A new disclosure data model has just been proposed by the SEC for U.S. securities lenders. Adoption of the model, called 10c-1 after the revised regulation, would be “one of the most drastic adjustments in the history of the securities lending industry,” writes Sidley Austin, a leading Wall Street law firm and advisor to broker-dealers. Previously, we have explained the proposal and intended benefits. Now we begin to analyze the proposed 10c-1 disclosure system’s value proposition. Will disclosure help more than it will cost to create and manage the network that supports the new disclosure system?
Q. Who pays?
In the model as proposed, start-up expenses for lenders and reporting agents were estimated by the SEC at US$375 million, or about 12.5% of 2020 U.S. lender-broker revenues. Ongoing costs were projected at 5% of current lender revenues. Those rates, based on SEC and industry research, represent a significant add-on to overhead in the low-margin securities lending market.
The lenders will have to pay for the 10c-1 disclosure system, one way or the other, creating a de facto subsidy to other, non-paying investors and to borrowers who will also have unfettered access to the same loan data.
Commercial vendors, despite the obvious hits to their balance sheets from commoditized data, are positioned to adapt to the new disclosure system. Only vendors currently have the network of loan feeds and reporting pipes in place, as well as the rudimentary analytics that will be needed to make sense of the public data feeds. However, that gain in data scope will come at a high cost to the vendors.
Data feeds without analytics, predicts the SEC, will no longer have any pricing power. So the vendors can no longer sell a raw feed as their baseline product. Even more than today, analytics will be their competitive distinction, not the scale of their data. Position your product line with deep analytics now, the SEC seems to be saying, or play catch up far behind.
The same will be true for the lending agents who rely on vendor reporting. Benchmarking has always been important to service providers in securities finance. Now advanced analytics will become a paramount distinction. The race is on.
Clearly, the 10c-1 disclosure system and network will be a big project for everyone, for a big outlay across the board. The disclosures anticipated by this model will extend the Commission’s reach for single-tape transparency from the consolidated equity tape (CT Plan) to the underlying loan market. This 10c-1 disclosure system will also support the industry’s march to T+1 settlement and complement FINRA’s plan for faster short sale reporting. The remodeling of the market infrastructure has begun in earnest.
Q. What are the benefits?
“The Commission preliminarily believes that the data collected and made available by the proposed Rule would 1) improve price discovery in the securities lending market and lead to a 2) reduction of the information asymmetry faced by end borrowers and beneficial owners in the securities lending market.
“The Commission also preliminarily believes the proposed Rule would 3) close securities lending data gaps, would also 4) increase market efficiency, and lead to 5) increased competition among providers of securities lending analytics services and to 6) reduced administrative costs for broker-dealers and lending programs.”
That is an impressive array of expected benefits. If the 10c-1 disclosure system delivers on these promises, lenders will praise the SEC’s initiative. If not, then the unfunded mandates in 10c-1 will be seen as a federal tax on the entire U.S. securities lending market. More ominously, the reporting of loans and identification of their principals can also light a pathway to potential transaction taxes on loans by a future U.S. Congress.
Even if the cost of compliance is not considered a tax, the proposed disclosure system might be seen by lenders as a subsidy paid to borrowers, in that the liquidity signals in the loan market data (financed by lenders) would be more valuable to hedge funds than to their lenders.
In our next post, we will outline the critical dependencies for success of the proposed 10c-1 disclosure system and identify some of the missing elements that would make the 10c-1 disclosure system more useful.
End Part 1
 In case work, experts review benchmarking products from all the data vendors. I agree with the staff’s assessment that not much differentiates the vendor datasets even today. The 10c-1 proposal suggests that a future data plan competing with a free public feed of the 10c-1 records will not be viable and can only be justified as an free add-on to a service provider’s portfolio.