Bob Currie offers an update on the SEC’s proposed 10c-1 rule and explores the potential implications for market participants as they prepare for the new US securities lending trade reporting requirement.
The Securities and Exchange Commission (SEC) has extended the deadline for potential approval of the Financial Industry Regulatory Authority’s (FINRA’s) Rule 6500 (SLATE) from 4 November 2024 to 2 January 2025.
Securities Lending and Transparency Engine (SLATE) is a reporting platform, to be implemented and operated by FINRA, to support reporting of securities lending transactions under SEC Rule 10c-1a.
The SEC circulated its proposed 10c-1 rule for industry consultation at the end of 2021, requiring that lenders of securities should report the material terms of securities lending transactions to a registered national securities association (RNSA).
Outlining the case for a new reporting regime, the SEC argued in its initial 10c-1 guidelines that “there is limited information available to market participants, the public and regulators about securities lending in the US. Data on the market is incomplete, unavailable to the general public and not centralized.” https://www.sec.gov/files/rules/proposed/2021/34-93613-fact-sheet.pdf
These gaps, the SEC observed, create inefficiencies in the US securities lending market and make it difficult for borrowers and lenders to know whether the terms of their loans are consistent with market conditions.
To date, one organisation, FINRA, has been approved by the SEC to act as an RNSA. To track the transaction, the RNSA will assign a unique transaction identifier to each reported securities lending trade. Modifications to the trade must also be reported to the RNSA.
The SEC adopted Rule 10c-1a on 13 October 2023, with FINRA subsequently issuing a new Rule 6500 Series (SLATE ) in May 2024 to implement the requirements of Rule 10c-1a, including the scope of these reporting obligations and relevant definitions. If this is approved by the SEC, in-scope firms will be required to begin reporting securities loan trades to FINRA soon thereafter.
The Proposed Rule will require FINRA to aggregate the reported transactions data and to publish a summary of selected non-confidential elements on an anonymised basis on the morning of the next business day. Sensitive information would be made publicly available on an aggregated, anonymised basis 20 days after the securities loan is reported or modified.
Those falling into scope of the reporting obligation (‘covered persons’), include a lender entering into a securities loan transaction, a lending intermediary (for example an agent lender) lending on behalf of the lender, or a US-registered dealer or broker when borrowing “fully paid” (i.e. fully paid for by the lender, not bought on margin) or excess margin securities.
Transactions falling into scope of these US reporting requirements (‘covered transactions’) include loans of equities, debt securities, and crypto assets deemed to be reportable securities under the SEC’s Consolidated Audit Trail (CAT), FINRA’s Trace or the Municipal Securities Rulemaking Board’s Real-time Reporting System (RTRS).
Covered persons may use a reporting agent to meet their transaction reporting obligations, providing that they have a written agreement and effective governance policies in place and the covered person is able to provide timely trade data to the reporting agent.
ISLA Americas and KPMG have published a joint report, SEC Rule 10c-1a: Paving the Way for Transparent Securities Lending Markets (Oct 2024), which examines the current status of the 10c-1a policy dialogue, its implementation requirements and implications for market participants.
The report concludes that implementing Rule 10c-1a will prepare the way for enhanced transparency and efficiency but will also present challenges that will require careful analysis and coordination among industry participants to resolve. It summarises these challenges as the three Cs: complexities, costs and unintended consequences.
In terms of complexities, the report highlights data complexities, regulatory interpretation and technical challenges. It notes that gathering and reporting detailed transaction data can be complex, requiring robust data management systems. Reporting entities, and their reporting agents, may also face technical complexities in integrating disparate data sources across the securities lending lifecycle and ensuring data integrity throughout the reporting process.
The costs and financial implications of this reporting regime relate particularly to technology investments, compliance resources and operational overheads. This includes the need for the firm to update or renew its data management systems and reporting tools, with reporting agents and service providers bearing parallel upgrade costs. Firms will also need to cover the cost of ongoing compliance requirements, along with any potential penalties resulting from non-compliance.
Additionally, the report identifies unintended consequences associated with a higher administrative workload linked to data collection, validation and reporting. Most significantly, it predicts that the reporting requirements, in their current form, may overstate actual securities lending activity, thereby misrepresenting the underlying dynamics of the market.
When measured against the transaction reporting regime implemented in the European Union under the Securities Financing Transactions Regulation (SFTR), the 10c-1 Proposed Rule is likely to impose a ‘leaner’ reporting framework, with 12 to 30 reporting fields in the current SEC 10c-1 design (12 mandatory reporting fields, 3 fields relating to confidential submissions, and up to 15 fields for loan modifications), compared with 155 for SFTR.
It is noteworthy that the SEC has made a number of significant amendments in response to industry feedback. In its initial design, for example, the proposal required that lenders should report trade details to an RNSA within 15 minutes of the time of the trade.
Some respondents to the Rule 10c-1 consultation suggested that reporting on an intraday basis for securities lending transactions would be operationally impractical and would deliver little or no additional value compared with end-of-day reporting. Additionally, this would limit time for reconciliation and require that firms invest in expensive real-time data capture and reporting systems to fulfil intraday reporting obligations. Subsequently, this requirement has been relaxed, with trade reporting required by end of day in the revised 10c-1a proposal.
