US securities lending rules back in focus
18 April 2023
S&P Global Market Intelligence’s Igor Kaplun and Matthew Chessum examine the progress of the SEC’s Rule 10c-1 proposals designed to enhance transparency for securities lending and borrowing trades in the US
Image: stock.adobe.com/eurobanks
Almost 18 months ago, on 18 November 2021, the US Securities and Exchange Commission (SEC) issued a significant proposal to implement a new reporting regime in the US for securities finance. Given the timing, heading into the Thanksgiving holiday, many industry participants had limited time to respond. Consequently, the proposal was again put forward for public consultation in the Spring of 2022, offering more time for the public to comment and for broader industry engagement to take place. Many issues were raised on the draft proposals, and the fact that the SEC allowed more time for consultation gives the industry some confidence that regulators will take the market’s perspectives into consideration when the final rules are published in 2023.
The proposed rules are designed to increase transparency in securities lending and borrowing transactions in the US. All lenders and lending agents will be required to report lending activity to a registered national securities association, such as the Financial Industry Regulatory Authority (FINRA), which will subsequently make the information public.
The quest for transparency in the securities lending market segment is nothing new and was outlined in the implementation of the Dodd-Frank Act in 2011. It has taken the SEC more than a decade to formulate a set of rules to fulfill the mandate set out in the legislation. The reporting of securities lending transactions has been live in the EU and UK since 2019 and the industry has largely come together to find a workable solution that addresses concerns over transparency, data quality and investor access.
The Securities Financing Transactions Regulation (SFTR) was the first regulation to go live and offers a blueprint for successful implementation across the board from borrowers, agents and lenders. The implementation of an efficient and cost-effective solution by IHS Markit (now S&P Global), Pirum and more than a dozen of the largest agent lenders in the industry has made this reporting regime a success across Europe. This extensive level of collaboration, common sense requirements and the extended implementation timeline were the key drivers of a successful go-live.
However, the data requested, and the timelines involved in the implementation of SEC 10c-1, are significantly different to those for SFTR. Some key differences include:
• A single sided reporting regime, instead of the dual-reporting requirement under SFTR.
• Real-time submissions within a 15-minute timeframe, instead of a T+1 requirement
• Submissions to FINRA, instead of a trade repository.
• The scope of reporting is not currently clear (repo appears to be excluded and US-domiciled firms only appear to be captured).
• The exact data requirements are not yet specified.
• Only registered broker-dealers currently appear to have a requirement to report.
• Third-party agents are not permitted to assist with reporting.
• A limited number of data fields will be reported for 10c-1, compared with 155 data fields under SFTR.
• ISO 20022 XML standards exist for SFTR, but the data standards are currently unknown for 10c-1.
• As the legislation stands, 10c-1 requires each lender to submit their on-loan balances, as well as their available-to-loan inventory, at the end of each business day.
Since the consultation process closed over 12 months ago, the industry has had time to digest the responses across all segments of the market and the issues above reflect the critical themes and points of contention that have emerged from these submissions. The question at this point is whether the SEC will modify the final rules to address these concerns or whether they will implement the proposal as it is currently written.
As it stands, the market believes that this rule has the potential to be heavily operational, time consuming and costly for most market participants. As many in the industry have noted, securities lending transactions currently settle on a T+1 basis, while the proposal requires reporting within 15 minutes of a securities lending transaction being executed or modified. Typically, securities loans are frequently modified throughout the day as borrowers’ trading needs shift. This can be due to changes to loan size, pricing, or credit concentrations, to name a few possible reasons.
It is still to be confirmed what happens between the time a securities lending order is executed and the time it settles? How many lifecycle events, corrections and modifications on that single order would need to be reported within 15 minutes? The move to a T+1 cash equity market will also mean that timelines are potentially consolidated further.
Even if firms could handle the 15-minute reporting timeframe, questions remain regarding the value that the regulator, and the market at large, will gain from these modifications. As proposed, the data reported to FINRA will be made available to the public — though at which point is still to be determined. As it stands, there is no clarity regarding how the publicly-available information will be disseminated. If FINRA does not publish the data in real time to the public, is there value in collecting that data in real time? Will the data provide any insight into the risk a counterparty is holding? The market is hoping that these questions will be addressed in the final version of the new rule.
The issue of transparency also arises with the requirement for firms to report their available-to-loan inventory. There are multiple concerns with this requirement. There are challenges, for example, with interpreting when a security is available for lending, which may generate an inaccurate picture of what is available for loan. Will this additional disclosure change the lending practices of the industry? Instead of using a US agent lender, could the buy-side firm instead rely on a UK or EU entity, which would be out of scope for SEC 10c-1 reporting obligations and instead be caught under the purview of SFTR? The market’s experience under SFTR suggests that this will not be the case — but, again, more clarity is required before these questions can be answered.
Despite the challenges faced by market participants in interpreting the current rules and managing the implementation of a new reporting regime, it is important that full consideration is given to the reasons why this requirement is being implemented.
Since the global financial crisis, additional attention has been directed to the “shadow banking sector”. This is a financial market segment that offers bank-like services, such as leverage, but without the regulatory oversight of the banking sector. Securities finance has been viewed as a part of these operations and the functioning of securities finance markets, and the build up of leverage using securities finance transactions, has come under heavy scrutiny.
A lack of transparency in these markets, and the paucity of readily available reporting to regulators, has resulted in suboptimal regulatory responses from global regulators (such as short selling bans) in their attempts to contain assumed market risk. With the advent of clear and efficient reporting, regulators will be better placed to implement the right decisions for the market during any future market events. The recent banking turmoil shows the speed at which a potential market event can unfold and how transparency is essential in ensuring market stability.
S&P Global Market Intelligence is well placed to understand the value that market data can bring to all market participants. As a provider of multiple data points to multiple clients on a minute-by-minute basis, the value of data in managing risk and decision making can be clearly documented. Transparency is also key to any well-functioning, efficient market. With the addition of the information offered to all stakeholders through the implementation of Rule SEC 10c-1, market participants will have more data points available to assist them in managing their inventories and exposures. This can only be a positive in a world where data is at a premium and is integral to any financial institution.
Many unknowns do still exist and the potential effects still need to be fully evaluated. There are clear concerns regarding implementation costs, implementation timeframes, cross-border applications and the impact that these rules will have on the competitive environment. However, the market is encouraged to show patience in evaluating the new rules until the final text is made available.
From a securities finance perspective, the industry already has experience in managing this change through the implementation of SFTR and the European Market Infrastructure Regulation (EMIR). Many US desks also offer international coverage within the firm and are, therefore, able to leverage their knowledge and existing playbooks for implementing reporting requirements for securities finance transactions in the US.
S&P Global Market Intelligence Cappitech continues to monitor this upcoming regulation and stands ready to help the industry to gather and disseminate the required information. Our experience with SFTR gives us the knowledge to facilitate the reporting requirements that will come out of this regulation. We welcome the opportunity to discuss SEC 10c-1 with market participants.
The proposed rules are designed to increase transparency in securities lending and borrowing transactions in the US. All lenders and lending agents will be required to report lending activity to a registered national securities association, such as the Financial Industry Regulatory Authority (FINRA), which will subsequently make the information public.
The quest for transparency in the securities lending market segment is nothing new and was outlined in the implementation of the Dodd-Frank Act in 2011. It has taken the SEC more than a decade to formulate a set of rules to fulfill the mandate set out in the legislation. The reporting of securities lending transactions has been live in the EU and UK since 2019 and the industry has largely come together to find a workable solution that addresses concerns over transparency, data quality and investor access.
The Securities Financing Transactions Regulation (SFTR) was the first regulation to go live and offers a blueprint for successful implementation across the board from borrowers, agents and lenders. The implementation of an efficient and cost-effective solution by IHS Markit (now S&P Global), Pirum and more than a dozen of the largest agent lenders in the industry has made this reporting regime a success across Europe. This extensive level of collaboration, common sense requirements and the extended implementation timeline were the key drivers of a successful go-live.
However, the data requested, and the timelines involved in the implementation of SEC 10c-1, are significantly different to those for SFTR. Some key differences include:
• A single sided reporting regime, instead of the dual-reporting requirement under SFTR.
• Real-time submissions within a 15-minute timeframe, instead of a T+1 requirement
• Submissions to FINRA, instead of a trade repository.
• The scope of reporting is not currently clear (repo appears to be excluded and US-domiciled firms only appear to be captured).
• The exact data requirements are not yet specified.
• Only registered broker-dealers currently appear to have a requirement to report.
• Third-party agents are not permitted to assist with reporting.
• A limited number of data fields will be reported for 10c-1, compared with 155 data fields under SFTR.
• ISO 20022 XML standards exist for SFTR, but the data standards are currently unknown for 10c-1.
• As the legislation stands, 10c-1 requires each lender to submit their on-loan balances, as well as their available-to-loan inventory, at the end of each business day.
Since the consultation process closed over 12 months ago, the industry has had time to digest the responses across all segments of the market and the issues above reflect the critical themes and points of contention that have emerged from these submissions. The question at this point is whether the SEC will modify the final rules to address these concerns or whether they will implement the proposal as it is currently written.
As it stands, the market believes that this rule has the potential to be heavily operational, time consuming and costly for most market participants. As many in the industry have noted, securities lending transactions currently settle on a T+1 basis, while the proposal requires reporting within 15 minutes of a securities lending transaction being executed or modified. Typically, securities loans are frequently modified throughout the day as borrowers’ trading needs shift. This can be due to changes to loan size, pricing, or credit concentrations, to name a few possible reasons.
It is still to be confirmed what happens between the time a securities lending order is executed and the time it settles? How many lifecycle events, corrections and modifications on that single order would need to be reported within 15 minutes? The move to a T+1 cash equity market will also mean that timelines are potentially consolidated further.
Even if firms could handle the 15-minute reporting timeframe, questions remain regarding the value that the regulator, and the market at large, will gain from these modifications. As proposed, the data reported to FINRA will be made available to the public — though at which point is still to be determined. As it stands, there is no clarity regarding how the publicly-available information will be disseminated. If FINRA does not publish the data in real time to the public, is there value in collecting that data in real time? Will the data provide any insight into the risk a counterparty is holding? The market is hoping that these questions will be addressed in the final version of the new rule.
The issue of transparency also arises with the requirement for firms to report their available-to-loan inventory. There are multiple concerns with this requirement. There are challenges, for example, with interpreting when a security is available for lending, which may generate an inaccurate picture of what is available for loan. Will this additional disclosure change the lending practices of the industry? Instead of using a US agent lender, could the buy-side firm instead rely on a UK or EU entity, which would be out of scope for SEC 10c-1 reporting obligations and instead be caught under the purview of SFTR? The market’s experience under SFTR suggests that this will not be the case — but, again, more clarity is required before these questions can be answered.
Despite the challenges faced by market participants in interpreting the current rules and managing the implementation of a new reporting regime, it is important that full consideration is given to the reasons why this requirement is being implemented.
Since the global financial crisis, additional attention has been directed to the “shadow banking sector”. This is a financial market segment that offers bank-like services, such as leverage, but without the regulatory oversight of the banking sector. Securities finance has been viewed as a part of these operations and the functioning of securities finance markets, and the build up of leverage using securities finance transactions, has come under heavy scrutiny.
A lack of transparency in these markets, and the paucity of readily available reporting to regulators, has resulted in suboptimal regulatory responses from global regulators (such as short selling bans) in their attempts to contain assumed market risk. With the advent of clear and efficient reporting, regulators will be better placed to implement the right decisions for the market during any future market events. The recent banking turmoil shows the speed at which a potential market event can unfold and how transparency is essential in ensuring market stability.
S&P Global Market Intelligence is well placed to understand the value that market data can bring to all market participants. As a provider of multiple data points to multiple clients on a minute-by-minute basis, the value of data in managing risk and decision making can be clearly documented. Transparency is also key to any well-functioning, efficient market. With the addition of the information offered to all stakeholders through the implementation of Rule SEC 10c-1, market participants will have more data points available to assist them in managing their inventories and exposures. This can only be a positive in a world where data is at a premium and is integral to any financial institution.
Many unknowns do still exist and the potential effects still need to be fully evaluated. There are clear concerns regarding implementation costs, implementation timeframes, cross-border applications and the impact that these rules will have on the competitive environment. However, the market is encouraged to show patience in evaluating the new rules until the final text is made available.
From a securities finance perspective, the industry already has experience in managing this change through the implementation of SFTR and the European Market Infrastructure Regulation (EMIR). Many US desks also offer international coverage within the firm and are, therefore, able to leverage their knowledge and existing playbooks for implementing reporting requirements for securities finance transactions in the US.
S&P Global Market Intelligence Cappitech continues to monitor this upcoming regulation and stands ready to help the industry to gather and disseminate the required information. Our experience with SFTR gives us the knowledge to facilitate the reporting requirements that will come out of this regulation. We welcome the opportunity to discuss SEC 10c-1 with market participants.
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