While there are numerous regulations that securities lending market participants are keeping an eye on, the Securities and Exchange Commission’s 10c-1 is going to be spotlighted during our upcoming Finadium Investors in Securities Lending conference. Here’s what you should already know about this “transformational” legislation from our FISL conference speakers.
Rule 10c-1 aims to provide transparency in the securities lending market and increase availability of information regarding transactions. The final version of the rule is yet to be determined, but one thing’s for sure: it is not going away, said Tamela Merriweather, senior vice president and assistant general counsel at Northern Trust.
Merriweather has a decade of experience at Northern Trust, during which she’s also become involved with the Securities Lending Council of the Risk Management Association at a time when the Dodd-Frank Act pushed the industry into major reforms. The Council has been one of the key tools for the industry, and particularly for beneficial owners, to understand the implications of the Act as well as similar rules globally, she noted.
10c-1 is promulgated under a Dodd-Frank section that tasks the SEC with improving transparency in the markets for securities lending. Over the course of several years, the industry put forward its perspective via conferences, direct meetings with regulators and authorities, and within the context of research projects to help develop a regulatory transparency regime for securities lending.
The result in the form of 10c-1 came “as a bit of a surprise”, and numerous market participants have expressed concern over the short period of time made available to comment on the rule and propose changes, said Merriweather. Still, there is industry-wide optimism that regulators will accommodate industry perspectives when the final rule drops.
For beneficial owners and agent lenders, one of the top concerns relates to the timing of trade reporting, which is within 15 minutes of a loan. This is “incongruous” with the way securities lending works, and there is a risk that it will create errors and result in poor data quality, she explained.
Another major sticking point is that the costs are going to land on the lending agents, said Merriweather: “There’s a great deal of concern that shifting the cost burden to lenders and lending agents means that you’ll ultimately have a drag on profitability of some types of essential trades, which would then impact the smooth functioning of the markets.”
There are also concerns about the definitions associated with the extraterritorial nature of the rule, and it is unclear for now which securities and market participants are going to end up in scope, she added.
Short selling is not securities lending
10c-1 is not taking shape in a vacuum, and questions have been raised over how it combines with other incoming regulations overall, and particularly the SEC’s proposed rule 13f-2 on short sale disclosures. It seems to be the case, looking at the combination of rules, that the SEC is interested in short selling transparency specifically rather than the securities lending market in general.
“We [custodians] are not engaged in the part of the transaction that provides the demand, we fulfil the demand,” explained Merriweather. “We appreciate when you are looking at the full lifecycle of market activity, securities lending in some ways fulfils shorting activity, but it also has other benefits to the market.”
When it comes to the cost of reporting, borrowers have had their fair share of obligation from other regimes, so the SEC has tapped lenders and agent lenders this time around. However, that is also part of a narrow view of the role of securities lending and doesn’t take into account that there are other available means to short, such as synthetic lending, peer-to-peer or repo trading activities.
“If the definitions are not sound, we may in fact just end up squeezing the securities lending market and then losing transparency to these other types of transactions that take its place,” she said.
Data and analytics
There are widespread expectations that regulators will listen to industry concerns and take into account comments in rulemaking. And while market participants are keeping a keen eye on that progression, so too there is anticipation of a future with more data. Equilend’s team has been closely monitoring 10c-1 and industry responses to it. Overall, the firm is supportive of the proposal, and furthermore expects to be well placed to be tapped as a reporting agent because two of its entities are registered with and regulated by the SEC and are FINRA members, said Nancy Allen, head of Data and Analytics at EquiLend.
“Already today we are consuming a lot of the data that is required,” she said. “We have the technology and connectivity in place to support intraday, or T+1 reporting, using existing services and pipes.”
Looking further into the future, Allen also believes there will be significant potential for advanced analytics once 10c-1 rolls out: “From a beneficial owner perspective, that means we should be able to offer better benchmarking services, with more valuable and a deeper level of analysis and revenue attribution…[It is] an opportunity for the market as a whole, and specifically for beneficial owners, to better understand supply-demand pricing and the impact of collateral on their trades and that pricing.”
Tamela and Nancy will be joining their colleagues from S&P Global Market Intelligence, Citi and Clear Street on a panel focused on Progress in Technology, Data and Transparency for Beneficial Owners at FISL 2022.