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SEC Adopts Long Awaited Securities Lending Disclosure Rule

Persuasive Public Comment Helps Mold the Final Rule

 

The Securities and Exchange Commission (SEC) has adopted a new rule, rule 10c-1, to increase transparency in the securities lending market. The rule requires certain persons to report information about securities loans to a registered national securities association (RNSA). The RNSA will then make certain information publicly available. The final approval of rule 10c-1 follows a twice-extended comment period and is informed by numerous public comment letters and 51 meetings between the SEC and commenters, including one with CSFME. In the release, the Commission was open about the extent to which the comments from the industry changed their thinking between the proposal and the final release and when it influenced the end result. 

 

The Final Rule

The rule addresses the limited availability of public information in the securities lending market. The SEC believes that the lack of transparency can create challenges for borrowers and lenders to determine the state of the market and whether the terms they receive align with market conditions. Moreover, the rule also aims to facilitate the oversight of the securities lending market by the SEC.[1] 

The rule requires covered persons (defined below) to report certain information about securities loans, including the identity of the parties to the loan, the number of securities loaned, the loan rate, and the collateral posted. The rule also requires covered persons to report certain confidential information to the RNSA, such as the borrower's identity and the purpose of the loan (i.e., Reg. T permitted purposes or any other purpose). However, the RNSA will not make this confidential information publicly available.
 

  • Information to be reported: The final rule requires reporting of the following information for each securities loan:
    1. The name of the issuer and ticker symbol of the security.
    2. The date and time the transaction took place.
    3. How the transaction was executed (which platform, if any).
    4. Terms of the lending transaction include the type and amount of collateral used, the associated rebate rates, fees, and charges, the loan duration, and the type of borrower.
    5. Confidential data elements, such as the legal names of the parties to the loan, whether the loan will be used to close out a fail to deliver, and whether a broker-dealer has loaned to a customer from its own inventory.
       
  • Covered persons: The Commission responded to many commenters’ requests, including ICI, Blackrock, MFA, and others, for clarity regarding the market participants that would be required to report securities loans under the rule Commission by defining a “covered person” to be:
     
  1. any person that agrees to a covered securities loan on behalf of a lender (“intermediary”) other than a clearing agency when providing only the functions of a central counterparty or central securities depository;
  2. any person that agrees to a covered securities loan as a lender when an intermediary is not used, unless the borrower is a broker or dealer borrowing fully paid or excess margin securities; or
  3. a broker or dealer when borrowing fully paid or excess margin securities.

What is Public and When?
 

          Transaction-by-transaction data 

  • 11 data elements (excluding the amount) must be made publicly available within one business day of the covered securities loan being effected.
  • The amount of the reportable securities loaned must be made publicly available within 20 business days of the covered securities loan being effected.
  • The same disclosure schedule applies to loan modification data elements.

 

          Aggregated data

  • Information pertaining to the aggregate transaction activity and distribution of loan rates for each reportable security must be made publicly available within one business day of covered securities loans being effected or modified.

 

In other words, the RNSA must disclose detailed information about each individual securities loan on the morning of the next business day, except for the amount loaned, which is disclosed 20 business days later. The RNSA must also disclose aggregated information about all loans for each reportable security on the morning of the next business day.

 

Key Differences from the Proposal

Published in December of 2021, the proposal received considerable public comment, requiring the Commission to extend the initial 30-day comment period twice, once due to a technical problem receiving comments, and then again to consider whether there would be any effects of proposed Rule 13f–2 that the Commission should consider in connection with proposed Rule 10c–1. Throughout the final release, the Commission notes where persuasive public comment informed the ultimate text of the rule.

The following are the key changes to the final rule 10c-1 from the proposing release:

  • Timing of reporting: The final rule requires reporting of loan data elements within one business day of the transaction rather than the proposed reporting timeframe of 15 minutes after the securities loans are effected. The final rule also requires reporting of loan modification data within one business day of the modification.[2]

    This change to the reporting time appears to be responsive to numerous commenters, including ICI, AIMA, State Street, and RMA, who suggested that it would be more practical to adopt end-of-day reporting instead of 15-minute reporting due to the nature of the market. Additionally, the RMA argued that adopting a T+1 standard would address the SEC's transparency concerns, reduce implementation costs, and align with the existing SFTR securities loan reporting regime.
     
  • Scope of persons required to report: The final rule expands the scope of persons required to report to include all persons who agree to a securities loan, regardless of whether they use a broker-dealer or other intermediary. This change is intended to increase transparency in the securities lending market by capturing all parties to a loan transaction. Notably, the final rule allows persons other than banks, brokers, dealers, and clearing agencies to act as intermediaries (i.e., lending agents) and permits covered persons to use third-party vendors to help fulfill their reporting obligation. These elements of the final rule should address some of the implementation costs raised by numerous commenters, including CSFME and ASC, by increasing competition among intermediaries.
     
  • Scope of securities required to be reported: The final rule expands the scope of securities required to be reported to include all securities that are reported or required to be reported to CAT, TRACE, or RTRS, or any reporting system that replaces one of these systems (reportable securities[3]). Commenters like ICI, Citadel, AIMA, and State Street pointed out to the Commission that the proposed rule failed to provide securities lending market participants with clarity regarding the specific types of transactions subject to the rule 10c-1 disclosure regime. They also pointed out substantial uncertainty about the territorial scope of the 10c-1 reporting obligation. This change in the final rule is intended to clarify the scope of the reporting requirement and ensure that all significant securities lending transactions are captured in the reporting system.

The final release introduces the concept of the “covered securities loan,” which refers to a transaction in which one person – either on that person’s own behalf or on behalf of one or more other persons – lends a “reportable security” to another person. The final release adds exclusions for:

  1. positions at a registered clearing agency that result from central counterparty services or central depository services, and
  2. the use of margin securities by a broker or dealer unless such broker or dealer lends such securities to another person.

These exceptions seem to be responsive to commenters who warned the Commission about the treatment of central clearing and loans from customer margin accounts under the proposal. According to the Commission, these exceptions “should help prevent the double counting of securities loans and support the integrity of publicly available data by excluding redundant and potentially misleading information.”[4]
 

  • “Available to loan" and "on loan" amounts: Proposed Rule 10c-1 required that by the end of each business day information concerning securities “on loan” and “available to loan” would be provided to an RNSA and made public. Under the final rule, however, the Commission seems to have been persuaded by commenters, including SIFMA, ICI, MFA, and AIMA, to remove this requirement based on concerns that daily publishing of on-loan and available-to-loan data would expose firm and customer investment strategies. The commenters also noted, consistent with proposed rule 13f-2 with respect to short sale activity, that aggregating collected data prior to publication can significantly reduce the risk of trading strategy leakage.

 

Effective Date

The final rule will be effective 60 days after being published in the Federal Register. The new rule has compliance dates determined as follows, with the first loan reporting required in roughly 26 months’ time:

  1. within four months of the effective date, an RNSA must propose rules;
  2. the proposed RNSA rules must be effective no later than 12 months after the effective date;
  3. starting on the first business day 24 months after the effective date, covered persons must report information required by the rule to an RNSA; and
  4. within 90 calendar days of the reporting date, RNSAs must publicly report information.

 

[1] As directed by the Dodd-Frank Act, the Commission proposed these rules to:

 

  • Supplement publicly available information,
  • Close data gaps in the securities lending market,
  • Minimize information asymmetries between market participants, and
  • Provide market participants with access to pricing and other material information.
     

Section 984 of the Dodd-Frank Act provides the Commission with the authority to increase transparency, among other things, with respect to the loan or borrowing of securities.  It also mandates that the Commission promulgate rules designed to increase the transparency of information available to brokers, dealers, and investors. 

 

[2] The SEC leaves it to the RNSA to define exactly what time is the “end of the business day,” “morning of the business day,” or what holidays should not be considered a “business day,” to give an RNSA the discretion to structure its systems and processes as it sees fit and implement its rules accordingly. (see footnote 72 in the Final Release).

 

[3]  A reportable security is a security for which information is already reported or required to be reported to existing reporting regimes.

[4] See Final Release, p. 86.

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