Be prepared
22 Mar 2023
Brian Bollen talks to industry participants about the potential impact of the SEC’s Rule 10c-1 and why opinions on its effectiveness continue to differ
Image: lvidi_studio/stock.adobe.com
“Some of what is being proposed is doable, but many firms don’t like it and would have preferred an SFTR approach.”
This is an affirmation made by Kevin McNulty, head of regulatory technology at EquiLend, discussing the aim of the U.S. Securities and Exchange Commission’s (SEC’s) Rule 10c-1 and its possible impact on the securities lending industry.
Whether SEC 10c-1 represents a carefully thought out, paternalistically benign rule-making programme, or whether it is a blatant, ham-fisted example of regulatory overreach driven by the Commission, is for the reader to decide.
The varying impressions expressed during the research process for this article are beyond any doubt unfavourable to the SEC. For the record, let it be known that we did invite the SEC to participate, but the official spokesperson responded: “We wouldn’t comment beyond the fact sheet available.”
Points of contention
“It is difficult to object to the lofty ambitions of the SEC’s Rule 10c-1,” says one market service provider. “Where we diverge from the view of the authorities is in relation to its highly aggressive ambition, in terms of timing and scope. It does present challenges on many levels, not least because the technical infrastructure to meet a 15-minute reporting requirement just does not exist.”
They went on to divulge: “SEC chairman Gary Gensler has pursued an agenda that has little regard for the ultimate consequences, not taking into account the aggregate impact or overlap of the dozens of rule-makings he has issued since 2021. Nor has he been receptive to any constructive criticism or beliefs that may run contrary to his own.”
Francesco Squillacioti, global head of client management for State Street’s securities finance business, affirms: “The SEC proposed Rule 10c-1 would establish a new reporting requirement for securities lending transactions and related data on securities on-loan, with the aim to increase transparency in the securities lending market.
“As one of the world’s largest agent securities lenders, State Street recognises the value of greater transparency and is broadly supportive of the proposal. However, some aspects do raise concerns and call into question how readily the proposed rule can fit into a securities lending framework.”
Unlike a ‘live’ cash equity market, securities loans, while transacted throughout the day, settle at the end of the day, rather than in ‘real-time.’ As such, a 15-minute reporting window is not consistent with the way the market functions.
Also not necessarily consistent with the way the market functions is the proposed move to T+1. The SEC faced some backlash last month when it confirmed 28 May 2024 as the T+1 execution date for the US. Speaking to Asset Servicing Times on this matter, ISITC’s director of industry affairs Gary Wright said: “There appears to be an overly positive view that the benefits of risk and cost reduction for clearing members far outweigh the significant costs inflicted on the industry, mainly on the buy-side.
“The SEC does not appear to recognise that approximately 35 per cent of US activity comes from the international market, yet the T+1 changes have been made with only the domestic investor in mind.”
Back to outlining the problems with the SEC’s 15-minute reporting window within Rule 10c-1, Squillacioti confirms: “In practice, there is a large amount of intra-day ‘cancel and rebook’ activity.
“Therefore, the 15-minute reporting window proposed by the Commission, would inevitably result in a high volume of ‘false positive’ information on securities lending transactions. That is more likely to confuse the market than to provide meaningful transparency.”
This ‘near real-time’ reporting window would also involve significantly higher implementation costs in the form of systems investment to be able to capture and report information in a timely way, Squillacioti adds. Those costs would be borne by agent lenders (who will be obliged to provide the data) and their clients, he clarifies.
Preparation
Speaking on Resonance FM in late February, Roy Zimmerhansl, practice leader of Pierpoint Financial and founder of Fintuition, affirmed: “What the SEC has proposed is disclosure of pricing. A stock loan ticker would show how much it cost to borrow — indicating the transactions completed, and at what prices.”
“What they have asked for is disclosure of the availability. That is: how much has been on loan, and how much is available for loan. Surely that is a good thing, because you know the liquidity of the position. When you do a securities lending transaction, you are creating a credit exposure — an ongoing credit exposure, as opposed to an executionary buy and sell — and when you have settled, that is it.”
He adds: “I don’t see how disclosing a highly capitalised low-risk counterparty’s trading price is useful to an entity that can’t borrow at that price, no matter what. I think that will lead to misleading prices. The SEC has taken a different approach to Europe. Europe put in SFTR. That is a super-onerous reporting obligation — 135-plus data fields have to be reported to European regulators on a daily basis, not just on new trades, but on changes to existing trades. Their reason for doing so is to try and identify roadblocks or liquidity squeezes in the system.
Zimmerhansl adds: “The SEC has taken this transparency focus with 15 fields of data reported within 15 minutes of transactions, and some of it being made publicly available. A completely different approach. SFTR, as onerous as it has been, is about risk reduction in the sense of identifying gaps, where possible. The SEC’s Rule 10c-1 is a misguided transparency regime.”
The final word is left to EquiLend’s McNulty. He concludes: “We have some sympathy with what the SEC has proposed, but there is no denying that its proposals are challenging for market participants, who have pushed back strongly. Some of its solutions lie in technology, some of them lie in refining existing operational processes. While political pressure is being applied to the SEC to slow down its proposals for market reforms, the Commission remains determined to push ahead with its agenda, and it would be unwise to expect dilution. Thinking about what will need to be done, in order to comply, could prove beneficial. Our message, ultimately, is: be prepared.”
This is an affirmation made by Kevin McNulty, head of regulatory technology at EquiLend, discussing the aim of the U.S. Securities and Exchange Commission’s (SEC’s) Rule 10c-1 and its possible impact on the securities lending industry.
Whether SEC 10c-1 represents a carefully thought out, paternalistically benign rule-making programme, or whether it is a blatant, ham-fisted example of regulatory overreach driven by the Commission, is for the reader to decide.
The varying impressions expressed during the research process for this article are beyond any doubt unfavourable to the SEC. For the record, let it be known that we did invite the SEC to participate, but the official spokesperson responded: “We wouldn’t comment beyond the fact sheet available.”
Points of contention
“It is difficult to object to the lofty ambitions of the SEC’s Rule 10c-1,” says one market service provider. “Where we diverge from the view of the authorities is in relation to its highly aggressive ambition, in terms of timing and scope. It does present challenges on many levels, not least because the technical infrastructure to meet a 15-minute reporting requirement just does not exist.”
They went on to divulge: “SEC chairman Gary Gensler has pursued an agenda that has little regard for the ultimate consequences, not taking into account the aggregate impact or overlap of the dozens of rule-makings he has issued since 2021. Nor has he been receptive to any constructive criticism or beliefs that may run contrary to his own.”
Francesco Squillacioti, global head of client management for State Street’s securities finance business, affirms: “The SEC proposed Rule 10c-1 would establish a new reporting requirement for securities lending transactions and related data on securities on-loan, with the aim to increase transparency in the securities lending market.
“As one of the world’s largest agent securities lenders, State Street recognises the value of greater transparency and is broadly supportive of the proposal. However, some aspects do raise concerns and call into question how readily the proposed rule can fit into a securities lending framework.”
Unlike a ‘live’ cash equity market, securities loans, while transacted throughout the day, settle at the end of the day, rather than in ‘real-time.’ As such, a 15-minute reporting window is not consistent with the way the market functions.
Also not necessarily consistent with the way the market functions is the proposed move to T+1. The SEC faced some backlash last month when it confirmed 28 May 2024 as the T+1 execution date for the US. Speaking to Asset Servicing Times on this matter, ISITC’s director of industry affairs Gary Wright said: “There appears to be an overly positive view that the benefits of risk and cost reduction for clearing members far outweigh the significant costs inflicted on the industry, mainly on the buy-side.
“The SEC does not appear to recognise that approximately 35 per cent of US activity comes from the international market, yet the T+1 changes have been made with only the domestic investor in mind.”
Back to outlining the problems with the SEC’s 15-minute reporting window within Rule 10c-1, Squillacioti confirms: “In practice, there is a large amount of intra-day ‘cancel and rebook’ activity.
“Therefore, the 15-minute reporting window proposed by the Commission, would inevitably result in a high volume of ‘false positive’ information on securities lending transactions. That is more likely to confuse the market than to provide meaningful transparency.”
This ‘near real-time’ reporting window would also involve significantly higher implementation costs in the form of systems investment to be able to capture and report information in a timely way, Squillacioti adds. Those costs would be borne by agent lenders (who will be obliged to provide the data) and their clients, he clarifies.
Preparation
Speaking on Resonance FM in late February, Roy Zimmerhansl, practice leader of Pierpoint Financial and founder of Fintuition, affirmed: “What the SEC has proposed is disclosure of pricing. A stock loan ticker would show how much it cost to borrow — indicating the transactions completed, and at what prices.”
“What they have asked for is disclosure of the availability. That is: how much has been on loan, and how much is available for loan. Surely that is a good thing, because you know the liquidity of the position. When you do a securities lending transaction, you are creating a credit exposure — an ongoing credit exposure, as opposed to an executionary buy and sell — and when you have settled, that is it.”
He adds: “I don’t see how disclosing a highly capitalised low-risk counterparty’s trading price is useful to an entity that can’t borrow at that price, no matter what. I think that will lead to misleading prices. The SEC has taken a different approach to Europe. Europe put in SFTR. That is a super-onerous reporting obligation — 135-plus data fields have to be reported to European regulators on a daily basis, not just on new trades, but on changes to existing trades. Their reason for doing so is to try and identify roadblocks or liquidity squeezes in the system.
Zimmerhansl adds: “The SEC has taken this transparency focus with 15 fields of data reported within 15 minutes of transactions, and some of it being made publicly available. A completely different approach. SFTR, as onerous as it has been, is about risk reduction in the sense of identifying gaps, where possible. The SEC’s Rule 10c-1 is a misguided transparency regime.”
The final word is left to EquiLend’s McNulty. He concludes: “We have some sympathy with what the SEC has proposed, but there is no denying that its proposals are challenging for market participants, who have pushed back strongly. Some of its solutions lie in technology, some of them lie in refining existing operational processes. While political pressure is being applied to the SEC to slow down its proposals for market reforms, the Commission remains determined to push ahead with its agenda, and it would be unwise to expect dilution. Thinking about what will need to be done, in order to comply, could prove beneficial. Our message, ultimately, is: be prepared.”
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