As our annual Finadium Investors in Securities Lending (FISL) conference approaches, we highlight some of the key regulatory themes facing the market with our industry experts from J.P. Morgan and DTCC, who will be speaking on the “Where is the SEC heading with securities finance regulation?” panel.
There is a significant laundry list of regulations coming down the wire from the SEC that will impact securities finance: the much discussed Basel III Endgame being one, and an update to the safeguarding rule being another, said Rebecca Goldenberg, head of Agency Securities Lending Finance Product for the Americas at J.P. Morgan.
The latter is on the radar because it will impact any securities lending business attached to a bank and could change how client cash assets are segregated and monitored on a custodian’s balance sheet. It’s expected that SEC chair Gary Gensler will want to get it over the line before the end of 2024, she noted.
Specific to securities lending, markets will be closely watching how T+1 unfolds after the end-of May go-live and preparing for the January 2026 start of Rule 10c-1, she added. In addition, US Treasury Clearing, with respect to the clearing of US Treasury repo through Fixed Income Clearing Corp, is occupying significant attention as this mandate will come into force at the end of Q2 2026.
10c-1 aims to provide transparency into the full lending chain – from the initial loan all the way through to the initial borrower and onward loans, with the onward end seemingly the main area of concern for prime brokers and borrowers related to reporting and public disclosure of securities lending, or 10c-1a, leading to legal challenges. Moreover, reporting would be under the aegis of FINRA – but there will be a window for comment following the release of the FINRA reporting requirements.
“Do we stop being ready, or do we anticipate a pause? Everyone’s watching how this plays out, but I don’t think it changes our need to be ready,” she said.
As a big market player, J.P. Morgan is well poised for the array of incoming regulations, but with one after another continuing to come online, industry-wide, firms are juggling a lot of resources. The overall net effect of these dynamics could be described as a general overhang of uncertainty.
“Something that’s in the back of everybody’s mind is — we may be ready, our line of business may be ready, our bank may be ready, but is everyone else going to be ready? Can we rely on all of our counterparts and all of the relationships that we have in the market, for them to be ready as well?” she said.
Cumulative impact
The nearest of the rules shaking up a broad swathe of the global market landscape is T+1, and it is unlikely to be a “big bang” approach from regulators in terms of evaluating the outcome of that change, said Christian Sabella, managing director and deputy general counsel at DTCC.
“When the switch does happen in May, barring any unexpected immediate consequences that are observed, there is going to be a watchful waiting period in the months and weeks to follow to see how the market is easing into this,” he said.
Sabella spent some 10 years at the SEC, and he noted that based on his experience with transparency regulations, this longer-view perspective will be of interest as T+1 meets implementation of another new SEC rule, Exchange Act Rule 10c-1, which is intended to promote more transparency in the securities lending market. Further considering Basel Endgame and the cumulative impact of rules on securities financing transactions (SFTs), he noted that DTCC’s NSCC SFT product is in part intended to deal with these types of “big atmospheric regulatory changes” in terms of helping members and their customers have options to cope with the changes.
“It’s a little bit unclear where [the Basel Endgame] initiative is going, given the strong political and comment period reaction that clearly has emerged to that rule making. So that’s another long term development to keep track of,” he said.
On a day-to-day basis, DTCC is heavily involved in the U.S. Treasury market changes as the SEC’s three-pronged regulatory approach comes into focus: one being more rigorous transparency and operational resiliency requirements for platforms facilitating treasury trading; another requiring some entities that trade treasuries to register with FINRA as dealers; and then UST and UST Repo central clearing, which is fundamental to DTCC as the central counterparty to the U.S. Treasury markets via its FICC Government Securities Division.
“Wow” moment
With the SEC currently weighing whether repo and securities lending could be interchangeable for firms getting caught up in the central clearing requirement due to cost pressures or other considerations, Sabella noted: “Bringing in more repo transactions also could indicate potential down-the-line effects in terms of market practice changing in the securities financing space, and the regulators will be watching that and thinking about how they want to react.”
He added that the industry is likely at the beginning of a new regulatory phase for securities financing regulation: “The 10c-1a transparency rule will likely serve as a baseline for policy and regulatory consideration in the future and generally when that happens, you typically see more regulation, or at least policy discussion, coming down the pipe.”
How pushback translates remains to be seen, but Sabella highlighted that the SEC comment files are significant and that litigation risk generally presents a “speed bump not accelerant”.
“Whether its T+1, or Treasury clearing or Basel Endgame, if there’s more that [market participants] have to do that results in increased costs (then) are the costs commensurate with anticipated benefits? It’s a very challenging, time-consuming, and technical analysis that must be performed these days, by firms and regulators, given the recent trend of a higher-than-likely probability that future regulation may be challenged by a litigant and the courts if that cost/value analysis is perceived to be out of balance,” he said.
J.P. Morgan’s Goldenberg stressed however that market participants have already overcome major hurdles of a demanding US regulatory agenda, coordinated across product, technology, operations and legal teams: “As an industry, we’ve really come together (to) make sure that we’re thinking about things from a best practice perspective (so) that clients are least impacted. There has been a tremendous amount of work done these past few years, and I think we should all just give ourselves a ‘wow’ moment.”
Rebecca and Christian will be joining Jeff Himstreet from the Managed Funds Association and Ben Gong from the Federal Retirement Thrift Investment Board on the panel at FISL, which takes place in New York from May 8 to May 9. It is our 8th annual conference bringing together a broad cross-section of the industry to share expert insights on the latest and most important developments in securities lending. Registration is free for qualified buy-side firms including asset owners, asset managers, insurance firms and hedge funds.