SEC’ securities lending regulation – Rule 10c-1a and implications

The securities lending market is vital to the healthy functioning of securities markets globally. Securities lending improves market liquidity, price discovery, and enables timely trade settlement but an opaque securities lending market and limited availability of securities lending data publicly are big concerns to the regulators. In alignment with Dodd-Frank Act (DFA) directive to SEC to increase transparency in securities lending market, SEC adopted rule 10c-1a that mandates the reporting of securities loans to a registered national securities association (RNSA). Other benefits include reduced information asymmetry, public insights on securities lending market, and enhanced surveillance by regulators.

Key changes from proposed rules

SEC published proposed rules on securities loans reporting in November 2021 and received diversified feedback from a wide range of respondents including market participants and investors. In the comments submitted to SEC, industry voiced concerns on the adverse impact of certain proposed rules including intraday reporting of securities loans and reporting of loan inventory information. SEC seems to have taken the industry concerns into consideration in formulating the final rules. Key changes from proposed rules include defining the reportable security, removal of the intraday reporting of securities loans and daily reporting of loan inventory information, and delayed publication of loan amount by RNSA.

Reporting obligations

SEC rule 10c-1a requires lender or lending agent, who lend on behalf of beneficial owners to report securities loans on a reportable security to an RNSA. But the borrower broker dealer is obligated to report when borrowing fully paid or excess margin securities from a customer. Reportable security includes any security that is currently subject to reporting under Consolidated Audit Trail (CAT), Trade Reporting and Compliance Engine (TRACE), and Municipal Securities Rulemaking Board’s Real-Time Transaction Reporting System (MSRB RTRS). Rule permits the firms with reporting obligation to delegate the reporting responsibility to a reporting agent, who would be a broker dealer or registered clearing agency. 

Securities loans on a reportable security must be reported to an RNSA by the end of the day on which the loan is executed. Reportable loan transaction data include public and confidential data that will be available to regulators only. The number of reportable fields are 15 and key fields include parties to the transaction, ticker symbol, venue, amount of the security loaned, rebate rate, and lending fee. Any modifications to the already reported loans must also be reported to an RNSA by the end of the day on which the loan is modified. Compared with securities financing transactions regulation (SFTR), rule 10c-1a is much simpler and easy to comply with, as the scope is limited to securities loans, requires single-sided reporting, and a smaller number of fields to report.

RNSA is required to publish the aggregate information and a subset of loan transaction data to the public by T+1 and publish the loan amount 20 days after loan executed (T+20). Currently, FINRA is the only RNSA in the USA.

Impact on broker-dealers

The regulation impacts broker dealers with securities lending and borrowing business in the US market. The impacted firms must analyze the existing securities loan booking flows for all asset classes in scope of the regulation for availability all data elements required for reporting and enhance loan booking systems to capture any missing data elements.

Firms need to enhance the existing transaction reporting system to comply with proposed reporting requirements. Key changes include integration with source systems, capture 10c-1a reporting eligibility rules in the rules engine, generate reporting files to RNSA, and capture unique transaction identifier (UTI) for each loan provided by RNSA in the feedback files, which must be quoted in the reporting of loan modifications, if any. Additionally, firms must build capability to automatically capture the loans data published by RNSA and distribute data to the interested consumers.

Implementation timeline

SEC adopted rule 10c-1a on October 13, 2023, and the regulation is published in federal register with effective date January 2, 2024. FINRA is required to propose rules pursuant to rule 10c-1a within 4 months of the effective date and the proposed rules will become effective within 12 months of the effective date. Securities loans reporting by the firms with reporting obligations will begin on the first business day 24 months after the effective date.

Conclusion

Though the securities loans reporting compliance date is 2 years away, firms need to watch out for proposed rules from FINRA due by April 2024. Post the publication of proposed rules from FINRA, impacted firms must kick off rule 10c-1a compliance program and engage business, operations, and technology groups to create awareness and prioritize the required technology and operational changes for firm’s readiness to comply with the regulation.