SIFMA and SIFMA AMG submitted a pair of comment letters on the U.S. Securities and Exchange Commission’s (SEC) proposed rule under the Securities Exchange Act of 1934 (Exchange Act) that would introduce a regime requiring the reporting of data, terms, and other market information regarding securities lending transactions to a registered national securities association (RNSA), and the subsequent public reporting of select data. The letters detail initial responses and outline recommended alternative approaches for further consideration.
The letter notes SIFMA’s concern that, as currently drafted, the proposed rule could result in “the public dissemination of incomplete, inaccurate, and misleading information that could have a severe adverse impact on the securities lending market as well as the overall securities markets. The proposed rule would also impose significant costs on SIFMA member firms which are not commensurate with the benefits sought to be achieved. However, given the very short comment period, SIFMA and its members do not have sufficient time to fully analyze and calculate the true anticipated cost of implementing the proposed reporting regime.”
In its letter, SIFMA offers suggested alternatives that it believes would foster the policy goals of the proposed rule while ameliorating the potential adverse consequences. These are:
- To ensure consistent reporting and avoid confusion and misinterpretation of data by the public, define what it means to “loan a security” and expressly exclude transactions such as short sales that do not constitute securities lending, pursuant to well established market practice, industry norms, and other regulations, as well as other transactions that would increase confusion and risk of data misinterpretation such as short arranged financing in connection with prime brokerage activities resulting in short positions.
- To assure that data is efficiently reported by the party best positioned to directly provide to the RNSA the transaction terms and information required under the proposed rule, maintain the currently-proposed requirement for lenders and Lending Agents to bear the reporting obligation.
- To achieve accurate reporting of contract terms for settled loans and eliminate “noise” caused by fails and corrections that routinely occur intraday, require securities lending transaction information to be reported to the RNSA no earlier than the end of each business day provided all required information is available, rather than within 15 minutes as proposed.
- To decrease the likelihood that published data will be potentially misleading or confusing, or that it could reveal short trading strategies that could prompt short sellers to exit the market, adjust the information that is provided publicly by the RNSA to be only aggregated securities lending data, including, among other things, a volume-weighted average borrowing fee aggregated across all firms, for each security loaned.
- To avoid a misleading impression of actual securities lending availability due to the inherent imprecision of the proposed calculation method, eliminate the requirement to report, by the end of the day, information on securities “available to lend.”
- To provide practical clarity to the market and avoid inadvertently capturing unwanted extraterritorial activity and imposing an undue burden on the industry, define the extraterritorial scope by expressly stipulating that it would apply only to loans of securities in which (i) the country of issue and primary trading market of the securities are the United States and (ii) the beneficial owner lender or Lending Agent is a U.S. person, under the guidelines set forth below.
- Implement a staged reporting regime to allow regulators sufficient time to analyze collected data before public dissemination of any information and also provide at least an 18-month build-out period following the RNSA’s finalization of the technical specifications for reporting for lenders to comply.
Similarly, SIFMA AMG wrote, “SIFMA AMG supports the SEC’s objectives, pursuant to Section 984 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, of increasing the transparency of information available to all market participants with respect to the securities lending market, with the goal of providing greater access to pricing and other material information in a timely manner and facilitating regulatory monitoring and surveillance.”
Notwithstanding these goals, SIFMA AMG believes:
- the thirty-day comment period for this Proposed Rule is inadequate given the magnitude of the proposed new regime and the nuanced aspects of the securities lending market;
- the Proposed Rule would result in significant unintended negative consequences, and could have an adverse impact on the securities lending market as well as the overall securities markets; and
- the Proposed Rule would also impose significant costs on SIFMA AMG member firms which are not commensurate with the benefits sought to be achieved.
In addressing these concerns, SIFMA AMG recommends consideration of a number of changes intended to better achieve the policy goals of the Proposed Rule while avoiding the likely adverse consequences:
- define what it means to “loan a security” to focus exclusively on securities lending transactions;
- clarify extraterritorial issues to address US lenders of US-listed securities;
- narrow the scope of the data to be reported to the RNSA, and then to be made public by the RNSA, to only aggregate transaction data;
- replace the 15-minute reporting period with the requirement to report by the end of next day (T+1), or at least no more frequently than by the end of each business day;
- clarify the requirement to report securities “available to lend” and securities “on loan” to avoid providing misleading information to the market; and
- implement a phased reporting regime to ameliorate the significant cost of implementation and allow regulators sufficient time to analyze collected data to inform the merit for more detailed reporting, and provide an implementation period commensurate with the compliance obligations.