 20548 February 26, 2009 The Honorable Carl Levin Chairman Permanent Subcommittee on Investigations Committee on Homeland Security and Governmental Affairs United States Senate The Honorable Charles Grassley Ranking Member Committee on Finance United States Senate Subject: Securities and Exchange Commission: Oversight of U.S. Equities Market Clearing Agencies An effective clearance and settlement process is vital to the functioning of equities markets. When investors agree to trade an equity security, the purchaser promises to deliver cash to the seller and the seller promises to deliver the security to the purchaser. The process by which the seller receives payment and the buyer, the securities, is known as clearance and settlement. In the United States equities market, a centralized clearance and settlement system was established to reduce risks and increase efficiency in the market. As part of this system, trades in equities and other securities are typically cleared and settled through clearing agencies-self-regulatory organizations (SRO) that are required to register with and are subject to oversight by the Securities and Exchange Commission (SEC). Virtually all equities securities trades in the United States are cleared and settled through the National Securities Clearing Corporation (NSCC) and the Depository Trust Company (DTC), clearing agency subsidiaries of the Depository Trust and Clearing Corporation (DTCC). According to DTCC, 99.9 percent of daily transactions by dollar value clear and settle within the standard 3-day settlement period. In the remaining transactions, the seller failed to deliver the securities on time, resulting in a fails to deliver (FTD). On December 31, 2007, the value of aggregated FTDs was $7.5 billion. According to SEC, many FTDs are caused by processing delays or mechanical errors, and are typically resolved within a few days. FTD can also result from naked short selling. While not defined in the federal securities laws or SRO rules, according to SEC, naked short selling generally refers to selling short without having borrowed the securities to make delivery; potentially resulting in a FTD.' When FTDs persist for days or months, they can accumulate 'A short sale is the sale of a security that the seller does not own or any sale that is consummated by the delivery of a security borrowed by, or for the account of, the seller. In general, short selling is used to profit from an expected downward price movement, to provide liquidity in response to unanticipated demand, or to hedge the risk of a long position in the same or related security. GAO-09-318R SEC Oversight of U.S. Equities Markets

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