The clamour for transparency
07 December 2021
Evaluating the potential impact of US Exchange Act Rule 10c-1, FIS’ David Lewis warns that the ambition to provide data to create a level playing field for all players may, in fact, make it harder for some
Image: stock.adobe.com/JrCasas
Buses. Never one in sight when you need one, then there are three at once. Or so the saying goes, at least in London. Regulations seem to be starting to exhibit the same behaviour. Rarely seen loitering around the securities lending markets for years, regulations are now coming thick and fast — relatively speaking for regulations that is.
The latest arrival on the regulatory scene is the proposed rule for Exchange Act Rule 10c-1 and, given it was announced just a few weeks ago, it has created perhaps more column inches across a wider variety of publications than many of its predecessors. This may be, in part, due to it having one of the longest lead ins for any new regulation, being based on the Dodd Frank Act which was first published back in 2010, where enhanced transparency was identified as a requirement for the markets post the financial crisis.
Searching for information on the web returns commentary and analysis from all points along the spectrum, from the Wall Street Journal and the Financial Times to the seminal sportsgrindentertainment.com. Reassurance is given by the author of the last example as they commit to bringing “relevant and unaltered sports news to the general public”. While this is a slightly facetious comment, it is designed to make a point about the gamification of financial markets.
Opaque market?
As a data provider in this space, it might be assumed that FIS would naturally be against any potential threat to the services we deliver, services that have been bringing intraday transparency to the global market for over 15 years. A publicly available and free service that, at least in its currently proposed form, indicates that it will provide same-day transparency to the market for all US securities is surely a threat to us and our esteemed competitors, isn’t it?
If that were the case, of course, we might be critics. Far from it: transparency is key to effective markets and, on that point, we certainly agree with the idea that more data transparency is a good thing. However, there are other aspects where we might respectfully disagree and raise concerns.
Looking at the stated objectives of this newly proposed rule, it is intended to bring transparency to “an opaque market”. The opening line of the US Securities and Exchange Commission’s (SEC’s) fact sheet describes the desire to “increase transparency and efficiency in the opaque securities lending market”, which points a little toward being presumed guilty before proven otherwise. Had that statement been made in 2000, it would have had some legitimacy. However, the three leading data providers in this market have independently and collectively been delivering significant levels of transparency since at least 2002.
The proposal does go on to point out that this information is, broadly, on a give-to-get model which means that you must be an active market participant to be able to meet that barrier to entry and therefore benefit from the data pool it buys you access to. On that basis, some would argue that they are being kept from seeing information that may be pertinent to their own investment strategies — information that institutions and professionals have access to, but the retail investor does not. This, therefore, may be seen to be unfair.
There is some credence to that argument, but there are also a plethora of web applications and data services that digest and process that information for the retail client. There are multiple examples of low-cost trading data platforms that use short interest data as part of their market analytics and research services. These can be accessed directly or through apps on the main platform providers, such as Bloomberg or Refinitiv for example, servicing the serious retail investor. Other platforms are available of course!
As a global data provider, processing millions of transactions per day across trillions of dollars of loans, FIS is more than aware of the kind of processing power required to make sense of this volume of data. Having a regulator publish such data for free does not resolve the issue of equal access to data. Instead, it dangles the promise of it in front of retail investors, who will then have to invest in some impressive hardware to make sense of the data.
SFTR experience
It is disappointing to see that the same mistakes are being repeated here as have been seen in the initial designs of the Securities Financing Transactions Regulation (SFTR). For example, the requirement to deliver collateral data alongside the loan details misses the reality of a loan transaction and how counterparties exchange collateral. In the US, 50 per cent of loans are against cash collateral, according to the ISLA Market Data Report (June 2021), making that process easier for half the activity, but with half the data being significantly more problematic. This will arguably extend beyond 50 per cent of loans if equities are accepted as collateral in the future, something that has been discussed for some time but has yet to materialise. Market participants will also be more than aware of the impact collateral quality has on the borrowing costs of a given security, adding another layer of complexity to the data to be ingested and processed.
One thing that has been learned from the SFTR experience is the advantage of single-sided reporting. As currently proposed, only lenders will be required to submit transactional data within 15 minutes of trade execution, and that means all lenders. This may be a difficult undertaking for some lenders, particularly in the retail space, or for smaller organisations that do not use agents to lend on their behalf and shoulder the reporting burden for them. It has been indicated that the costs of this initiative will be borne by the lenders. More information is needed on this part of the proposal before some may consider ceasing lending due to the additional costs incurred.
Two seemingly innocuous statements also appear on the SEC fact sheet. First, all trade modifications should be reported through the life of the loan. While this is, of course, a valid means to track how rates and borrowing costs change, it will add significant complexity to anyone looking to derive accurate information from the depth of data. Second, lenders will be required to report “securities that are available to loan”. It is not clear whether this is also data that will be made public, but some contributors may find this a step too far and, again, consider this to be another reason to stop lending their securities.
Transparency is a prerequisite for efficient markets. That is a broadly accepted fact, but it is also true that the wrong indications or deductions can create risk and liability. It is incorrect to say that the successful processing of millions of trades and tens of millions of lifecycle events each day is beyond the ability of every retail investor that tries to assimilate and include it in their own trading strategies and analysis. But when it goes wrong, as it did for many with the gamification of GameStop shares, who will carry the liability for loss? It may be that the desire to provide data to level the ground for all players, in fact, makes it much harder for some.
The latest arrival on the regulatory scene is the proposed rule for Exchange Act Rule 10c-1 and, given it was announced just a few weeks ago, it has created perhaps more column inches across a wider variety of publications than many of its predecessors. This may be, in part, due to it having one of the longest lead ins for any new regulation, being based on the Dodd Frank Act which was first published back in 2010, where enhanced transparency was identified as a requirement for the markets post the financial crisis.
Searching for information on the web returns commentary and analysis from all points along the spectrum, from the Wall Street Journal and the Financial Times to the seminal sportsgrindentertainment.com. Reassurance is given by the author of the last example as they commit to bringing “relevant and unaltered sports news to the general public”. While this is a slightly facetious comment, it is designed to make a point about the gamification of financial markets.
Opaque market?
As a data provider in this space, it might be assumed that FIS would naturally be against any potential threat to the services we deliver, services that have been bringing intraday transparency to the global market for over 15 years. A publicly available and free service that, at least in its currently proposed form, indicates that it will provide same-day transparency to the market for all US securities is surely a threat to us and our esteemed competitors, isn’t it?
If that were the case, of course, we might be critics. Far from it: transparency is key to effective markets and, on that point, we certainly agree with the idea that more data transparency is a good thing. However, there are other aspects where we might respectfully disagree and raise concerns.
Looking at the stated objectives of this newly proposed rule, it is intended to bring transparency to “an opaque market”. The opening line of the US Securities and Exchange Commission’s (SEC’s) fact sheet describes the desire to “increase transparency and efficiency in the opaque securities lending market”, which points a little toward being presumed guilty before proven otherwise. Had that statement been made in 2000, it would have had some legitimacy. However, the three leading data providers in this market have independently and collectively been delivering significant levels of transparency since at least 2002.
The proposal does go on to point out that this information is, broadly, on a give-to-get model which means that you must be an active market participant to be able to meet that barrier to entry and therefore benefit from the data pool it buys you access to. On that basis, some would argue that they are being kept from seeing information that may be pertinent to their own investment strategies — information that institutions and professionals have access to, but the retail investor does not. This, therefore, may be seen to be unfair.
There is some credence to that argument, but there are also a plethora of web applications and data services that digest and process that information for the retail client. There are multiple examples of low-cost trading data platforms that use short interest data as part of their market analytics and research services. These can be accessed directly or through apps on the main platform providers, such as Bloomberg or Refinitiv for example, servicing the serious retail investor. Other platforms are available of course!
As a global data provider, processing millions of transactions per day across trillions of dollars of loans, FIS is more than aware of the kind of processing power required to make sense of this volume of data. Having a regulator publish such data for free does not resolve the issue of equal access to data. Instead, it dangles the promise of it in front of retail investors, who will then have to invest in some impressive hardware to make sense of the data.
SFTR experience
It is disappointing to see that the same mistakes are being repeated here as have been seen in the initial designs of the Securities Financing Transactions Regulation (SFTR). For example, the requirement to deliver collateral data alongside the loan details misses the reality of a loan transaction and how counterparties exchange collateral. In the US, 50 per cent of loans are against cash collateral, according to the ISLA Market Data Report (June 2021), making that process easier for half the activity, but with half the data being significantly more problematic. This will arguably extend beyond 50 per cent of loans if equities are accepted as collateral in the future, something that has been discussed for some time but has yet to materialise. Market participants will also be more than aware of the impact collateral quality has on the borrowing costs of a given security, adding another layer of complexity to the data to be ingested and processed.
One thing that has been learned from the SFTR experience is the advantage of single-sided reporting. As currently proposed, only lenders will be required to submit transactional data within 15 minutes of trade execution, and that means all lenders. This may be a difficult undertaking for some lenders, particularly in the retail space, or for smaller organisations that do not use agents to lend on their behalf and shoulder the reporting burden for them. It has been indicated that the costs of this initiative will be borne by the lenders. More information is needed on this part of the proposal before some may consider ceasing lending due to the additional costs incurred.
Two seemingly innocuous statements also appear on the SEC fact sheet. First, all trade modifications should be reported through the life of the loan. While this is, of course, a valid means to track how rates and borrowing costs change, it will add significant complexity to anyone looking to derive accurate information from the depth of data. Second, lenders will be required to report “securities that are available to loan”. It is not clear whether this is also data that will be made public, but some contributors may find this a step too far and, again, consider this to be another reason to stop lending their securities.
Transparency is a prerequisite for efficient markets. That is a broadly accepted fact, but it is also true that the wrong indications or deductions can create risk and liability. It is incorrect to say that the successful processing of millions of trades and tens of millions of lifecycle events each day is beyond the ability of every retail investor that tries to assimilate and include it in their own trading strategies and analysis. But when it goes wrong, as it did for many with the gamification of GameStop shares, who will carry the liability for loss? It may be that the desire to provide data to level the ground for all players, in fact, makes it much harder for some.
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