Clearly, the SEC is not superstitious as it announced this past Friday the 13th major changes for securities lending via the adoption of new Rule 10c-1a. I think the industry is hoping the changes may help securities firms make the most of whatever good luck comes their way.
In its announcement, the SEC focused on a new requirement that “certain persons” will need to report information “about securities loans to a registered national securities association (RNSA) and require RNSAs to make publicly available certain information that they receive regarding those lending transactions. The rule is intended to increase the transparency and efficiency of the securities lending market.”
The SEC explains in its fact sheet that a new level of transparency is needed for securities lending operations.
“Parties to securities lending transactions are not currently required to report the material terms of those transactions. The lack of public information and data gaps create inefficiencies in the securities lending market and make it difficult for borrowers and lenders to ascertain — and to know whether the terms of their loans are consistent with — market conditions,” according to the SEC.
“Rule 10c-1a will provide market participants with access to pricing and other material information regarding securities lending transactions in a timely manner. Further, the rule will provide regulators with information for their market oversight functions,” the SEC adds.
By the way, the current and only RNSA for the securities lending data is the Financial Industry Regulatory Authority (FINRA), notes the SEC.
“Rule 10c-1a will require any “covered person” who agrees to a ‘covered securities loan’ to provide specified information to an RNSA. A covered person refers to (1) any person that agrees to a covered securities loan on behalf of the lender (intermediary) other than a clearing agency when providing only the functions of a central counterparty or a central securities depository, (2) any person that agrees to a covered securities loan as the lender when an intermediary is not used, or (3) the broker or dealer when borrowing fully paid or excess margin securities,” according to the SEC.
For further clarification, the SEC defines a covered securities loan as “a transaction in which one person — either on that person’s own behalf or on behalf of one or more other persons — lends a ‘reportable security’ to another person, with exclusions for (1) positions at a registered clearing agency that result from central counterparty services or central depository services, and (2) the use of margin securities by a broker or dealer unless such broker or dealer lends such securities to another person. A reportable security is a security for which information is already reported or required to be reported to existing reporting regimes.”
The SEC’s Rule 10c-1a also requires covered persons to provide certain terms of the covered securities loans to an RNSA, which will make the information public, such as:
- The legal name of the issuer of the securities to be borrowed;
- The ticker symbol of those securities;
- Time and date of the covered securities loan;
- Name of the platform or venue, if one is used;
- Amount of reportable securities loaned;
- Rates, fees, charges, and rebates for the loan;
- Type of collateral provided for the covered securities loan and the percentage of the collateral to the value of the reportable securities loaned;
- The termination date of the covered securities loan; and
- Borrower types such as broker, dealer, bank, customer, bank, clearing agency, and custodian.
Firms will have to provide other loan terms to the RNSA but this information will not be made public:
- The legal names of the parties to the loan;
- When the lender is a broker-dealer, whether the security loaned to its customer is loaned from the broker-dealer’s inventory; and
- Whether the loan will be used to close out a fail to deliver pursuant to Rule 204 of Regulation SHO or whether the loan is being used to close out a fail to deliver outside of Regulation SHO.
There is another crucial step: “to track the securities lending transaction, Rule 10c-1a will require an RNSA to assign each loan a unique identifier,” the SEC says.
Overall, Rule 10c-1a wants a covered person to give information to an RNSA “by the end of the day that the loan is effected or modified and that an RNSA makes certain information public not later than the morning of the next business day,” the SEC stipulates. “However, the publication of the amount of an individual loan will be published on a delayed basis. An RNSA will publish information pertaining to aggregate transaction activity and distribution of loan rates for each security.”
In his prepared statement, SEC Chair Gary Gensler referred to some of the history behind the new push for transparency.
“Securities lending played a role in the 2008 financial crisis, and, currently, the securities lending market is opaque,” Gensler says. The Dodd-Frank Act mandated more transparency for the securities lending market, and the new transparency is intended to spur more competition and fair, orderly, and efficient markets, he adds.
The new transparency combined with the complications that come with the trading day plus one day (T+1) shorter settlement is also likely to mean that there will be lots more to come in this space, and we will be happy to cover it.
More information about the SEC’s rule can be found here: https://bit.ly/46xfeTg
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