Securities lending market is vital to the healthy functioning of securities markets globally. Securities lending improves market liquidity, price discovery, and enables timely trade settlement but an opaque securities lending market and limited availability of securities lending data publicly are big concerns to the regulators. In alignment with Dodd-Frank Act (DFA) mandate to SEC to increase transparency in securities lending market, SEC proposed 10c-1 rule to obligate lenders or lending agents to report securities loans and loan inventory information to a registered national securities association (RNSA). Other benefits include reduced information asymmetry, public insights on securities lending market, and enhanced surveillance by regulators.

Reporting obligations

Proposed rule places reporting obligation on lenders or lending agents, who lend on behalf of beneficial owners. A lender or lending agent can delegate the reporting responsibility to a reporting agent and only a broker-dealer can serve as a reporting agent under proposed rule. Lenders or lending agents are obligated to report securities loans to a RNSA within 15 minutes after loan effected and currently, FINRA is the only RNSA in USA.  Any modifications to the loans also need to be reported within 15 minutes of modification.

Reportable loan transaction data include data to be disseminated to public and confidential data that will be available to regulators only. The number of reportable fields are 15 and key fields include parties to the transaction, ticker symbol, venue, amount of the security loaned and rebate rate or lending fee. Additionally, lenders or lending agents are required to report security name, ticker symbol, total amount of securities on loan, and total amount of securities available to loan on daily basis to a RNSA.

RNSA is required to disseminate part of the loan transaction data to the public for insights into the securities lending market and price improvement. Also, RNSA is required to publish the aggregated amount of securities on loan and securities available to loan per security.

How 10c-1 differs from SFTR

SEC has taken a different approach from EU regulators with aim to improve transparency in the securities lending market, whereas EU regulators focused on monitoring the risk in securities finance market. Securities financing transactions regulation (SFTR) requires reporting of all securities financing transactions, dual-sided reporting by both lender and borrower, and reporting up to 155 fields depending on product. Proposed 10c-1 rule is much simpler and easy to comply with, as the scope is limited to securities loans, requires single-sided reporting, and a smaller number of fields to report.

Key industry concerns on proposed regulation

Firms supported SEC’s goal to increase transparency in securities lending market but voiced concerns on the adverse impact of the certain proposed rules on the securities lending market and significant implementation cost amid ongoing other regulatory requirements including transition to T+1 settlement in US market. Intraday reporting of securities loan transactions will significantly increase the risk of reporting and publication of incomplete and inaccurate data, surge in the number of modifications to be reported, and additional costs as opposed to end of day reporting. Similarly, proposed reporting of total amount of securities available to loan will be a grossly inflated number and publication of inaccurate data will pose risk in the securities lending market.

Impact on broker-dealers

Broker-dealers, serving as lending agent must analyze the existing securities loan booking flows on availability of all data elements required for reporting and enhance loan booking systems to capture any missing data elements. Firm’s internal systems and trader workflows need to be enhanced to capture all loan transactions with all data required for reporting on a timely basis, which would be critical if SEC finalizes the proposed reporting of loans within 15 minutes after loan effected.

The message flow between the broker-dealer and RNSA is illustrated in the below picture. Firms need to enhance the existing transaction reporting system to comply with proposed reporting requirements. Key changes include integration with source systems, generate reporting files to RNSA, and capture unique transaction identifier (UTI) for each loan provided by RNSA in the feedback files, which must be quoted in the reporting of loan modifications, if any. Also, firms must build capability to automatically capture the loan and aggregated inventory data published by RNSA and distribute to the interested consumers.

Conclusion

SEC expected to publish final rules in the near-term considering industry concerns on potential unintended consequences of certain proposed rules and scrutinizing the recommended alternative approaches by industry.  It is imperative for lending agents to watch out for final rules of 10c-1 and prioritize the required technology and operational changes to comply with the regulation.