25 Jan 2022
To meme or not to meme
If you’ve ended up here this seems unlikely you did, but just in case you missed it, the US Securities Exchange Commission (SEC) published a proposal for the reporting of securities loans on November 18 last year. The proposed Rule 10c-1 under the Securities Exchange Act of 1934 will, in the SEC’s own words, attempt to ensure ‘market participants, the public, and regulators have access to timely and comprehensive information about the market’ and bring securities lending ‘out of the dark’.
The idea that additional regulatory reporting for securities lending would happen in the US is not new, in fact it has been on the cards since the Financial Stability Board (FSB) recommended it globally nearly a decade ago. The European equivalent, the Securities Finance Transaction Regulation (SFTR) stemmed from the same FSB mandate and has been live since 2020 with the underlying regulation having first hit the statute books in 2015.
From a US standpoint, it seems clear additional impetus and a call to action was provided to the SEC by the meme stock trading events of January 2021, highlighted during a hearing before the House Financial Services Committee on March 17, 2021. The rise of retail investors buying into specific individual securities became an accelerant that fueled extreme volatility and unleashed a battle between retail and “sophisticated investors”, in this case hedge funds who were short-sellers. The rise of individual investors, or a band of individuals who collectively traded ideas via bulletin boards and social media platforms, challenged the status-quo and shook up the market. No secret is made of this during the introduction to the proposal itself and the SEC emphasises their focus on increasing public transparency around securities lending transactions. In contrast, its older European cousin SFTR was focused on systemic risk and monitoring of exposure by the regulators and although it does produce public data it’s at an aggregated, higher level than the SEC have proposed.
Intentions were made known when the proposed rule landed in the Federal Register, there followed the response period with the proposal being open for comment by interested parties for 30 days. The first thing to say is 30 days really isn’t a lot of time to review a significant and complex reporting requirement, one that has 184 pages and 97 questions posed by the SEC. This is especially true when the timing to respond was at the end of the calendar year and during the holiday season. This was pointed out to the SEC in a number of early responses, however given the deadline (7th January) has officially passed without any further comment from the Commissioner, it seems unlikely that this will be extended.
So where are we? At Pirum, given our SFTR experience and growing North American footprint, we felt compelled to compile a response to the proposal. History tells us that a collaborative approach elicits the optimal outcome and therefore we hosted a user forum in mid-December to present our initial review and summary of the challenges but more importantly, gain feedback from our clients and market participants to ensure our response was representative of market sentiment.
Following this forum, we submitted our response to the SEC. Below is a brief summary of the main issues and points of clarification we raised. A full copy of our response can be accessed on the SEC website at https://www.sec.gov/comments/s7-18-21/s71821-20111338-264952.pdf.
- 15-minute reporting frequency - based on own review and substantiated by client feedback the proposed 15 minute reporting time frame was identified as being challenging, costly and ultimately not increasing transparency versus a T+1 requirement which we proposed in the response.
- Territorial scope - we didn’t believe the exact territorial scope was clear and this was validated by a poll we conducted where 73% of respondents agreed clarification was needed which we requested.
- UTI Model - the proposal for UTIs to be issued on receipt by the Registered National Securities Association (RNSA) would cause issues in global aggregation and for firms with existing UTIs under the SFTR regime, we proposed that the SEC allow UTIs be provided by submitting firms where appropriate.
- Delegated reporting - we requested additional options for delegated reporting be expressly permitted. The initial proposal only covers delegation via registered broker-dealers only which would limit the options lenders required to report.
Should you be reviewing this proposal for the first time and or wish to discuss any matter with us, we would welcome the opportunity to speak.
COO & Head of Americas