Recommendations to Improve Rule 10c-1a for Reporting of Securities Loans

Summary

SIFMA Comments to the U.S. Securities and Exchange Commission (SEC) to recommend that it make certain limited changes to Rule 10c-1a (Reporting of Securities Loans), which the Commission adopted under the Securities Exchange Act of 1934 (“Exchange Act”) on October 13, 2023.2

Excerpt

Subsequent to its adoption, Rule 10c-1a and another highly interrelated rule adopted by the Commission on the same day, Rule 13f-2 (Short Position and Short Activity Reporting by Institutional Investment Managers),3 were challenged together in the Fifth Circuit Court of Appeals. The Fifth Circuit remanded the rules to the Commission to conduct a cumulative economic analysis of the rules after finding that because of the close relation of the two rules the Commission should have considered both rules collectively in each rule’s respective economic analysis.4 As the Commission undertakes this analysis, we understand that the Commission is also considering amending Rules 10c-1a and 13f-2 to ensure that both rules are appropriately tailored to achieve their important transparency goals.5

SIFMA submits for the Commission’s consideration the following specific recommendations for amending Rule 10c-1a, which SIFMA believes would serve to “right-size” the rule by reducing risks, costs, and operational burdens, while maintaining the transparency benefits of the rule that were intended under the Dodd-Frank Act.

Executive Summary

SIFMA supports the Commission’s policy goal, required by the Dodd-Frank Act, of increasing transparency in the securities lending market for brokers, dealers, and investors.6 With this  in mind, SIFMA has identified three principal recommended amendments to Rule 10c-1a that we believe would increase transparency in the securities lending market but under a reporting regime that is more appropriately tailored to require reporting only of securities lending data that is reasonably likely to be meaningful and relevant to market participants. If
implemented, these recommendations also should reduce the overall costs and burdens on
SIFMA members of reporting securities loan information, as well as the overall cumulative
economic impact for industry-wide compliance with reporting obligations under Rules 10c-1 and 13f-2:

1. Expressly exclude short arranged financing transactions with customers from the definition of “covered securities loan” under Rule 10c-1a(j)(2). Prime brokers offer their institutional customers short arranged financing to facilitate their short sales and these transactions (a) typically have bespoke economic terms that are not transaction specific; (b) are substitutes for and economically equivalent to customer short positions that are more appropriately reported as, and would be largely duplicative to reporting of, short positions under Rule 13f-2; and (c) would be operationally difficult and costly to report. Reporting short arranged financing transactions would not meaningfully improve transparency in the securities lending market, but would increase risks of information leakage of sensitive short investment strategies.
2. Amend Rule 10c-1a(g) to require public dissemination by the Financial Industry Regulatory Authority (“FINRA”) of loan-specific non-confidential data elements reported pursuant to Rules 10c-1a(c) and (d) on the 20th business day after a covered securities loan is effected or modified to limit the risk of data leakage of time sensitive short investment strategies that can result from earlier public dissemination.
3. Amend Rule 10c-1a to require reporting only of securities loans that actually settle, given that unsettled securities loans generally do not represent binding enforceable transactions.