New US Securities and Exchange Commission (SEC) proposals for a securities lending trade reporting regime have the potential to turn global securities financing transaction (SFT) reporting on its head. The proposals introduce near real-time transparency to SFT markets, while significantly reducing the operational burden on market participants to report their trades. On the flip side, get it wrong and we could see a mass exodus from the US securities lending market, a significant reduction in liquidity and higher financing costs affecting wholesale capital markets in the United States.
The SEC shows its hand
It was likely to be only a matter of time under President Biden’s administration before US regulatory attention turned to SFT data collection under the 2015 Financial Stability Board (FSB) mandate. To date, the only element of Standards and Processes for Global Securities Financing Data Collection and Aggregation (FSB 2015) implemented in the US was the Office of Financial Research requirement. This was introduced in October 2019 for central clearing houses (DTCC in particular) to report details of centrally cleared repo transactions to the Federal Reserve Bank of New York on a business day+1 basis – a significant but small subset of the overall US SFT market. Amidst much more comprehensive reporting requirements in Europe and Japan, the SEC has chosen now to show its hand.
What’s being proposed?
In summary, this proposal is in a moderately late stage of development and seems highly likely to come to fruition. Plans are afoot for any lenders, oft represented by agent lenders or broker dealers to report basic details (12 fields) in relation to their securities lending transactions and any modifications to a Registered National Securities Association (RNSA) – almost certainly the Financial Industry Regulatory Authority (FINRA), within 15 minutes of execution. Lenders are also required to report details of the total amount of securities available to lend and the total amount of securities on loan by end of day each business day.
More transformational are plans for RNSAs to publish details of securities loans, potentially on an intraday basis (ticker tape style). In particular, proposals include publishing the legal name of the issuer of the securities to be borrowed, the ticker symbol of those securities, time and date of the loan, name of the platform or venue (if applicable), amount of securities loaned, rates, fees, charges and rebates for the loan (as applicable), type of collateral provided for the loan, percentage collateralisation of the value of the loaned securities, termination date of the loan (if applicable) and borrower type (e.g. broker, dealer, bank, customer, clearing agency, custodian). In addition, aggregated information on securities on loan or available to loan would also be published on a timely basis, likely the following business day.
The reporting obligation is intended to be far more timely (within 15 minutes of execution or a modification being made) but with far fewer fields (12 fields for a transaction report) than existing regimes such as SFTR in Europe. If SEC rule 10c-1 reporting of securities lending transactions works (with flaws ironed out and without unintended consequences), then it is likely to prove revolutionary and could prove quite transformative of regulatory regimes across the globe. It puts end investors, transparency and market efficiency first, is operationally (comparatively) light/low cost, while meeting both the micro surveillance as well as macro systemic aims of SFT reporting regimes.
The pros of this proposal are:
- The intention to eliminate pricing and security availability (for loan) information asymmetry between broker dealers, agent lenders, beneficial owners, borrowers and end investors in the securities lending market. The primary focus is in providing market transparency and creating a level playing field, enabling all market participants to understand market conditions and ensure best execution
- Single-sided reporting is proposed by lenders only (who are seen as closest to the data – reducing the regulatory burden)
- The SEC have stated that the reporting would be a means to achieve in-depth monitoring of lending activity and surveillance of securities markets, enable the identification of the build-up of risk by market participants, provide colour on broker-dealer strategies to source securities for customer lending and cover for settlement fails. Furthermore, the SEC expect to build a greater understanding of investor behaviour in the securities lending market and the broader securities market more generally
- Reports require just 12 simple, precise fields to populate at the trade level. Even fewer fields are required for end of day position and availability for loan reporting.
- Beneficial owners and securities lenders can be a shy bunch. A sizeable proportion of beneficial owners are established or domiciled outside the US and subsequently may take fright at the level of transparency on offer and withdraw from the market entirely, lend in the UK, EU or a jurisdiction not subject to such transparency or simply execute equivalent, unpublished repo transactions instead
- The domestic US securities lending market may in part or on a larger scale migrate to the repo market, where economically equivalent transactions can be executed. A large proportion of these repo transactions, under current rules, would not be subject to any reporting requirements or transparency
- 15 minute reporting, presumably proposed because the majority of TRACE securities trade reports to FINRA are required within 15 minutes, is likely to prove both challenging and optimistic in the comparatively manual and less automated securities lending market.
This regulation is set to develop very quickly from here, with the SEC inviting comments and answers to the 97 questions posed in the consultation by 7 January 2022 (30 days after its publication). They have stated that a decision will be made concerning the collection of information between 30 and 60 days after publication of the consultation. This regulation looks set to be one, if not the biggest focus of SFT market attention in 2022, certainly in the US, if not throughout the world. It may well go ahead in close to its current form but we suspect that for the reporting requirement to be truly successful (and not result in damaging unintended consequences) then it will have to be extended to the repo market.