Commenters differ on SEC’s securities lending proposals

By Jay Fishman, J.D.

The Better Markets organization and SIFMA stand out among the many persons commenting on the SEC’s rule proposals to increase transparency in securities lending, with Better Markets supporting the rulemaking pretty much as written while SIFMA requests some significant modifications. The proposals would implement Dodd Frank Act Section 984(b), by mandating that lenders of securities report certain terms of their transactions to a registered national securities association (RNSA), and further requiring the RNSA to make some of that information publicly available to investors.

The two proposals. The first proposal would create a new Exchange Act Rule 10c-1 to provide investors and other market participants with timely access to pricing and other material information about all securities lending transactions made by all lenders including banks, insurance companies, and pension plans. Additionally, lenders would need to report the following material terms (and any modifications of those terms) to an RNSA within 15 minutes of a transaction, which would then be made public no later than the next business day:

• Ticker symbol of these securities;
• Time and date of the loan;
• Name of the platform or venue, if one is used;
• Amount of securities loaned;
• Rates, fees, charges and rebate for the loan as applicable;
• Type of collateral provided for the loan and the percentage of the collateral provided to 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.

The second proposal would amend Exchange Act Rules 17a-4 and 18a-6 on recordkeeping requirements for broker-dealers, security-based swap dealers, and major security-based swap participants, to provide an audit trail alternative to the WORM requirement for newly-created records. Basically, a broker-dealer of a security-based swap entity would need to produce electronic records in a reasonably usable electronic format, thereby enabling securities regulators to search the information in records that registrants must preserve for particular time periods.

The commenters. Better Markets. Better Markets implored the SEC to “finalize this long-overdue, mandatory rulemaking without delay or dilution” after implementing Better Markets small suggested changes. Better Markets stated, moreover, that the proposal “represents the bare minimum to ensure that the proposal meets the statutory requirement to increase the transparency of information available to brokers, dealers, and investors.”

Better Markets’ four suggestions asked the Commission to consider: (a) requiring reporting on the use of collateral; (b) reevaluating the proposal’s timing deadlines; (c) closing any potential loophole that would permit evasion by characterizing securities lending transactions as repurchase agreements; and (d) deem the proposals merely a first step in addressing short-selling issues.

Better Markets considers securities lenders reporting their collateral use in lending transactions as crucial to prevent unseen, dangerous risk to the financial system. Better Markets believes the 15 minute and next day reporting time-frames are weak (and should be further minimized) in light of high frequency traders’ ability to manipulate the system in seconds. As for the potential risks caused by mischaracterizing securities loans as repurchase agreements, Better Markets recommends the “securities lending” definition include transactions that could fairly be described as “securities loans” rather than excluding from that definition transactions which could fairly be described as repurchase agreements. Lastly, Better Markets advocates for a further proposal specifically addressing short-selling activities (because these proposals are insufficient on short-selling).

SIFMA. The following SIFMA-requested modifications, more significant than Better Markets,’ were hastily sent to the Commission because SIFMA found the comment period too short for appropriate fleshed-out remarks:

1. Define what it means to “loan a security” to focus exclusively on securities lending transactions; more specifically, exclude transactions like short-selling from the definition because it does not constitute securities lending;
2. Clarify extraterritorial issues to address U.S. lenders of U.S. listed securities; stipulate that extraterritorial activity solely comprises securities loans where the issuing country and primary trading market are in the U.S. and that the beneficial owner-lender or lending agent are U.S. persons;
3. Narrow the scope of the reported data to the RNSA, as well as the scope of the data that becomes publicly available; in both instances, narrow the scope of the data to aggregated securities lending data, including volume-weighted average borrowing fee aggregated across all firms, for each security loaned.
4. Replace the 15-minute reporting period with required reporting by the end of the next business day, or at least no more frequently than by the end of each business day; this is to achieve accurate reporting of contract terms for settled loans;
5. Clarify the requirement to report securities “available to lend” and securities “on loan” in order to avoid providing the market with misleading information; and
6. Implement a phased-in reporting regime to eliminate the significant cost of implementation and allow regulators sufficient time to analyze collected data to inform the merit for more than detailed reporting, and provide an implementation period that matches the compliance obligations; specifically an 18-month build-out period following RNSA’s finalization of the technical specifications for reporting, to enable lenders to comply.