On October 13, the Securities and Exchange Commission (the “SEC”) adopted new rule 10c-1a (the “Rule”), which establishes broad reporting requirements of the terms of securities loans to the Financial Industry Regulatory Authority (“FINRA”) for public dissemination. Aimed at increasing transparency in the securities lending market, the Rule will significantly increase compliance obligations in the securities lending industry, and many market participants will likely require extensive operational upgrades to prepare for compliance. Certain details of reporting obligations will be the subject of FINRA rulemaking, and participants should be prepared to review and provide comment on what is proposed.
Who has to report?
Rule 10c-1a will require the following “covered persons” to report certain data about securities loans:
- Intermediaries: any person that agrees to a covered securities loan on behalf of a lender other than a clearing agency when providing only the functions of a central counterparty or central securities depository
- Securities lenders not using intermediaries: Any securities lender that does not use an intermediary, unless the borrower is a broker-dealer borrowing fully paid or excess margin securities
- Broker-dealers when borrowing fully-paid or excess margin securities
The Rule generally places the burden of reporting on the lender, except where the lender uses an intermediary (in which case the burden falls on the intermediary), or when the borrower is a broker-dealer borrowing fully paid or excess margin securities (in which case the burden falls on the borrowing broker-dealer).
The Rule permits covered persons to use a broker-dealer or clearing agency as its reporting agent under certain conditions. The covered person must provide the reporting agent with the requisite information about the securities loans, but the reporting agent would submit the information to FINRA instead of the covered person.
What kinds of loans have to be reported?
Any loan of a “reportable security” is a “covered securities loan” subject to reporting. A reportable security is one that is already subject to reporting requirements under the NMS plan governing the consolidated audit trail (“CAT”), under FINRA’s Trade Reporting and Compliance Engine (“TRACE”) rules, or the Municipal Securities Rulemaking Board’s Real Time Reporting System (“RTRS”).
Repurchase agreements and short sales are not considered covered securities loans (though loans that are used for short sales would be).
Rehypothecation of customer margin securities by a broker-dealer is not itself considered a covered securities loan. However, if the broker-dealer lends those margin securities, that would be a covered securities loan (and the broker-dealer would have to report it).
Positions at a clearing agency resulting from central counterparty or central securities depository services are not considered covered securities loans.
What information has to be reported?
The following information about a covered securities loan must be reported:
- Legal name of the security issuer and its LEI, if possible;
- The security’s ticker symbol, ISIN, CUSIP, or FIGI;
- Date and time the covered securities loan was effected (not when the securities loan is settled);
- Name of the platform or venue where the covered securities loan was effected, if applicable;
- Amount of securities loaned;
- Type of collateral and percentage of collateral to value of securities loaned;
- Rebate rate or other fee information;
- Termination date;
- Borrower type (broker-dealer, customer, clearing agency, bank, custodian, other);
- Certain “confidential data elements,” which FINRA will not make publicly available:
- Legal name of the parties, CRD or IARD number, MPID, and LEI of each party, and whether such party is the lender, borrower, or intermediary;
- If the lender is a broker or dealer and the borrower is its customer, whether the security is loaned from the broker’s or dealer’s inventory;
- Whether the covered securities loan is being used to close out a fail to deliver under or outside of Reg SHO.
Covered persons must also report modifications of the non-confidential data elements above. For example, if the number of loaned securities increases, the covered person must report the precise increase. Further details on what counts as a reportable “modification” will largely depend on FINRA rulemaking. For example, it is not clear if the daily fluctuation in a rebate rate that references a benchmark rate (e.g., SOFR) counts as a reportable modification. Market participants should review FINRA’s proposed implementing rules carefully and seek any needed clarity through the comment process.
When reporting a modification, covered persons need only report the relevant modification along with a unique identifier for the loan in question (which FINRA will provide).
When does the information have to be reported?
Covered persons must report the required data by the end of the day on which the covered securities loan is effected or modified. Importantly, the reporting obligation does not depend on when the securities loan is actually settled (which will often be T+1, i.e., the day after the loan is effected).
How will all this be reported?
Most data elements, including the identity of the security, the date and time of the loan, the platform or venue, the rebate rate or other fee, the termination date, and the borrower type, will be reported on an individual transaction basis the morning of the business day after the covered securities loan is effected or modified. Information about the amount of securities loaned will be disseminated 20 business days later in recognition of the sensitivity of such data.
Each day’s aggregate transaction activity for a reportable security (i.e., the absolute value of all transactions in a reportable security) and the distribution of loan rates for a reportable security will be published the morning of the next business day. Net position changes will not be disseminated to prevent the exposure of proprietary information.
When does reporting start?
Reporting requirements will begin two years after the Rule’s effective date, which will be 60 days after the Rule is published in the Federal Register. FINRA must propose its own implementing rules within four months of this effective date. Those rules in turn must become effective within one year of the effective date. Market participants will thus have one year after the finalization date of FINRA’s rules to prepare for their reporting obligations. FINRA will have 90 days after reporting requirements begin to make the information publicly available.
 This would exclude, for example, the National Securities Clearing Corporation, the Depository Trust Company, and the Options Clearing Corporation, when acting in their capacity as a central counterparty or central securities depository.