Sunday, November 21, 2021

SEC Proposes Sweeping Securities Lending Disclosure Rules

Bringing Securities Lending Out of the Dark.

Author: David Schwartz J.D. CPA

On November 18, 2021, the Securities and Exchange Commission (SEC)  proposed broad disclosure rules intended to "provide transparency in the securities lending market." As directed by the Dodd-Frank Act[1], the Commission proposed these rules to:

  1. Supplement publicly available information,
  2. Close data gaps in the securities lending market,
  3. Minimize information asymmetries between market participants, and
  4. Provide market participants with access to pricing and other material information.

Further, the data elements proposed to be collected are intended to provide regulators with the information necessary to perform effective market surveillance. "This proposal would bring securities lending out of the dark," according to SEC Chair Gary Gensler.


Reporting by all lenders and their agents.


Proposed Exchange Act Rule 10c-1 would require all lenders to report within 15 minutes of clearing a list of material terms of each securities lending transaction to a "registered national securities association," (RNSA) namely, the Financial Industry Regulatory Authority (FINRA). In turn, FINRA would make some of this information available to the general public.[2] In addition, the proposed rule would require lenders to report at the end of each trading day the total number of shares they have lent in each security and the number of shares they have available to borrow. The focus of proposed Rule 10c-1 is on lenders only. 


"The Commission preliminarily believes that any person that loans a security on behalf of itself or another person, which would include banks, insurance companies, and pension plans, should be required to provide the material terms of lending transactions to ensure that proposed Rule 10c-1 is appropriately designed to increase the transparency of information available to brokers, dealers, and investors, with respect to the loan or borrowing of securities." [3]


Although the proposed rule places an obligation on "each person that loans a security on behalf of itself or another person to provide information to an RNSA," if a lender/beneficial owner is using a lending agent, the lending agent would have the obligation to provide the 10c-1 information to an RNSA on behalf of the lender/beneficial owner.[4]


Public and Non-public Disclosures


The disclosures that would be required for each lending transaction include (1) information identifying the securities lent (i.e., the name of the issuer and ticker symbol, or ISIN, or CUSIP); (2) the date and time the transaction took place; (3) how it was executed (which platform, if any); and (4) terms of the lending transaction, including the type and amount of collateral used, the associated rebate rates, fees, and charges, duration of the loan, and type of borrower. The Commission proposes that all of this information would be made available to the public through FINRA. The Commission also proposes to collect some information that would not be publicly disclosed. This includes the legal names of the parties to the loan, whether the loan will be used to close out a fail to deliver, and whether a broker-dealer has loaned to a customer from its own inventory. 


A different approach from the EU.


The SEC has taken a somewhat different approach to securities lending disclosure than their regulatory counterparts in Europe. Foremost is scope. The SEC's proposal is strictly limited to securities lending transactions. SFTR applies broadly to all securities financing transactions, including repurchase transactions and secured loans (repos), buy/sell-backs, securities lending and borrowing, commodities lending and borrowing, and margin lending. As proposed, Rule 10c-1 would apply only to lenders or their agents. In contrast, the EU's Securities Finance Transaction Regulation (SFTR) requires reporting from both borrower and lender counterparties (explicitly excluding agents), introducing some messy reconciliation and double-counting issues that the SEC has avoided with its approach.[5] Also, the SEC proposes to collect only a dozen or so material data points for each transaction, while SFTR requires 153. The Commission also chose to make more of the data collected available directly to the public and more quickly. Raw SFTR data is only available to approved trade repositories and regulators, and the public can only access aggregated data on a rolling monthly basis. 


SEC responds to its mandate under Dodd-Frank.


The specific approach taken by the SEC is a direct response to the mandate given to the agency under Section 984b of the Dodd-Frank Act. The language of the statute required the Commission to "promulgate rules designed to increase the transparency of information available to brokers, dealers, and investors, with respect to loan or borrowing securities."  While SFTR focuses on providing regulators information to monitor the concentration of leverage and potential points of failure, the SEC's proposal follows its mandate to provide better data to the broader audience of investors, market participants, and regulators. 


Securities lending transparency and GameStop. 


The Commission intends the proposed securities lending disclosure to give both market participants and regulators a better handle on market conditions like those present in last year's GameStop squeeze.[6]  As New York Stock Exchange Chief Operating Officer Michael Blaugrund said in recent Congressional testimony,

 "[a] system that anonymously published the material terms for each stock loan would provide the necessary data to understand shifts in short-selling activity while protecting the intellectual property of individual market participants." [7]


A global move to more securities lending transparency.


The Commission's proposal is consistent with the FSB's and G-20's policy objectives for securities financing transaction (SFT) data collection. In November 2015, the FSB published the consultation paper, "Standards and Processes for Global Securities Financing Data Collection and Aggregation," building on policy recommendations to address financial stability risks in SFTs, particularly recommendations to improve the transparency of securities financing markets. The FSB followed up with the 2018 publication of "Securities Financing Transactions Reporting Guidelines" with greater specification of the kinds and types of SFT data desired. Capturing position-level data has been the focus since the inception of the SFT data collection initiative. The Commission's proposal is a step toward the FSB's vision for enhancing the ability of regulators "to oversee [securities finance transactions] that are vital to fair, orderly, and efficient markets." [8]


A short 30-day comment period.


Given the scope and potential effects of this proposal, comments will no doubt be plentiful. The Commission has opted for a short 30-day comment period. The abbreviated comment period indicates that the SEC would like to move on finalizing the regulations quickly. It may also suggest that the Commission does not anticipate making any significant changes to the proposal. 



[1] Pub. L. 111-203, 984(b), 124 Stat 1376 (2010) 


[2] The Proposing Release requests explicitly feedback on how much data reported to FINRA should be made public. Proposing Release Para. 70 at p. 75.


[3] Proposing Release at pp. 22-23. 


[4] Proposing Release at p. 78.


[5] Because of its broad scope and the transnational nature of securities finance, it can be challenging to determine which parties fall in the scope of SFTR reporting. See e.g., ICMA, "Are you obliged to report under SFTR? A checklist for non-European firms," Dec. 2020. 

In general, the following counterparties are considered "in-scope" of SFTR:

  • European Union (EU) counterparties
  • Non-financial counterparties
  • Financial counterparties
  • Any branches of EU entities domiciled outside the EU
  • Any branches of non-EU entities located in the EU


In addition, SFTR interpretations have created some broad exclusions freeing large numbers of counterparties from the scope of SFTR. For example, the European Commission and ESMA have confirmed that non-EU hedge funds (i.e., AIFs not established in the EU), are not subject to the reporting obligations of SFTR, even if their manager/advisor is authorized or registered under AIFMD, "except in respect of SFTs concluded in the course of the operations of a branch in the Union of the non-EU AIF", which will rarely apply.


[6] Notably, FINRA recently proposed Regulatory Notice 21-19, expanding short-selling disclosure. Short Interest Position Reporting Enhancements and Other Changes Related to Short Sale Reporting


[7] See Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, Part II: Hearing Before the H. Comm. on Fin. Serv., 117th Cong. (2021). 


[8] Proposing Release, p. 9.