August 21, 2023
Vanessa A. Countryman
U.S. Securities and Exchange Commission
100 F Street, NE
Washington, D.C. 20549-1090
Re: Reopening of Comment Period for Position Reporting of Large Security-Based Swap Positions (the “Proposed Rule”)1 (File No. S7-32-10)
Dear Ms. Countryman:
The Asset Management Group of the Securities Industry and Financial Markets Association (“SIFMA AMG”)2 appreciates the opportunity to provide comments to the Securities and Exchange Commission (the “Commission” or “SEC”) in response to the Commission’s above-captioned reopening of the comment period (“Reopening Release”)3 on the security-based swap (“SBS”) position reporting requirements set forth in proposed Rule 10B-1 under the Securities Exchange Act of 1934 (the “Exchange Act”) and proposed Schedule 10B.
While SIFMA AMG generally supports rules which seek to increase transparency, promote market integrity, and reduce misconduct, it is important that such rules are designed to achieve those goals while minimizing any adverse effects on pricing, liquidity, and hedging risks. We are concerned that if the Proposed Rule is adopted without many of the changes suggested in this letter, market participants will be reluctant to engage in SBS for bona fide hedging and investment purposes due to the complexity, uncertainty and risks introduced by the new requirements.
We acknowledge and agree that the Commission should have the information it needs to adequately surveil and monitor the market from a stability and integrity perspective, however, it is important that the reporting regime introduced to achieve this does not have an unnecessary chilling effect on legitimate market activity.
We are disappointed that the Reopening Release and associated economic analysis (“DERA Memo”)4 do not address the core concerns we raised in our previous letter dated March 22, 2022 (the “2022 SIFMA AMG Comment Letter”).5 Most notably the Reopening Release and DERA Memo do not address concerns that the data captured by Proposed Rule 10B-1 would be misleading and confusing when publicly disseminated. They also do not address the risk that opportunistic traders could cherry-pick that data to reverse engineer and front run other market participants’ trading strategies.
The Reopening Release and DERA Memo do not attempt to quantify or describe how the benefits of position-level disclosure under Proposed Rule 10B-1, on top of the already extensive transaction-level reporting under Regulation SBSR, would outweigh these costs and risks, in addition to the operational costs and burdens of establishing and maintaining new reporting systems and processes. Such costs and burdens would be present even if the Commission limited Proposed Rule 10B-1 to regulatory, and not public, reporting—as firms would still be required to expend significant resources to implement the rule with no material incremental benefit to the Commission, given that the Commission already has access to the data needed to understand and monitor the SBS markets, as evidenced by the DERA Memo itself.
In addition to the foregoing shortcomings, the DERA Memo inexplicably focuses on a subset of available data for equity SBS to the exclusion of other asset classes. In the 2022 Release, the Commission expressly acknowledged the existence of limitations associated with the heavy use of Form N-PORT data for purposes of setting the Reporting Threshold Amounts, as the universe of Form N-PORT filers is limited to registered investment companies, as opposed to all market participants in scope for the Proposed Rule.6 Despite the Commission’s own acknowledgement of obvious data limitations in its original economic analysis, the supplemental analysis set out in the DERA memo fails to expand the dataset to available SBSR data that would have enabled more comprehensive analysis to be performed with respect to the SBS trading activity of non-investment funds, particularly with respect to CDS and non-CDS debt SBS. If SBSR data had been included in the analysis for non-equity asset classes, the number of SBS positions subject to reporting under the Proposed Rule would almost certainly have been considerably more numerous. Many such positions would not have constituted the type of large SBS positions intended to be captured by the proposed rulemaking.]
We respectfully ask the SEC to amend and revise the Proposed Rule as follows:
- As public disclosure of SBS positions and related holdings will have an adverse impact on managers and their clients, any public dissemination of such information should be deferred indefinitely until the Commission has collected and analyzed data and considered alternatives to public reporting to achieve the objectives of the Proposed Rule. Any public reporting should be implemented at the ultimate parent level; thereby permitting public disclosure in an aggregated and anonymized manner.
- Where an investment adviser has discretionary authority over a client’s SBS trading, the Proposed Rule should clarify that SBS positions only have to be reported at the advisee client level and not at the investment adviser level.
- For separately managed accounts, reporting of SBS positions should only be required at the level of each separate pool of assets managed. If reporting is not so limited, the Proposed Rule should allow adequate time after the parties become aware that a reporting threshold has been exceeded (based on the aggregate positions across all assets of the sole beneficial owner) before the SBS position must be reported.
- There should be a transition period of at least 24 months to give market participants adequate time to undertake the significant work required to implement the new requirements.
- The reporting threshold amounts should be amended and recalibrated to reflect the different trading and liquidity characteristics of the categories of SBSs and related underlying instruments and markets.
- To avoid unnecessary and potentially misleading reporting, amended reports should only be required following a material acquisition or disposition relating to a previously reported SBS position.
- In terms of the information which must be reported, the Proposed Rule should be specific as to what “related” instruments need to be reported in Schedule 13B.
- The obligation to report an SBS position should not be triggered based on the involvement of U.S. personnel in arranging, negotiating, and executing any SBS transaction as non-dealers will have no way of knowing whether U.S. personnel are involved and therefore whether a reporting obligation exists.
- If the Commission adopts Proposed Rule 10B-1, it should substantially increase the reporting threshold amounts.
1 SEC Release No. 34-93784 (December 15, 2021), 87 Fed. Reg. 6652 (February 4, 2022) (the “2022 Release”).
2 SIFMA AMG brings the asset management community together to provide views on U.S. and global policy and to create industry best practices. SIFMA AMG’s members represent U.S. and global asset management firms whose combined assets under management exceed $45 trillion. The clients of SIFMA AMG member firms include, among others, tens of millions of individual investors, registered investment companies, endowments, public and private pension funds, UCITS and private funds such as hedge funds and private equity funds.
3 Release No. 34-97762 (June 20, 2023), 88 Fed. Reg. 41338 (June 26, 2023).
4 In connection with the Reopening Release, the Commission’s Division of Economic and Risk Analysis (“DERA”) released a memorandum providing “[s]upplemental data and analysis regarding the proposed reporting thresholds in the equity security-based swap market.” Memorandum from DERA to SEC File No. S7-32-10 (June 20, 2023), available at https://www.sec.gov/comments/s7-32-10/s73210-207819-419422.pdf.
5 Letter from Lindsey Keljo, Head – SIFMA Asset Management Group, and William Thum, Managing Director and Associate General Counsel SIFMA AMG to Vanessa Countryman, Secretary of the Commission, dated March 21, 2022, available at https://www.sifma.org/wp-content/uploads/2022/03/SIFMA-AMG-Comment-SEC-SBS-Large-Position-Reporting.pdf.
6 See e.g., 87 Fed. Reg. 24 at 6697, footnote 259 (“The Commission recognizes that Form N-PORT reporting filers may not be representative of the ‘average’ trading entity in the security-based swap market and in particular, the ‘average’ trading entity in the [debt] total return . . . swap market. The Commission believes that Form N-PORT-reporting investment funds are likely to . . . participate in a smaller number of transactions . . .”) (emphasis added).