The safe haven would be like a bank in a snow globe: transparent to the regulator and enclosed from risk.  Like a peaceful sanctuary in the mountains of Switzerland yet safer than banks of Switzerland as it is isolated from sovereign debt exposures looming in Europe. 



                                                                                                                                           February 21, 2015


 Senator Elizabeth Warren

317 Hart Senate Office Building

Washington DC, 20510 



RE: Enduring Proprietary Trading Enforcement / The Solution to Systemic Risk

The Fully Transparent Broker-Dealer


Dear Elizabeth Warren,


The editorial board of the New Jersey Star Ledger points out though the Volcker Rule was not overturned earlier this year the banks “will keep coming with further attempts to chip away at Dodd-Frank, no doubt”. Given the level of aggression of bank lobbyist to force change on the second day of congress, the Volcker Rule will likely be challenged in the legislature in coming years until finally overturned. The lifespan of the legislation though is irrelevant if customers of “too big to fail banks” are provided a highly regulated fully transparent alternative to shift their assets.


Broker-Dealers have effectively controlled risk of their own customers by comparing the customer positions to the level of equity in customer accounts. Portfolio Margin accounts are SEC Approved for additional leverage as real-time systems monitor solvency throughout the trading day .

If a broker-dealer such as Fidelity can effectively manage risk of millions of margin accounts by comparing the customer positions to equity levels in real-time, then why could the same not be done for firm trading accounts? Both the firm and the systemic risk regulator should see the same message: There is insufficient liquidity for this firm to execute this transaction.


If bank or broker-dealer were to make their positions fully transparent electronically in real-time, and the systemic risk regulator had the ability to circumvent trades at the time of transaction, then systemic risk would be contained.


The Fully Transparent Broker-Dealer:


  1. Electrically disseminates all data but personally identifiable information to the regulator.

  2. Allows for independent customer reserve and net capital computations.

  3. Does not engage in derivatives trading for customer or firm accounts

  4. Allows the systemic risk regulator to block risk based trades in real time.


According to SEC Rule 15c3-3 a Broker-Dealer which maintains customer accounts must segregated all of customer funds into a bank account for exclusive benefit of the customers. The reserve requirements of what banks must maintain per the Federal Reserve is ten percent. A fully transparent broker-dealer accommodating with risk positions thus draws a clear contrast to banks which remain opaque on derivatives transactions.


As the fully transparent broker-dealer takes profound and substantive steps to avoid risk, its customers should fairly qualify for insurance benefits relative to its risk. If customers focused on capital preservation were offered a greater level of coverage, such customers would likely shift their holdings away from the “too big too fail banks”. A deterioration of the customer base of banks will compel banks to ultimately decide whether they want to be banks or proprietary trading firms.


Whether the goal be customer protection or trust busting, the goal can be achieved with ease by nimbly sidestepping the contentiousness of the legislature or judiciary. Executive Order 15576 Delivering Enabling, Effective and Accountable Government mandates “the Administration is committed to insuring that the Federal Government serves the American people with the utmost effectiveness and efficiency. It is simply more efficient to transfer the data to the government than the examiners of the SEC to the data.


Attached is a letter to the Securities & Exchange Commission“Simultaneously Eliminating Budget and Regulatory Gaps” where such efficiencies are defined and yet to be realized. It calls for the utilization of a patented system which will make broker-dealer proprietary positions, and their exposures known as “haircuts” transparent to the regulator. This information historically required SEC Rule 15c3-1 The Net Capital Rule complements what is newly mandated for the Volcker Rule.


The broker-dealer accommodating with data would be a snow globe in the hand of the regulator:

Completely transparent to the regulator but enclosed from the interrelatedness of derivatives trades.

The snow globe shows a peaceful sanctuary like the mountains of Switzerland yet safer than a Swiss banks as it is isolated from sovereign debt exposures looming in Europe.


The simple solution to “too big to fail”is to offer customers an attractive incentive for shifting their assets to a safe haven insulated from the derivatives markets. Protection of customer assets is realized not by ring fencing the contagion of each and every insolvent bank or country but to draw assets to an formidable fortress ring-fenced from derivatives toxicity: The Fully Transparent Broker-Dealer.


If you're weary of requesting the details of the plus one-trillion in uncovered derivative swap trades

from contentious big banks, then come to the Fully Transparent Broker-Dealer which is receptive with complaisance and real-time data. A dose of stiff competition as required by the Sherman Act of 1890 is precisely what is needed to compel the big banks to accommodate customers and regulators with profound reverence. To quote Teddy Roosevelt “In life, as in a football game, the principle is to hit the line hard.”. Seize the day as there is a glaring opportunity to break the game line right now.




Peter Schwartz