The SEC proposed a rule that would impose extensive reporting requirements on any individual loaning a security. The SEC stated that the proposed rule is intended to enhance the transparency of the securities lending market as the information available to regulators and the public on this market is limited.
Under proposed SEA Rule 10c-1 ("Securities lending transparency"), securities lenders would have to report to FINRA certain terms of their transactions, within 15 minutes of the trade, which FINRA would then make public.
The terms that a securities lender would have to provide FINRA include:
- the legal name of the issuer of the relevant securities and its ticker;
- the time and date of the loan;
- the name of any platform or venue used;
- the number of securities loaned;
- loan rates, fees, charges and rebates;
- what collateral was provided for the loan and what percentage of the collateral was "provided to the value of the loaned securities";
- the loan's termination date; and
- the type of borrower.
The proposed rule would also require securities lenders to provide FINRA with information that will not be made public, including:
- the legal names of the loans' parties;
- if the lender is a broker-dealer, whether the security loaned is from the broker-dealer's inventory; and
- if the loan will be used to close out a failure to deliver, pursuant or not pursuant to Regulation SHO.
The proposed rule would also require that information regarding securities on loan or available to loan be provided to FINRA, which would then make the information public in an aggregated manner.
Comments on the proposed rule must be received within 30 days of its publication in the Federal Register.
SEC Chair Gary Gensler praised the proposal as a step in furtherance of the SEC's mission to improve market transparency and competition.
Commentary Steven Lofchie
The requirement to report information in such significant detail as to securities lending will make for a huge change in the market.
The proposing release asserts that the transparency requirements will serve to drive down the costs of short selling. It is also reasonable to ask whether the requirements of the rule will drive more smaller lenders and market participants away from the activity as the requirements impose another significant technology cost.
One aspect of the rule, assuming it proceeds, that likely should be changed is the requirement that securities lending information should be reported within 15 minutes of any securities loan. It is not obvious that this is either practical or particularly valuable. It should be sufficient that information would be reported end-of-day, or perhaps with a one day or more lag. The mechanics and pricing of a securities loan work differently from those of a cash market trade or from entry into a swap, and a good volume of securities lending likely is effected through ordinary operational processes that operate at the end of the trading day.
Market participants should be aware that this rule is not limited to broker-dealers. The requirement applies to "any person that loans a security" including banks, insurance companies, investment companies, and natural persons. There is no discussion in the proposal of how the requirement will apply to foreign persons lending to U.S. persons.
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