Make no mistake. The new 10c-1 disclosure proposal by the SEC is an Investor Protection Rule on steroids. It is also a profound escalation of regulatory support for Investor Self-Protection. Nothing less than a near real-time, stock loan ticker will result if enacted, revealing U.S. loan rates and liquidity to the investing public for the first time in history.
More than one right of protection for U.S. investors is strengthened by the rule, which if enacted will cost banks $375 million in SEC-estimated compliance and development costs. The sweep of disclosure is unprecedented. Procedural reforms for service providers are implied strongly. No mention is made of the contentious proxy-voting or cum-ex frauds in the disclosure, but the data will be readily available for auditors in compliance -- and for litigators in discovery.
The Commission believes that an “information asymmetry” exists in the securities financing markets. Principals in the market for loans, as well as all other investors, as explained by the Commission, are entitled to see terms, liquidity metrics, and even the “signals” revealed within comprehensive disclosures of loan data.
“[P]roviding access to timely, granular information about certain material terms of securities lending transactions would allow investors, including borrowers and lenders, to evaluate not only the rates for such transactions, but also any signals that rates provide, e.g., that changes in supply and demand for a particular security may indicate an increase in short sales of that security.” [Proposal, p.11, emphasis added]
Signal access is now an enumerated right for investors. If this proposal is enacted, delivering timely data with corrections for signal distortion is going to be one of the big challenges for service providers and commercial data vendors. For their part, many beneficial owners will welcome the new disclosures.
“You scratch the data and find something, then go back to your provider and say, ‘You're a little slow to re-rate the middle range of specials.’ I found out that some of my providers were a bit slow to re-rate those loans. But you have to go on an adventure to find those items, they're not handed to you.” [EU lender, RMA Panel, 27 OCT 2020].
One need not read too far between the lines to see the direction implied by this new SEC disclosure mandate. It is clear: the Commission is scoping out the quantitative layer of an IT data lake to be used a) by regulators for systemic monitoring; b) by investors for self-protection and c) by providers for new services. When acting as a Market Posse, investors will finally have the data needed to protect the integrity of their marketplace and manage their own risks.
As proposed, the platform would be run by FINRA staff and legacy IT systems. [Note: data vendors will no doubt want the contract to be bid out.] By enabling the compilation of key stock loan data, the Commission is giving asset owners the gift of a data model for a stock loan registry founded on a data trust, without saying it directly.
In its consultation, the SEC is asking 97 questions of the public. In turn, beneficial owners should be asking the following questions of their service and data providers:
- Can service providers accurately report locked-in loans within 15 minutes?
- Even sourcing the same data, can vendors match the FINRA value proposition?
- Should the SEC share the costs, perhaps through a public-private partnership?
- Given a safer market, should the FRB offer bank agents RWA relief on default indemnities as an offset to compliance costs?
- How real is the potential for a U.S. government data monopoly after mass exits by global data and service providers?
- This rule sets new reporting standards. What could be next?