Proposed Rule2021-25739
Reporting of Securities Loans
Primary source
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Published
December 8, 2021
Issuing agencies
Securities and Exchange Commission
Abstract
The Securities and Exchange Commission ("Commission" or "SEC") is proposing a rule to increase the transparency and efficiency of the securities lending market by requiring any person that loans a security on behalf of itself or another person to report the material terms of those securities lending transactions and related information regarding the securities the person has on loan and available to loan to a registered national securities association ("RNSA"). The proposed rule would also require that the RNSA make available to the public certain information concerning each transaction and aggregate information on securities on loan and available to loan.
Full Text
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<title>Federal Register, Volume 86 Issue 233 (Wednesday, December 8, 2021)</title>
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[Federal Register Volume 86, Number 233 (Wednesday, December 8, 2021)]
[Proposed Rules]
[Pages 69802-69853]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2021-25739]
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Vol. 86
Wednesday,
No. 233
December 8, 2021
Part III
Securities and Exchange Commission
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17 CFR Part 240
Reporting of Securities Loans; Proposed Rule
Federal Register / Vol. 86 , No. 233 / Wednesday, December 8, 2021 /
Proposed Rules
[[Page 69802]]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 240
[Release No. 34-93613; File No. S7-18-21]
RIN 3235-AN01
Reporting of Securities Loans
AGENCY: Securities and Exchange Commission.
ACTION: Proposed rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'' or
``SEC'') is proposing a rule to increase the transparency and
efficiency of the securities lending market by requiring any person
that loans a security on behalf of itself or another person to report
the material terms of those securities lending transactions and related
information regarding the securities the person has on loan and
available to loan to a registered national securities association
(``RNSA''). The proposed rule would also require that the RNSA make
available to the public certain information concerning each transaction
and aggregate information on securities on loan and available to loan.
DATES: Comments should be received on or before January 7, 2022.
ADDRESSES: Comments may be submitted by any of the following methods:
Electronic Comments
<bullet> Use the Commission's internet comment form (<a href="https://www.sec.gov/regulatory-actions/how-to-submit-comments">https://www.sec.gov/regulatory-actions/how-to-submit-comments</a>); or
<bullet> Send an email to <a href="/cdn-cgi/l/email-protection#255750494008464a4848404b5156655640460b424a53"><span class="__cf_email__" data-cfemail="dba9aeb7bef6b8b4b6b6beb5afa89ba8beb8f5bcb4ad">[email protected]</span></a>. Please include
File Number S7-18-21 on the subject line.
Paper Comments
<bullet> Send paper comments to Vanessa A. Countryman, Secretary,
Securities and Exchange Commission, 100 F Street NE, Washington, DC
20549-1090.
All submissions should refer to File Number S7-18-21. This file number
should be included on the subject line if email is used. To help us
process and review your comments more efficiently, please use only one
method. The Commission will post all comments on the Commission's
internet website (<a href="http://www.sec.gov/rules/proposed.shtml">http://www.sec.gov/rules/proposed.shtml</a>). Comments
are also available for website viewing and printing in the Commission's
Public Reference Room, 100 F Street NE, Washington, DC 20549-1090 on
official business days between the hours of 10 a.m. and 3 p.m.
Operating conditions may limit access to the Commission's public
reference room. All comments received will be posted without change.
Persons submitting comments are cautioned that we do not redact or edit
personal identifying information from comment submissions. You should
submit only information that you wish to make available publicly.
Studies, memoranda, or other substantive items may be added by the
Commission or staff to the comment file during this rulemaking. A
notification of the inclusion in the comment file of any such materials
will be made available on our website. To ensure direct electronic
receipt of such notifications, sign up through the ``Stay Connected''
option at <a href="http://www.sec.gov">www.sec.gov</a> to receive notifications by email.
FOR FURTHER INFORMATION CONTACT: Theresa Hajost, Special Counsel,
Samuel Litz, Special Counsel, John Guidroz, Branch Chief, Josephine
Tao, Assistant Director, Office of Trading Practices, Division of
Trading and Markets, Securities and Exchange Commission, 100 F Street
NE, Washington, DC 20549, at (202) 551-5777.
SUPPLEMENTARY INFORMATION: The Commission is proposing for public
comment 17 CFR 240.10c-1 (``proposed Rule 10c-1'' or ``proposed
Rule''), under the Securities Exchange Act of 1934 (``Exchange Act'')
[15 U.S.C. 78a et seq.].
Proposed Rule 10c-1 would apply to any person that loans a security
(``securities lending transactions'') on behalf of itself or another
person. It would require such persons to report the specified material
terms for each securities lending transaction and related information
to an RNSA. Proposed Rule 10c-1 would also require that the RNSA
disseminate certain information concerning each securities lending
transaction to the public and certain aggregate loan information.
Table of Contents
I. Executive Summary
A. Introduction
1. Market Background
2. Intended Objectives
II. Background
A. Market Structure
B. Transaction Reporting
1. Data Available From Private Vendors
III. Discussion of Proposed Rule
A. Reporting
1. Obligation To Provide Information to an RNSA
(a) Obligation of Lender To Provide 10c-1 Information
(b) Providing Information to an RNSA
2. Persons Responsible for Providing Information to an RNSA
(a) Lending Agent Provides Information to an RNSA
(b) Reporting Agent Provides Information to an RNSA
(c) Beneficial Owner Provides Information to an RNSA
(d) Examples of Who Is Responsible for Providing Information to
an RNSA
B. Information To Be Provided to an RNSA
1. Data Elements Provided to an RNSA
(a) Initial Loan-Level Data Elements
(b) Loan Modification Data
(c) Material Transaction Data That Would Not Be Made Public
(d) Total Amount of Securities Available to Loan and Total
Amount of Securities on Loan
C. RNSA Rules To Administer the Collection of Information
D. Data Retention and Availability
E. Report and Dissemination Fees
IV. General Request for Comment
V. Paperwork Reduction Act Analysis
A. Background
B. Proposed Use of Information
C. Information Collections
D. Information Collections Applicable to Lenders
1. Lending Agents
(a) Providing Lending Agents
(i) Initial Burden
(ii) Ongoing annual burden
(b) Non-Providing Lending Agents
(i) Systems Development and Monitoring
(ii) Entering into Written Agreement With Reporting Agent
2. Reporting Agents
(a) Systems Development and Monitoring
(i) Initial Burden
(ii) Ongoing Annual Burden
(b) Entering Into Written Agreements With Persons on Whose
Behalf the Reporting Agent Would be Providing Information
(c) Entering Into Written Agreement with RNSA
(d) Recordkeeping Requirement
3. Lenders That Would Not Employ a Lending Agent
(a) Self-Providing Lenders
(i) Initial Burden
(ii) Ongoing Annual Burden
(b) Lenders That Would Directly Employ a Reporting Agent
(i) Systems Development and Monitoring
(ii) Entering Into a Written Agreement with a Reporting Agent
E. Information Collection Applicable to RNSAs
1. RNSA Collection of Information From Lenders and Providing
Information to the Public and the Commission
(a) Initial Burden
(b) Ongoing Annual Burden
2. RNSA Retention of Collected Information
F. Collection of Information is Mandatory
G. Confidentiality
H. Retention Period of Recordkeeping Requirement
I. Request for Comment
VI. Economic Analysis
A. Introduction and Market Failure
1. Introduction
2. Market Failures
B. Baseline
1. Securities Lending
2. Current State of Transparency in Securities Lending
[[Page 69803]]
3. Characteristics of the Securities Lending Market
4. Structure of the Securities Lending Market
(a) Market for Borrowing and Borrowing Services
(b) Market for Lending Services
5. Market for Securities Lending Data and Analytics
C. Economic Effects of the Proposed Rule
1. Effects of Increased Transparency in the Lending Market
(a) Reduction in Information Asymmetry
(b) Improved Information for Participants in the Securities
Lending Market
(c) Improved Market Function Through Effects on Short Selling
(d) Improved Financial Management for Financial Institutions
2. Regulatory Benefits
(a) Surveillance and Enforcement Uses
(b) Market Reconstruction Uses
(c) Market Research Uses
3. Direct Compliance Costs
4. Indirect Costs
5. Risk of Circumvention Through Repurchase Agreements
D. Impact on Efficiency, Competition, and Capital Formation
1. Efficiency
2. Competition
3. Capital Formation
E. Alternatives
1. Broker-Dealer Reporting
2. Publicly Releasing the Information in 10c-1(d)
3. Additional Information in the Reported or Disseminated
Information
4. Alternative Timeframes for Reporting or Dissemination
5. Allow an RNSA to Charge Fees to Distribute the Data
6. Longer Holding Period Requirement
7. Report to the Commission Rather Than to an RNSA
8. Report Through an NMS Plan
F. Request for Comment
VII. Regulatory Flexibility Act Certification
VIII. Consideration of Impact on the Economy
IX. Statutory Authority
List of Subjects in 17 CFR parts 240
I. Executive Summary
A. Introduction
1. Market Background
The securities lending market is opaque.\1\ Section 984 of the
Dodd-Frank Act provides the Commission with the authority to increase
transparency, among other things, with respect to the loan or borrowing
of securities.\2\ It also mandates that the Commission promulgate rules
designed to increase the transparency of information available to
brokers, dealers, and investors.\3\ Although various market
participants, such as registered investment companies (``investment
companies''), are required to make specified disclosures regarding
their securities lending activities,\4\ parties to securities lending
transactions are not currently required to report the material terms of
those transactions.\5\ The value of securities on loan in the United
States as of September 30, 2020, was estimated at almost $1.5
trillion.\6\ Yet, despite its size, the securities lending market in
the United States has a general lack of information available to its
market participants, the public and regulators.\7\ Based on the lack of
transparency and statutory objective \8\ to increase transparency in
securities lending transactions, the Commission is proposing Rule 10c-1
under the Exchange Act, which would require any person who loans a
security on behalf of itself or another person (a ``Lender'') \9\ to
provide the specified material terms of their securities lending
transactions to an RNSA, as discussed more fully below.
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\1\ See infra Part II.B. The corporate bond and municipal
securities markets are now more transparent and efficient markets.
The regulatory concerns that led to these transformations included
the lack of publicly available pricing information, which is similar
to the concerns that would be addressed by proposed Rule 10c-1. The
changes to these markets have provided investors with greater
pricing transparency, lower search costs and greater price
competition. See, e.g., Louis Loss, Joel Seligman & Troy Paredes,
Chapter 7.A.2--Bond Trading, in Fundamentals of Securities
Regulation (6th ed. Supp. 2021). See also Interim Report of the
Financial Stability Board Workstream on Securities Lending and
Repos, Securities Lending and Repos: Market Overview and Financial
Stability Issues, at 14 (Apr. 27, 2012), available at <a href="https://www.fsb.org/wp-content/uploads/r_120427.pdf">https://www.fsb.org/wp-content/uploads/r_120427.pdf</a>.
\2\ Public Law 111-203, 984(b), 124 Stat. 1376 (2010). Section
984(a) of the Dodd-Frank Act (``DFA''), now Section 10(c)(1) of the
Exchange Act, makes it ``unlawful for any person, directly or
indirectly, by the use of any means or instrumentality of interstate
commerce or the mails, or of any facility of any national securities
exchange . . . to effect, accept or facilitate a transaction
involving the loan or borrowing of securities in contravention of
such rules and regulations as the Commission may prescribe as
necessary or appropriate in the public interest or for the
protection of investors.'' Section 984 of the DFA focuses on the
loan or borrowing of securities; therefore, the Commission is not
proposing to include repurchase agreements within the scope of the
rule.
\3\ Id. Section 984(b) of the DFA directs the SEC to
``promulgate rules that are designed to increase the transparency of
information available to brokers, dealers, and investors with
respect to loan or borrowing securities.''
\4\ Investment companies are required to disclose certain
information about their securities lending activities. See, e.g.,
Form N-CEN, Item C.6 (requiring disclosures relating to an
investment company's securities lending activities) and Form N-PORT,
Items B.4 and C.12 (requiring disclosure by investment companies of
certain information on borrowers of loaned securities and collateral
received for loaned securities). See also 81 FR 81870 (Nov. 18,
2016) (discussing requirements for securities lending disclosures by
investment companies).
\5\ See infra Part II.B.
\6\ See Financial Stability Oversight Council (FSOC), 2020
Annual Report, figure 3.4.2.8, at 41, available at <a href="https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf">https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf</a>. (``FSOC
2020 Annual Report''). See infra note 14.
\7\ See infra Part VI.A.2.
\8\ See supra note 3.
\9\ Lender, when used in this release, refers to any persons
that loans a security on behalf of itself or another person,
including persons that own the securities being loaned (``beneficial
owners''), as well as third party intermediaries, including banks,
clearing agencies, or broker-dealers that intermediate the loan of
securities on behalf of beneficial owners (``lending agent''). The
term Lender does not extend to the borrower of securities in a
securities lending transaction or any third party the intermediates
the borrowing of securities on behalf of the borrower.
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Private data vendors have attempted to address the opacity in the
securities lending market by developing systems that provide data to
clients who both subscribe to those systems and provide their
transaction data to the data vendor. Only subscribers can use those
systems to receive information regarding securities lending
transactions.\10\ Moreover, as the private systems capture data only
from their subscribers, the available data is not complete, nor is the
transaction data captured by these private vendors available to the
general public without a subscription, or available in one centralized
location.
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\10\ See infra Part II.B.1.
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Industry observers and market participants have suggested that the
Commission consider measures to provide additional transparency in the
securities lending market.\11\ Furthermore, there have been other calls
for additional transparency, including in testimony during a hearing
before the House Financial Services Committee on March 17, 2021. Such
testimony supported the creation of a ``consolidated tape'' or a public
data feed of securities lending transactions.\12\
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\11\ During a March 17, 2021, hearing before the House Financial
Services Committee, Dennis Kelleher, CEO of Better Markets, former
SEC Commissioner Michael Piwowar, now Executive Director of the
Milken Institute Center for Financial Markets, and Michael
Blaugrund, COO of the NYSE, each testified that additional
transparency in the securities lending market is warranted. See Game
Stopped? Who Wins and Loses When Short Sellers, Social Media, and
Retail Investors Collide, Part II: Hearing Before the H. Comm. on
Fin. Serv., 117th Cong. (2021). As Michael Blaugrund stated during
the hearing, ``[a] system that anonymously published the material
terms for each stock loan would provide the necessary data to
understand shifts in short-selling activity while protecting the
intellectual property of individual market participants.''
\12\ Id.
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The lack of public information and data gaps creates inefficiencies
in the securities lending market. The gaps in securities lending data
render it difficult for borrowers and lenders alike to ascertain market
conditions and to know whether the terms that they receive are
consistent with market conditions.\13\ These gaps also impact the
[[Page 69804]]
ability of the Commission, RNSAs and other self-regulatory
organizations (``SROs''), and other Federal financial regulators
(collectively ``regulators'') to oversee transactions that are vital to
fair, orderly, and efficient markets.\14\ Indeed, the size of the U.S.
securities lending market can only be estimated as the data currently
``available on . . . securities lending transactions are spotty and
incomplete.'' \15\ Furthermore, the FSOC 2020 Annual Report noted data
gaps in ``certain important financial markets including transaction
data . . . for securities lending arrangements. . .'' \16\
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\13\ See infra Part VI.A.2.
\14\ In its 2020 Annual Report, FSOC describes securities
lending as ``support[ing] the orderly operation of capital markets,
principally by enabling the establishment of short positions and
thereby facilitating price discovery and hedging . . . it is
estimated that at the end of September 2020 the global securities
lending volume outstanding was $2.5 trillion, with around 57 percent
of it attributed to the U.S.'' Financial Stability Oversight Council
(FSOC), 2020 Annual Report, at 45, available at <a href="https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf">https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf</a>. See
also Viktoria Baklanova, Adam Copeland & Rebecca McCaughrin,
Reference Guide to U.S. Repo and Securities Lending Markets (Off. of
Fin. Research, Working Paper No. 15-17, 2015) at 5, available at
<a href="https://www.financialresearch.gov/working-papers/files/OFRwp-2015-17_Reference-Guide-to-U.S.-Repo-and-Securities-Lending-Markets.pdf">https://www.financialresearch.gov/working-papers/files/OFRwp-2015-17_Reference-Guide-to-U.S.-Repo-and-Securities-Lending-Markets.pdf</a>
(``OFR Reference Guide'').
\15\ OFR Reference Guide, supra note 14, at 5.
\16\ FSOC 2020 Annual Report, supra note 14, at 187.
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2. Intended Objectives
To supplement the publicly available information involving
securities lending, close the data gaps in this market, and minimize
information asymmetries between market participants, proposed Rule 10c-
1 is designed to provide investors and other market participants with
access to pricing and other material information regarding securities
lending transactions in a timely manner. For example, the Commission
preliminarily believes that the data collected and made available by
the proposed Rule would improve price discovery in the securities
lending market and lead to a reduction of the information asymmetry
faced by end borrowers and beneficial owners in the securities lending
market. The Commission preliminarily believes the proposed Rule would
close securities lending data gaps, would also increase market
efficiency, and lead to increased competition among providers of
securities lending analytics services and to reduced administrative
costs for broker-dealers and lending programs.\17\
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\17\ See infra Part VI.A.1.
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The data elements provided to an RNSA under proposed Rule 10c-1 are
also designed to provide the RNSA with data that could be used for
important regulatory functions, including facilitating and improving
its in-depth monitoring of member activity and surveillance of
securities markets. Further, the data elements are designed to provide
regulators with information to understand: Whether market participants
are building up risk; the strategies that broker-dealers use to source
securities that are lent to their customers; and the loans that broker-
dealers provide to their customers with fail to deliver positions.
Enhancing the transparency of data on securities lending transactions
should provide more information to help illuminate investor behavior in
the securities lending market and the broader securities market more
generally. It will also provide beneficial owners and borrowers with
better tools to ascertain current market conditions for securities
loans and allow them to determine whether the terms that they receive
for their loans are consistent with market conditions.
The Commission preliminarily believes that public disclosure of
specified material information regarding securities lending
transactions could improve efficiency in the securities lending market
and the securities market in general by reducing frictions that can
exist where pricing information is not publicly available.\18\ In
particular, providing access to timely, granular information about
certain material terms of securities lending transactions would allow
investors, including borrowers and lenders, to evaluate not only the
rates for such transactions, but also any signals that rates provide,
e.g., that changes in supply and demand for a particular security may
indicate an increase in short sales of that security.\19\ In addition,
increasing the accessibility of data could lower barriers to entry for
would-be participants in the securities lending market as well as the
securities markets more broadly because all market participants, not
just counterparties to a trade or those that subscribe to certain
services, would be able to view and analyze transactions that are
taking place in the securities lending market. As a result, the
disclosure of the specified material terms of securities lending
transactions might improve the efficiency and resiliency of the
securities market by reducing frictions in the cost of borrowing
securities, which may also have positive effects on the markets for the
securities themselves. Additional benefits from increased transparency
could include increased savings and profits for investors, improved
terms for beneficial owners participating in lending programs, and
improved competitiveness in the lending agent and broker-dealer
businesses. The proposal might also reduce the cost of short selling
and lead to an increase in fundamental research, which contributes to
more efficient prices.\20\ Finally, access to additional data can
contribute to more informed portfolio management and lending
decisions.\21\
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\18\ Frictions in trading costs and price can stem from general
lack of information on current market conditions, which can lead to
inefficient prices for securities loans. See infra Part VI.A.2.
\19\ Subject to certain exceptions, Rule 203 of Regulation SHO
requires a broker-dealer to identify shares of a security that are
available for borrowing prior to initiating a short sale in that
security. See 17 CFR 242.203(b). Rule 204 of Regulation SHO requires
a participant of a registered clearing agency to ``close out'' open
short sale positions within specified timeframes by either
purchasing or borrowing shares in order to make delivery. 17 CFR
242.204. As a result, heightened demand for borrowing shares of a
security is frequently associated with an increased level of short
selling activity in that security.
\20\ Fundamental research typically involves analyzing and
interpreting publicly-available company information to determine
whether a stock is under- or overvalued. See, e.g., Zvi Bodie, Alex
Kane & Alan J. Marcus, Investments 363 (2008).
\21\ See infra Part VI.C.1.b).
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II. Background
A. Market Structure
Securities lending is the market practice by which securities are
transferred temporarily from one party, a securities lender, to
another, a securities borrower, for a fee.\22\ A securities loan is
typically a fully collateralized transaction. Securities lenders,
referred to as ``beneficial owners,'' are generally large institutional
investors including investment companies, central banks, sovereign
wealth funds, pension funds, endowments, and insurance companies.\23\
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\22\ See, e.g., OFR Reference Guide, supra note 14, at 24.
\23\ Id. at 29.
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Beneficial owners of large, static, unleveraged portfolios, mainly
pension funds, increasingly cite securities lending as an important
income-enhancing strategy with minimal, or at least controlled,
risk.\24\ This incremental income not only helps defined-benefit
pension funds to generate income, but also provides investment company
investors with additional returns.\25\
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\24\ See Lipson, Sabel & Keane, infra note 37, at 1; OFR
Reference Guide, supra note 14, at 29; A Pilot Survey of Agent
Securities Lending Activity (Off. of Fin. Research, Working Paper
No. 16-08, 2016) at 4. <a href="https://www.financialresearch.gov/working-papers/2016/08/23/pilot-survey-of-agent-securities-lending-activity/">https://www.financialresearch.gov/working-papers/2016/08/23/pilot-survey-of-agent-securities-lending-activity/</a>
(``OFR Pilot Survey'').
\25\ OFR Reference Guide, supra note 14, at 29. See also Zoltan
Pozsar, Shadow Banking: The Money View (Off. of Fin. Research,
Working Paper No. 14-04, 2014), available at <a href="https://www.financialresearch.gov/working-papers/files/OFRwp2014-04_Pozsar_ShadowBankingTheMoneyView.pdf">https://www.financialresearch.gov/working-papers/files/OFRwp2014-04_Pozsar_ShadowBankingTheMoneyView.pdf</a>. The majority of passive and
exchange traded funds (ETFs) also engage in securities lending. In
each case, securities lending has been an important revenue source
that can compound each year to offset fees and transaction costs,
protect an asset manager's profit margins, and improve fund investor
returns. See, e.g., Tomasz Mizio[lstrok]ek, Ewa Feder-Sempach & Adam
Zaremba, The Basics of Exchange-Traded Funds, in International
Equity Exchange-Traded Funds, at 97-98 (1st ed. 2020).
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[[Page 69805]]
Broker-dealers are the primary borrowers of securities; they borrow
for their market making activities or on behalf of their customers.\26\
Broker-dealers who borrow securities typically re-lend those securities
or use the securities to cover fails to deliver or short sales \27\
arising from proprietary or customer transactions.\28\ While the
identities of the ultimate securities borrowers are usually unknown,
anecdotally, hedge funds rank among the largest securities borrowers
and access the lending market mainly through their prime brokers.\29\
Brokers and dealers may also lend securities that are owned by the
broker or dealer, customer securities that have not been fully paid for
(i.e., have been purchased with a margin loan from the broker-dealer),
and the securities of customers who have agreed to participate in a
fully paid securities lending program offered by their broker-
dealer.\30\
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\26\ Dealers, which often act as market makers, borrow
securities to settle buy orders from customers. See OFR Reference
Guide, supra note 14, at 33. See also Comptroller's Handbook:
Custody Services/Asset Management, Off. of the Comptroller of the
Currency, at 28 (Jan. 2002), <a href="https://www.occ.treas.gov/publications-and-resources/publications/comptrollers-handbook/files/custody-services/index-custody-services.html">https://www.occ.treas.gov/publications-and-resources/publications/comptrollers-handbook/files/custody-services/index-custody-services.html</a> (``Comptroller's Handbook'');
OFR Pilot Survey, supra note 24, at 2-3.
\27\ Regulation SHO requires, among other things, that fails to
deliver be closed out by purchasing securities of like kind and
quantity by no later than the settlement day after settlement is
due, or no later than two settlement days after settlement is due
for short sales resulting from long sales or from bona fide market
making activity. As previously emphasized by the Commission, the
determination of whether a short sale qualifies for the bona fide
market making is based on a variety of facts and circumstances
surrounding a transaction, and must be made on a trade-by-trade
basis. See Exchange Act Release No. 58775 (Oct. 14, 2008), 73 FR
61690 (Oct. 17, 2008), available at <a href="http://www.sec.gov/rules/final/2008/34-58775fr.pdf">http://www.sec.gov/rules/final/2008/34-58775fr.pdf</a>.
\28\ Brokers' and dealers' securities lending and borrowing
activities are governed by a number of regulations including 17 CFR
240.15c3-3 (``Exchange Act Rule 15c3-3''; commonly referred to as
the ``Customer Protection Rule''), 17 CFR 240.15c3-1 (``Exchange Act
Rule 15c3-1; commonly referred to as the ``Net Capital Rule''), 17
CFR 240.8c-1 and 17 CFR 240.15c2-1 (``Exchange Act Rules 8c-1 and
15c2-1 commonly referred to as the ``hypothecation rules''). See
also Comptroller's Handbook, supra note 26, at 28.
\29\ OFR Reference Guide, supra note 14, at 33. Many trading
strategies rely on the ability of the trader to borrow securities.
For example, traders often borrow securities to establish a short
position in one security to hedge a long position in another
security. Id.
\30\ See Exchange Act Rule 15c3-3.
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Securities lending transactions are usually facilitated by a third
party. Custodian banks have traditionally been the primary lending
agent or intermediary and lend securities on behalf of their custodial
clients for a fee.\31\ Advances in technology and operational
efficiency have made it easier to separate securities lending services
from custody services. Such developments have given rise to specialist
third-party agent lenders, who have established themselves as an
alternative to custodial banks.\32\ Agent lenders provide potential
borrowers with the inventory of securities available for lending on a
daily basis.\33\
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\31\ See infra Part VI. See, e.g., Comptroller's Handbook, supra
note 26, at 27. Beneficial owners typically share a portion of their
total compensation with the agent and it is common for the
beneficial owner to retain most of it. See, e.g., OFR Pilot Survey,
supra note 26, at 2.
\32\ OFR Reference Guide, supra note 14, at 31.
\33\ Id. at 34.
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In addition to agent intermediaries, \34\ there are also principal
intermediaries, such as prime brokers, securities dealers, and
specialist intermediaries. The role of the principal intermediary is to
provide credit transformation for lending clients who are not willing
to assume exposure to certain types of borrowers. For example, a prime
broker assumes credit exposure to the borrower.\35\ In short, agent
intermediaries aggregate supply on lendable assets, while principal
intermediaries aggregate demand for lendable assets.\36\ Some large
investment companies and their fund managers have created their own
securities lending programs and use their own employees to staff the
program rather than using the services of a custodial bank lending desk
or third-party agent lender.\37\
---------------------------------------------------------------------------
\34\ Agent intermediaries include custodian banks, agent lenders
and other third parties, such as asset managers or specialized
consultants. Id. at 30-31.
\35\ Id. at 32.
\36\ Id.
\37\ As a low-margin business, beneficial owners' portfolios
need to be of a sufficient size for a securities lending program to
be economically feasible. See OFR Reference Guide, supra note 14, at
29. See also Anthony A. Nazzaro, Chapter 4--Evaluating Lending
Options, in Securities Finance, at 83-84 (Frank J. Fabozzi & Steven
V. Mann ed. 2005). See also Fidelity, Fidelity Agency Lending,
available at <a href="https://capitalmarkets.fidelity.com/fidelity-agency-lending">https://capitalmarkets.fidelity.com/fidelity-agency-lending</a>; Fidelity, Q&A: New Securities Lending Agent for the
Fidelity Funds (July 8, 2020), available at <a href="https://institutional.fidelity.com/app/proxy/content?literatureURL=/9899781.PDF">https://institutional.fidelity.com/app/proxy/content?literatureURL=/9899781.PDF</a>. Also a few large pension and endowment funds lend
directly. See Paul C. Lipson, Bradley K. Sabel & Frank M. Keane,
Securities Lending, Federal Reserve Bank of New York Staff Report
no. 555, at 2 (Mar. 2012), available at <a href="http://www.newyorkfed.org/research/staff_reports/sr555.pdf">www.newyorkfed.org/research/staff_reports/sr555.pdf</a>.
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Traditionally, securities lending and borrowing transactions have
been conducted on a bilateral basis.\38\ Generally, when an end
investor wishes to borrow securities, and its broker-dealer does not
have those securities available in its own inventory or through
customer margin accounts to loan, the broker-dealer will borrow the
securities from a lending agent with whom it has a relationship. The
broker-dealer will then re-lend the securities to its customer. Loans
from lending programs to broker-dealers occur in what is referred to as
the ``Wholesale Market'', while loans from a broker-dealer to the end
borrower occur in what is referred to as the ``Retail Market''.
Obtaining a securities loan often involves an extensive search for
counterparties by broker-dealers.\39\
---------------------------------------------------------------------------
\38\ See, e.g., id. at 36. Typically, the parties enter into a
written contract that sets out their legal rights and obligations.
See OFR Reference Guide, supra note 14, at 36. While there are some
differences in the contract provisions used, usually the general
terms are the same. See Lipson, Sabel & Keane, supra note 37, at 44-
45. In the United States, a Master Securities Loan Agreement (MSLA)
is normally used to set out the legal rights and obligations of the
parties in securities lending transactions. See OFR Reference Guide,
supra note 14, at 36. A copy of the Master Securities Lending
Agreement (``MSLA'') published by SIFMA is available at <a href="https://www.sifma.org/resources/general/mra-gmra-msla-and-msftas/">https://www.sifma.org/resources/general/mra-gmra-msla-and-msftas/</a>.
\39\ See, e.g., Adam C. Kolasinski, Adam V. Reed & Matthew C.
Ringgenberg, A Multiple Lender Approach to Understanding Supply and
Search in the Equity Lending Market, 68 J. Fin. 559-95 (2013).
---------------------------------------------------------------------------
There are also digital platforms for secured financing
transactions, including securities lending, which provide electronic
trading in the securities lending market.\40\ Another approach to
securities lending is based on a competitive blind auction to determine
the optimal lending strategy for beneficial owners who opt to use the
auction route. The auction process is intended to improve price
transparency for borrowers who pay for access to lendable assets.\41\
There are also efforts to develop and expand peer-to-peer lending
platforms involving multiple beneficial owners and borrowers, where
securities lending transactions take place without the use of
traditional intermediaries.\42\
---------------------------------------------------------------------------
\40\ See, e.g., Equilend, Next-Generation Trading (NGT), <a href="https://www.equilend.com/services/ngt/">https://www.equilend.com/services/ngt/</a>.
\41\ See, e.g., eSecLending, The eSecLending Difference, <a href="https://www.eseclending.com/why-eseclending/">https://www.eseclending.com/why-eseclending/</a>. See also OFR Reference Guide,
supra note 14, at 32.
\42\ See, e.g., The Global Peer Financing Association, available
at <a href="https://globalpeerfinancingassociation.org">https://globalpeerfinancingassociation.org</a>.
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Additionally, the Options Clearing Corporation (``OCC'') has two
stock loan
[[Page 69806]]
programs: The Stock Loan Program (formerly ``Hedge'') and the Market
Loan program.\43\ The Stock Loan Program allows OCC clearing members to
use borrowed and loaned securities to reduce OCC margin requirements,
which OCC considers as reflecting the real risks of their intermarket
hedged positions. In this program OCC serves as a principal
counterparty, by becoming the lender to the borrower and the borrower
to the lender for each transaction. In its Market Loan program OCC
processes and maintains stock loan positions that have originated
through a Loan Market.\44\ OCC acts as central counterparty to these
matched loans and provides clearing and settlement services to the
market and OCC clearing members.\45\
---------------------------------------------------------------------------
\43\ See The Options Clearing Corporation, Stock Loan Programs,
<a href="https://www.theocc.com/Clearance-and-Settlement/Stock-Loan-Programs">https://www.theocc.com/Clearance-and-Settlement/Stock-Loan-Programs</a>;
see also The Options Clearing Corporation, Market Loan Program FAQs,
<a href="https://www.theocc.com/Clearance-and-Settlement/Stock-Loan-Programs/OCC-Market-Loan-Program-FAQs">https://www.theocc.com/Clearance-and-Settlement/Stock-Loan-Programs/OCC-Market-Loan-Program-FAQs</a>.
\44\ OCC currently clears securities lending transactions for
Automated Equity Finance Markets, Inc., a wholly owned subsidiary of
EquiLend Clearing LLC. See The Options Clearing Corporation, Market
Loan Program FAQs, <a href="https://www.theocc.com/Clearance-and-Settlement/Stock-Loan-Programs/OCC-Market-Loan-Program-FAQs">https://www.theocc.com/Clearance-and-Settlement/Stock-Loan-Programs/OCC-Market-Loan-Program-FAQs</a>.
\45\ The Depository Trust & Clearing Corporation (DTCC), through
its equities clearing subsidiary, National Securities Clearing
Corporation (NSCC), has proposed a rule change for regulatory
approval to centrally clear securities financing transactions, which
would include securities loans. See SEC, Notice of Filing of
Proposed Rule Change to Establish the Securities Financing
Transaction Clearing Service and Make Other Changes, SR-NSCC-2021-
010 (Aug. 5, 2021), available at <a href="https://www.sec.gov/rules/sro/nscc.htm#SR-NSCC-2021-010">https://www.sec.gov/rules/sro/nscc.htm#SR-NSCC-2021-010</a>.
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Securities loans may be either for a specific term or open-ended
with no fixed maturity date. The typical market practice is for
securities loans to be open-ended, allowing the security on loan to be
recalled by the beneficial owner. The open recall feature of a
securities loan is driven by the assumption that participation in
securities lending should not impact the investment strategy of the
lender.\46\ For example, a security may be recalled when its beneficial
owner would like to sell it or exercise its voting rights.\47\ Loans
that provide the borrower with certainty regarding the length of the
loan can be more valuable to the borrower.\48\
---------------------------------------------------------------------------
\46\ OFR Reference Guide, supra note 14, at 34.
\47\ OFR Reference Guide, supra note 14, at 29.
\48\ See, e.g., Mark C. Faulkner, Chapter 1--An Introduction to
Securities Lending, in Securities Finance, at 8 (Frank J. Fabozzi &
Steven V. Mann ed. 2005). A relatively static portfolio with low
securities turnover is more attractive to securities borrowers
because it minimizes recalls of loaned securities. See also OFR
Reference Guide, supra note 14, at 29.
---------------------------------------------------------------------------
Normally, the beneficial owner has specific guidelines regarding
which counterparties can borrow its securities and the type of
collateral it accepts. Lenders who are able and willing to be flexible
on the type of collateral they will accept to secure the loan are more
attractive to some borrowers.\49\ Beneficial owners may have different
approaches to securities lending and associated risks.\50\ For example,
some beneficial owners may prefer ``volume lending,'' in which large
volumes of easier to lend securities are lent and returns can be
enhanced with varying risk, such as the type of collateral accepted or
investment of cash collateral in higher-yielding and riskier vehicles.
Other beneficial owners may take a ``value lending'' approach where
they lend in-demand securities, which generate higher borrower fees,
and take a more conservative approach to the type of collateral
accepted or the reinvestment of cash collateral.\51\ Different types of
beneficial owners also operate under different laws and regulatory
frameworks, which may or may not include regulations or regulatory
guidance on securities lending activities. For example, investment
companies are registered with the SEC under the Investment Company Act
of 1940 and rules thereunder.\52\ Defined benefit plans are subject to
the Employee Retirement Security Act (``ERISA''), as administered by
the U.S. Department of Labor. Insurance companies are regulated at the
state level.
---------------------------------------------------------------------------
\49\ Faulkner, supra note 48, at 6.
\50\ See OFR Reference Guide, supra note 14, at 30.
\51\ See Mizio[lstrok]ek, et al., supra note 25, at 12.
\52\ See supra note 4.
---------------------------------------------------------------------------
In the United States, the most common form of collateral for equity
security loans is cash. The borrower of the security typically deposits
102% or 105% of the current value of the asset being loaned as
collateral.\53\ The Lender then reinvests this collateral, usually in
low-risk interest-bearing securities, then rebates a portion of the
interest earned back to the borrower. The difference between the
interest earned and what is rebated to the borrower is the lending fee
earned by the Lender. The portion of the interest earned on the
reinvested collateral that is returned to the borrower is called the
rebate rate, and is a guaranteed amount set forth in the terms of the
loan. It is possible for the Lender to lose money on the loan if the
interest earned on the reinvestment of the collateral does not exceed
the rebate rate. If the security is in high demand in the borrowing
market, the rebate rate may be negative, indicating that the borrower
does not receive any rebate and must also provide additional
compensation to the Lender.
---------------------------------------------------------------------------
\53\ OFR Pilot Survey, supra note 26, at 12. ``Margins on
securities loans are negotiable. The variation around the standard
margins of 102 percent and 105 percent can be attributed to firm-
specific differences in margining policies and the quality and type
of the collateral security.''
---------------------------------------------------------------------------
When collateral for a security loan is in the form of other
securities, the borrower pays the Lender a set fee. The fee depends on
the availability of the security being borrowed; securities in high
demand command a higher fee.\54\
---------------------------------------------------------------------------
\54\ OFR Pilot Survey, supra note 26, at 2.
---------------------------------------------------------------------------
While a security is on loan the borrower receives any dividends,
interest payments, and, in the case of equity security loans, holds the
voting rights associated with the shares.\55\ Usually the terms of the
loan stipulate that dividends and interest payments must be passed back
to the beneficial owner in the form of substitute payments.
---------------------------------------------------------------------------
\55\ See, e.g., OFR Reference Guide, supra note 14, at 36.
---------------------------------------------------------------------------
B. Transaction Reporting
As discussed above, certain institutional investors, including
pension funds (which provide retirement benefits) and mutual funds
(which retail and institutional investors rely on to meet financial
needs) lend out their securities to earn incremental income, help
pension funds generate income, and provide additional returns for their
long-term savers.\56\ As discussed below, the existing data are not
comprehensive or centralized, and there are significant information
asymmetries between market participants.\57\ The transaction
information that would be provided to an RNSA under proposed Rule 10c-1
would include securities lending transaction information from all
Lenders, and most of the information would be made publicly available.
The Commission preliminarily believes the proposed Rule would provide
material, granular, and timely data regarding the terms of securities
lending transactions thereby allowing market participants, the public,
and regulators access to key market information.
---------------------------------------------------------------------------
\56\ See supra Part II.A. See also OFR Reference Guide, supra
note 14, at 30.
\57\ See, e.g., infra Part VI.A.2.
---------------------------------------------------------------------------
1. Data Available From Private Vendors
Currently, the predominant sources of pricing information for
securities loans are private vendors who offer a variety of systems for
borrowers and lenders of securities to provide and receive information
regarding securities lending transactions. Some, if not all, of the
[[Page 69807]]
private vendors operate their systems on a ``give-to-get'' model, which
effectively precludes access to their systems unless the would-be
subscriber has securities lending transaction information to provide.
Some private securities lending data vendors provide an intraday data
feed or end of day information on securities lending transactions by
various market participants as well as analytic services involving such
data. The data are collected from securities lending transaction
participants, including beneficial owners, broker-dealers, agent
lenders and custodians.
Commonly collected data elements include CUSIP identifiers for
securities on loan, quantity, borrowing cost, utilization of available
supply, owner domicile, and type of collateral held.\58\
---------------------------------------------------------------------------
\58\ See OFR Reference Guide, supra note 14, at 63.
---------------------------------------------------------------------------
However, the available data are incomplete, as private vendors do
not have access to pricing information that reflects all transactions.
This in part, reflects the voluntary submission of transaction
information by subscribers to vendors and is compounded by the unknown
comparability of data due to, among other things, the variability of
the transaction terms disseminated, as well as how those terms are
defined. As no single vendor has information for all securities lending
transactions that take place, some persons pay to subscribe to multiple
vendors' systems in order to capture as much of the currently available
data as they determine to purchase, which can be expensive.\59\
---------------------------------------------------------------------------
\59\ See, e.g., Beneficial Owners Demand Independent
Benchmarking, Global Inv., 2017 WLNR 5380098 (Feb. 2, 2017).
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III. Discussion of Proposed Rule
A. Reporting
1. Obligation To Provide Information to an RNSA
The Commission is proposing Rule 10c-1(a), which would require any
person that loans a security \60\ on behalf of itself or another person
to provide to an RNSA the information required by paragraphs (b)
through (e) of proposed Rule 10c-1 (``10c-1 information'') as discussed
below \61\ in the format and manner required by the rules of the RNSA.
---------------------------------------------------------------------------
\60\ See Section 3(a)(10) of the Exchange Act, which defines the
term ``security.'' 15 U.S.C. 78c(a)(10).
\61\ See infra Part III.B.
---------------------------------------------------------------------------
(a) Obligation of Lender to Provide 10c-1 Information
Proposed Rule 10c-1 would apply to all Lenders. Section 10(c)(1) of
the Exchange Act makes it unlawful for any person, directly or
indirectly, by use of any means or instrumentality of interstate
commerce or of the mails, or of any facility of any national securities
exchange to effect, accept, or facilitate a transaction involving the
loan or borrowing of securities in contravention of such rules and
regulations as the Commission may prescribe as necessary or appropriate
in the public interest or for the protection of investors.\62\ The term
``person,'' for purposes of the Exchange Act, means a natural person,
company, government, or political subdivision, agency, or
instrumentality of a government.\63\ Accordingly, Section 10(c)(1) of
the Exchange Act provides the Commission with broad authority to
implement rules regarding securities lending transactions involving any
person, including banks, insurance companies, and pension plans, so
long as the rules involving the loan or borrowing of securities
prescribed by the Commission are necessary or appropriate in the public
interest or for the protection of investors. The Commission
preliminarily believes that the proposed Rule is necessary or
appropriate in the public interest or for the protection of investors.
As discussed further in Part VI, the securities lending market lacks
public information regarding securities lending transactions, which
creates inefficiencies in the securities lending market. The proposed
Rule is designed to address these inefficiencies in the securities
lending market by making more comprehensive information regarding
securities lending transactions publicly available, which could better
protect investors by eliminating certain information asymmetries that
currently exist in the securities lending market. The removal of such
information asymmetries may improve market efficiencies in the
securities market and enhance fair, orderly, and efficient markets for
borrowing of the securities and the market for such underlying
securities. Additionally, as discussed in greater detail in Part
VI.C.2, proposed Rule 10c-1 would provide a number of regulatory
benefits related to surveillance and enforcement, reconstruction of
market events, and research.
---------------------------------------------------------------------------
\62\ 15 U.S.C. 78j(c).
\63\ 15 U.S.C. 78c(a)(9).
---------------------------------------------------------------------------
Proposed Rule 10c-1(a) would require Lenders to provide certain
terms of securities lending transactions to an RNSA.\64\ The Commission
preliminarily believes that any person that loans a security on behalf
of itself or another person,\65\ which would include banks, insurance
companies, and pension plans, should be required to provide the
material terms of lending transactions to ensure that proposed Rule
10c-1 is appropriately ``designed to increase the transparency of
information available to brokers, dealers, and investors, with respect
to the loan or borrowing of securities.'' \66\ Although the majority of
securities lending transactions involve broker-dealers, over which the
Commission has direct regulatory oversight,\67\ a significant
percentage of securities lending transactions occur away from broker-
dealers.\68\ The Commission preliminarily believes that any person that
loans a security on behalf of itself or another person should be
required to provide the specified terms of a securities lending
transaction because excluding certain persons--such as banks, insurance
companies, and pension plans--would lead to incomplete information
regarding securities lending transactions, which might reduce the
benefits of the public availability of 10c-1 information and
potentially lead to competitive advantages for those Lenders that are
not required to provide 10c-1 information to an RNSA.
---------------------------------------------------------------------------
\64\ See infra Part III.A.2 (Discussion of which Lenders are
required to provide the 10c-1 information to the RNSA).
\65\ See infra Part III.A.2 (Discussion of the hierarchy
regarding who is required to provide information to the RNSA).
\66\ Public Law 111-203, 984(b), 124 Stat. 1376 (2010).
\67\ See 15 U.S.C. 78o.
\68\ While the Commission preliminarily believes that the
majority of transactions involve broker-dealers the precise
percentage is currently unknown. Based on 2015 survey data the
Commission estimates that broker-dealers facilitate between 60% and
90% of transactions in the equity lending market. See OFR Pilot
Survey, supra note 26, at 7-8.
---------------------------------------------------------------------------
The Commission proposes to limit the obligation to provide the
specified material terms to an RNSA only to the Lender to avoid the
potential double counting of transactions that could arise if the Rule
required both sides of the securities lending transaction to provide
the material terms. Furthermore, the Commission preliminarily believes
that the Lender is in the better position to provide the material terms
of the securities lending transactions. Lenders are more likely to have
access to all of the 10c-1 information. For example, a borrower will
not be privy to information required to be provided to the RNSA under
paragraph (e) of proposed Rule 10c-1, such as the number of securities
available to loan. Additionally, entities such as investment companies,
broker-dealers, and banks, which engage in securities lending
transactions, typically tend to be larger institutions because of the
[[Page 69808]]
scale necessary to make the lending of securities cost-effective.\69\
To the extent that smaller entities engage in securities lending, they
generally employ lending agents, which as discussed below in Part
III.A.2.a), would relieve these smaller lending entities from having to
provide the 10c-1 information to the RNSA. Accordingly, the Commission
preliminarily believes that requiring only the Lender to provide the
10c-1 information will alleviate the potential for the double counting
of transactions and limit the burdens of proposed Rule 10c-1 to larger
institutions.
---------------------------------------------------------------------------
\69\ See, e.g., Faulkner, supra note 48, at 6 (the economies of
scale offered by agents that pool together the securities of
different clients enable smaller owners of assets to participate in
the market. The costs associated with running an efficient
securities lending operation are beyond many smaller funds).
---------------------------------------------------------------------------
Proposed Rule 10c-1 would apply to all securities.\70\ The
Commission preliminarily believes that proposed Rule 10c-1 should apply
to all securities to ensure that a complete picture of transactions
involving the loan of securities is provided to the RNSA. According to
the OFR Pilot Survey, nearly half of the dollar value of assets on loan
in 2015 were debt instruments.\71\ If the Commission were to limit the
scope of the proposed Rule (e.g., to only equity securities) then a
significant number of securities lending transactions would be excluded
and the market efficiencies and reduction of information asymmetry that
the Commission anticipates will result from proposed Rule 10c-1 would
not accrue to non-equity securities.\72\ Accordingly, the proposed Rule
includes 10c-1 information for all securities lending transactions and
is not limited to loans of equity securities.
---------------------------------------------------------------------------
\70\ See Exchange Act Section 3(a)(10), supra note 60.
\71\ See OFR Pilot Survey, supra note 26, at 8.
\72\ Additionally, Congress did not limit or specify the classes
of securities in Section 984 of the DFA.
---------------------------------------------------------------------------
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
1. Should persons required to provide information regarding
securities lending transactions to an RNSA under proposed Rule 10c-1 be
limited to only persons registered with the Commission, such as
brokers-dealers, investment companies, investment advisers, and
clearing agencies? If so, why? What would be the impact or limitations
on the information made available to the public and regulators if
proposed Rule 10c-1 limited the requirement to provide information to
an RNSA to persons registered with the Commission? Please identify any
relevant data, such as the number of securities lending transactions
that would not be provided to an RNSA if the rule were limited to
registered persons and the dollar value of such transactions, which
would be useful for the Commission in considering the effects of the
proposed Rule.
2. What, if any, are the broader impacts of requiring that certain
information be provided to an RNSA, for example to help borrowers and
lenders evaluate rates and signals, such as whether a security is hard
to borrow or heavily shorted? Would such a requirement bring more
efficiency to the market? Please explain.
3. Are there certain types or categories of Lenders that should be
excluded from the requirements under proposed Rule 10c-1 to provide
10c-1 information to an RNSA? If so, please identify such Lender or
Lenders, and explain why they should be excluded from the requirements
under proposed Rule 10c-1. For example, should clearing agencies be
excluded from the requirements under proposed Rule 10c-1 to provide
Rule 10c-1 information to an RNSA? If so, why? How would such an
exclusion impact the information available to the public and
regulators? Should a broker-dealer that is borrowing securities from a
Lender that is not a broker-dealer have a requirement to provide 10c-1
information to an RNSA rather than the non-broker-dealer Lender? If so,
why?
4. Should borrowers be required to provide 10c-1 information
instead of, or in addition to, Lenders providing such information?
Would such a requirement increase the overall costs and burden of the
requirement to provide 10c-1 information to an RNSA? Is there
information that a borrower of securities is in a better position to
provide? Do commenters agree that the requirement to provide 10c-1
information to an RNSA is appropriately placed on Lenders? If not, why
not?
5. Does the proposed Rule not cover any transactions that
commenters believe should be covered? Does the scope of the proposed
Rule create opportunities for gaming or evasion of the reporting
requirements, whether through other economically equivalent instruments
or otherwise? If so, please explain.
6. The Commission is proposing to include all securities in the
scope of the Rule. Is this appropriate, or should certain types of
securities be excluded from the Rule? If so, which types of securities
should be excluded, and why? Are certain types of securities not lent?
7. Should the proposed Rule include an exception or exemption for
certain securities, such as government securities, from the requirement
to provide 10c-1 information to an RNSA in proposed Rule 10c-1? If so,
please identify the type of security and the rationale for excluding
such security from the requirement to provide 10c-1 information to an
RNSA in proposed Rule 10c-1.
8. Should the Commission define what it means to ``loan a
security''? Should such a definition be included in the Rule? What
further information is needed?
9. Is the discussion and overview of the securities lending market
included in this release accurate? If not, what is inaccurate regarding
the discussion of the securities lending market? Are there differences
in the securities lending market depending on the type of security
loaned, including whether the terms and structures of loans are the
same or different depending on security type.
10. As drafted, would the proposed Rule cover all securities
lending transactions? If not, what transactions would not be covered by
the proposed Rule? How might a Lender structure a securities lending
transaction to avoid providing information to an RNSA?
(b) Providing Information to an RNSA
The Commission preliminarily believes that Lenders should be
required to provide the material terms of securities lending
transactions to an RNSA. Currently, FINRA is the only RNSA and has
experience establishing and maintaining systems that are designed to
capture transaction reporting, such as the system in proposed Rule 10c-
1. For example, FINRA has established and operates several systems for
the reporting of transactions in equity and fixed income
securities.\73\ Indeed, the majority of securities lending transactions
are through broker-dealers that are members of FINRA.\74\ Most broker-
dealers already have connectivity to FINRA's systems to report trades
in equity and fixed income
[[Page 69809]]
securities. Accordingly, this requirement might help reduce the cost of
providing information to an RNSA because most FINRA members will
already have established connectivity to FINRA's systems. Furthermore,
as discussed below,\75\ the proposal would allow Lenders, including
lending agents, who are not members of FINRA to contract with reporting
agents that have connectivity to FINRA. The Commission preliminarily
believes that this could reduce the costs for a non-FINRA-member Lender
because rather than incur the costs associated with directly reporting
10c-1 information, including the costs of establishing connectivity
with FINRA, it will have the option to use a third party with existing
connectivity to provide the Lender's 10c-1 information to FINRA. In
addition, requiring 10c-1 information be provided to FINRA could assist
FINRA with its surveillance of FINRA Rules 4314 (Securities Loans and
Borrowings), 4320 (Short Sale Delivery Requirements), and 4330
(Customer Protection--Permissible Use of Customers' Securities)
regarding securities lending and short selling.
---------------------------------------------------------------------------
\73\ FINRA operates a number of transparency reporting systems
including the Alternative Display Facility (displaying quotations,
reporting trades, and comparing trades); OTC Transparency (over-the-
counter (OTC) trading information on a delayed basis for each
alternative trading system (ATS) and member firm with a trade
reporting obligation under FINRA rules); OTC Reporting Facility
(ORF) (reporting of trades in OTC Equity Securities executed other
than on or through an exchange and for trades in restricted equity
securities effected under Rule 144A under the Securities Act of 1933
and dissemination of last sale reports); Trade Reporting and
Compliance Engine (TRACE) (facilitates the mandatory reporting of
over-the-counter transactions in eligible fixed income securities);
and Trade Reporting Facility (TRF) (reporting of transactions
effected otherwise than on an exchange).
\74\ See supra note 68.
\75\ See infra Part III.A.2.
---------------------------------------------------------------------------
Under Section 10 of the Exchange Act, the Commission has the
authority to require persons that are not members of an RNSA to provide
information to an RNSA, and has previously exercised this authority.
Exchange Act Rule 10b-17 requires any issuer of a class of securities
publicly traded by the use of any means or instrumentality of
interstate commerce or of the mails to provide certain information to
an RNSA within a prescribed period of time to give notice to the market
regarding certain corporate events, such as the payment of dividends,
stock splits, or rights offerings.\76\ The Commission approved FINRA
rules and fees to support its administration of Exchange Act Rule 10b-
17, which provided for oversight of non-FINRA members' compliance with
Rule 10b-17.\77\
---------------------------------------------------------------------------
\76\ 17 CFR 240.10b-17.
\77\ See FINRA Rule 6490; See also Exchange Act Release 62434
(July 1, 2010); 75 FR 39603 (July 9, 2010) (approving FINRA Rule
6490).
---------------------------------------------------------------------------
The Commission could take an alternative approach to providing 10c-
1 information to an RNSA. For example, as discussed in Part VI below,
the Commission could require that Lenders provide 10c-1 information
directly to the Commission. The Commission does not currently have the
systems designed to facilitate trade-by-trade reporting and disclosure
as contemplated by the proposed Rule. As noted above, FINRA has
established and maintained systems similar to what is contemplated in
the proposed Rule. As such, the Commission preliminarily believes that
requiring Lenders to provide 10c-1 information to FINRA rather than to
the Commission, will effectively accomplish the policy objectives of
the Rule. As discussed throughout this release, the Commission
preliminarily believes that FINRA is well-positioned to accommodate the
trade-by-trade reporting of securities lending transactions.
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
11. Are there methods for the Commission to improve transparency in
the securities lending market other than requiring Lenders to provide
the material terms of a securities lending transaction to an RNSA? If
so, how would the commenter suggest improving transparency in the
securities lending market?
12. Would Lenders use a reporting agent to provide 10c-1
information to an RNSA? Why might a Lender choose not to use a
reporting agent? Would Lenders be unwilling to use reporting agents due
to concerns regarding maintaining the confidentiality of the
information that the reporting agent would be required to provide an
RNSA?
13. Should proposed Rule 10c-1 require that Lenders provide
material information to an entity other than an RNSA? For example,
should proposed Rule 10c-1 require the material terms of a securities
lending transaction be provided directly to the Commission, a clearing
agency, or some other entity? If so, should the proposed Rule require
that such entity be registered with the Commission? If the commenter
believes the entity does not need to be registered with the Commission
please explain how the Commission would oversee the repository of the
information?
14. Do commenters believe that FINRA, as the only current RNSA, is
the appropriate organization to receive, store, and disseminate the
10c-1 information? What concerns do commenters have, if any, about
requiring Lenders that are not FINRA members to either provide
information to FINRA themselves, or contract with a reporting agent to
provide the information to FINRA on their behalf? Do commenters believe
the proposed approach of establishing RNSAs as the exclusive recipients
and disseminators of 10c-1 information has implications for data
quality, compared to alternative approaches? If so, are there
alternative approaches commenters believe would address or mitigate
those implications?
2. Persons Responsible for Providing Information to an RNSA
To reduce the potential for double counting of securities lending
transactions and limit the burden on Lenders, proposed Rule 10c-1 would
specify who is responsible for providing information to an RNSA in
certain factual circumstances. First, although the proposed Rule places
an obligation on any person that loans a security on behalf of itself
or another person, if such Lender is using an intermediary such as a
bank, clearing agency,\78\ or broker-dealer for the loan of securities,
such lending agent shall have the obligation to provide the 10c-1
information to an RNSA on behalf of the Lender.\79\ Second, persons
with a reporting obligation, including a lending agent, could enter
into a written agreement with a broker-dealer that agrees to provide
the 10c-1 information to the RNSA on its behalf (``reporting agent'').
Finally, Lenders are required to directly provide the RNSA with the
10c-1 information if the Lender is not using a lending agent or not
employing a reporting agent to provide the 10c-1 information to an
RNSA.
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\78\ The Commission understands that certain clearing agencies
currently are offering to act as an intermediary on behalf of
beneficial owners to lend the beneficial owners' securities. In this
circumstance, a clearing agency would be acting as a lending agent
and would be required to provide 10c-1 information to an RNSA.
Specifically, it is the clearing agency's action as an intermediary
on behalf of a beneficial owner to loan the beneficial owner's
securities that triggers the requirement to provide the proposed
10c-1 information to an RNSA and not the clearance of the securities
lending transaction by itself.
\79\ As discussed in supra Part II.A, certain digital platforms
provide electronic trading in the securities lending market. These
platforms, to the extent they serve as lending agents on behalf of
beneficial owners, would be required to provide the 10c-1
information to an RNSA. If a platform is not serving as a lending
agent, the beneficial owner would be required to provide the 10c-1
information to an RNSA.
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(a) Lending Agent Provides Information to an RNSA
The Commission preliminarily believes it is appropriate to require
lending agents to provide 10c-1 information to the RNSA on behalf of
beneficial owners that employ lending agents, because lending agents
are in the best position to know when securities have been loaned from
the portfolios that the lending agent represents. Indeed, a beneficial
owner might not know that the lending agent has lent securities from
the portfolio until after the time prescribed by proposed Rule 10c-1 to
provide 10c-1 information to the RNSA. Furthermore, by requiring the
lending agent to provide 10c-1 information to the RNSA, the proposed
[[Page 69810]]
Rule would require the party intermediating the loan (i.e., the lending
agent) to also be responsible for providing the material terms of the
loan to the RNSA. Specifically, lending agents are directly involved
with the loan of securities on behalf of a beneficial owner. In such a
circumstance, the beneficial owner is passive. For purposes of proposed
Rule 10c-1, a beneficial owner that makes available the securities in
its portfolio for a lending agent to lend on its behalf is not directly
involved with the lending of its securities. Rather, it is the active
steps taken by the lending agent that directly results in a loan of
securities. For example, a customer of a broker-dealer that
participates in their broker-dealer's fully paid lending program might
lack the ability to provide 10c-1 information to the RNSA.\80\
Additionally, the beneficial owner may lack access to some of the 10c-1
information, such as the identifying information of the borrower.
Similarly, an institutional investor that uses a lending agent to
manage its securities lending program might not know within 15 minutes
that the lending agent has loaned securities from the institutional
investor's portfolio, or details on the specific borrower, negotiated
fees, or rebate rates.\81\
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\80\ See Exchange Act Rule 15c3-3(b)(3). 17 CFR 240.15c3-
3(b)(3).
\81\ For additional discussion of how lending agents manage the
portfolios of the beneficial owners that they lend shares on behalf
of, see infra Part VI.B.4.b) (discussing how lending programs
generally pool shares across accounts with which they have lending
agreements to create a common pool of shares available to lend).
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Accordingly, under proposed Rule 10c-1(a)(1)(i)(B) the beneficial
owner would not be required to provide the 10c-1 information to an RNSA
for any loan of securities intermediated by a lending agent. The
Commission preliminarily believes that responsibility for failing to
provide 10c-1 information to an RNSA should be on the lending agent and
not the beneficial owners because the lending agent is directly
responsible for the loan of securities. Furthermore, placing
responsibility on beneficial owners who do not have access to all the
necessary information to provide information to the RNSA might have a
chilling effect on persons being willing to loan securities, which
could negatively impact the securities market generally.
(b) Reporting Agent Provides Information to an RNSA
The Commission preliminarily believes it is appropriate that a
Lender, including a lending agent, be able to enter into a written
agreement with a broker-dealer acting as a reporting agent to permit
the reporting agent to provide the 10c-1 information to an RNSA on
behalf of the Lender because such an arrangement will ease burdens on
Lenders, including lending agents, that do not have or do not want to
establish connectivity to the RNSA. In order to employ a reporting
agent to report the 10c-1 information to the RNSA on behalf of the
Lender, proposed Rule 10c-1 would require the Lender and reporting
agent to enter into a written agreement. Such written agreements under
proposed Rule 10c-1(a)(1)(ii)(A) would memorialize and provide proof of
the contractual obligations for the reporting agent to provide the 10c-
1 information to an RNSA. Proposed Rule 10c-1(a)(1)(ii)(B) would
require the reporting agent to provide the 10c-1 information to an RNSA
if the reporting agent has entered into a written agreement to provide
the 10c-1 information to an RNSA pursuant to Rule 10c-1(a)(1)(ii)(A)
and such reporting agent is provided timely access to such 10c-1
information. The Commission preliminarily believes that it is
appropriate for a reporting agent to be responsible for providing
information to the RNSA if it contractually agrees to provide such
information to the RNSA and it has timely access to such information.
In such an instance, the person who enters into the written agreement
with the reporting agent is not required to provide the 10c-1
information to the RNSA. If, however, the reporting agent is unable to
provide 10c-1 information to the RNSA because it lacks timely access to
it, the person who enters into the written agreement with the reporting
agent is responsible for providing such information to the RNSA.\82\
For purposes of proposed Rule 10c-1 ``timely access'' would mean that
the reporting agent has access to the 10c-1 information with sufficient
time to provide such information to the RNSA within the fifteen minutes
after the securities loan is effected or the terms of the loan are
modified. This paragraph of proposed Rule 10c-1 is designed to ensure
that persons provide the 10c-1 information to a reporting agent so that
the reporting agent can provide the information to an RNSA within the
required timeframe. The Commission preliminarily believes that clearly
delineating who is responsible for providing the 10c-1 information to
the RNSA would aid in compliance with proposed Rule 10c-1 because each
party will have a clear understanding of its obligations when it enters
into a reporting agreement. Namely, the person or lending agent would
have an obligation to provide access to the 10c-1 information to the
reporting agent in a timely manner; and the reporting agent would have
an obligation to provide the 10c-1 information to the RNSA.
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\82\ For example, if a reporting agent establishes an automated
system that pulls 10c-1 information directly from the records
management system of a beneficial owner but the beneficial owner
disables the connectivity to the automated system for any reason,
the reporting agent would not have access to the 10c-1 information.
As a result, the beneficial owner would be required to provide 10c-1
information to an RNSA under paragraph (a)(1)(ii)(C) of proposed
Rule 10c-1.
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Furthermore, proposed Rule 10c-1(a)(2)(ii) would require that the
reporting agent enter into a written agreement with the RNSA. Such
written agreement must explicitly permit the reporting agent to provide
10c-1 information on behalf of Lenders. Additionally, proposed Rule
10c-1(a)(2)(iii) would require the reporting agent to provide the RNSA
with a list of each beneficial owner or lending agent on whose behalf
the reporting agent is providing 10c-1 information and to update the
list by the end of the day when the list changes. By requiring a
written agreement between the reporting agents and the RNSA, the
proposed Rule would require that the parties create documentation
regarding the agreement to provide 10c-1 information, which would
further provide evidence of the commitment by the reporting agent to
provide 10c-1 information to the RNSA. Additionally, requiring the
reporting agent to provide the identities of each person and lending
agent on whose behalf the reporting agent is providing 10c-1
information to the RNSA provides the Commission with the ability to
obtain the identities of such Lenders and broker-dealers (as discussed
below) from the RNSA, which would aid the Commission with its oversight
of the Lenders that have entered into agreements with reporting agents,
including with their compliance with the proposed Rule.
Under the proposed Rule, only a broker-dealer could serve as a
reporting agent. The Commission preliminarily believes that limiting
who can act as a reporting agent to broker-dealers, which are regulated
directly by the Commission, is in the public interest and would protect
investors because it would aid the Commission in overseeing compliance
with proposed Rule 10c-1. Specifically, by limiting reporting agents to
broker-dealers the Commission could directly oversee the reporting
agent's compliance with the requirement to provide 10c-1
[[Page 69811]]
information to the RNSA. Additionally, requiring that reporting agents
be broker-dealers provides the RNSA, as well as other self-regulatory
organizations (``SROs''), with the ability to oversee the activity of
its members that perform a reporting agent function. If reporting
agents were to include other entities the Commission might lack an
efficient way to oversee how the entity is complying with its
responsibility to provide 10c-1 information to an RNSA under proposed
Rule 10c-1.
Proposed Rule 10c-1(a)(2)(i) would require any reporting agent that
enters into a written agreement to provide information on behalf of
another person to establish, maintain, and enforce reasonably designed
written policies and procedures to provide 10c-1 information to an RNSA
in the manner, format, and time consistent with Rule 10c-1.
Accordingly, a broker-dealer could not act as a reporting agent unless
the broker-dealer establishes, maintains, and enforces such written
policies and procedures. The requirement for a reporting agent to have
such written policies and procedures would provide regulators with a
means to examine and enforce a reporting agent's compliance with
proposed Rule 10c-1.
Proposed Rule 10c-1(a)(2)(iv) would also require that the reporting
agent maintain certain information for a period of three years, the
first two years in an easily accessible place. The information required
to be maintained would include the 10c-1 information provided by the
beneficial owner or the lending agent to the reporting agent, including
the time of receipt, as well as the 10c-1 information that the
reporting agent sent to the RNSA, and time of transmission.
Additionally, the reporting agent would have to retain the written
agreements between the reporting agents and beneficial owners, lending
agents, and the RNSA. The recordkeeping requirements are designed to
help facilitate the Commission's oversight of reporting agents and
review the reporting agents' compliance with the requirement to provide
the 10c-1 information to the RNSA.
(c) Beneficial Owner Provides Information to an RNSA
As discussed above, proposed Rule 10c-1(a)(1)(i)(B) and
(a)(1)(ii)(C) provide that if a lending agent or reporting agent is
responsible for providing information required by Rule 10c-1 to an RNSA
pursuant to paragraphs (a)(1)(i) or (ii), the beneficial owner is not
required to provide the 10c-1 information to the RNSA. Accordingly, if
a beneficial owner does not employ a lending agent or enter into a
written agreement with a reporting agent, the beneficial owner would be
responsible for complying with the requirements of proposed Rule 10c-
1(a) to provide 10c-1 information to the RNSA. The Commission
preliminarily believes that only large beneficial owners run their own
lending programs without the assistance of a lending agent because
securities lending is a low-margin business and portfolios need to be
of a sufficient size for a securities lending program to be
economically feasible.\83\ Furthermore, to the extent a beneficial
owner is not using a lending agent, the Commission preliminarily
believes that it would likely enter into a written agreement with a
reporting agent.
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\83\ See supra note 37.
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(d) Examples of Who Is Responsible for Providing Information to an RNSA
To provide clarity regarding who is responsible for providing 10c-1
information to an RNSA the Commission offers the following examples:
A. Beneficial Owner and Lending Agent: A beneficial owner is
represented by a lending agent that is a bank. The lending agent
intermediates the loan of securities to a broker-dealer (the borrower)
on behalf of the beneficial owner. In this scenario, the lending agent
would be responsible for providing the 10c-1 information to the RNSA.
If, however, the beneficial owner uses a person to intermediate the
securities lending transaction that is not a bank, clearing agency, or
broker-dealer the beneficial owner would be responsible for providing
the 10c-1 information to the RNSA.
B. Beneficial Owner and Clearing Agency: As noted above, some
clearing agencies have established programs to intermediate the loan of
securities on behalf of beneficial owners. In such a scenario, the
clearing agency would be a lending agent and, similar to example A,
would be responsible for providing the 10c-1 information to the RNSA. A
clearing agency not acting as a lending agent would not have a
responsibility to provide 10c-1 information to an RNSA. For example, if
the clearing agent cleared a securities lending transaction but did not
act as an intermediary on behalf of a beneficial owner for the loan of
securities, the clearing agency would not be responsible for providing
the 10c-1 information to an RNSA.
C. Lending Agent and Reporting Agent: Same scenario as example A,
however, this time the lending agent has entered into a written
agreement with a reporting agent, which happens to be the same broker-
dealer that borrowed the shares in example A. In this scenario, the
reporting agent- even though it is the broker-dealer that borrowed the
securities--would be responsible for providing the 10c-1 information to
the RNSA.
D. Onward Lending: Same scenario as example A, however, the broker-
dealer that borrowed the securities in example A loans the borrowed
securities to a hedge fund. In this scenario, the broker-dealer would
be responsible for providing the 10c-1 information to the RNSA
regarding the securities lending transaction between the broker-dealer
and the hedge fund because the broker-dealer is lending the securities
that it borrowed. In this instance, the broker-dealer is loaning the
securities on behalf of itself. The obligations to provide information
as described in example A for the first lending transaction would
remain unchanged.
E. No Lending Agent or Reporting Agent: If a beneficial owner does
not employ a lending agent or reporting agent, and loans its
securities, the beneficial owner would be responsible for providing the
10c-1 information to the RNSA.
F. Reporting Agent Fails to Provide 10c-1 Information to the RNSA
on Behalf of a Person or Lending Agent: A lending agent enters into a
written agreement with a reporting agent to provide 10c-1 information
to an RNSA. The lending agent provides the reporting agent with timely
access to the 10c-1 information, but the reporting agent fails to
provide such information to the RNSA. The reporting agent would have
violated proposed Rule 10c-1 because it would have been responsible for
providing 10c-1 information to the RNSA. However, if the reporting
agent was not provided with timely access to the 10c-1 information by
the lending agent, the lending agent would have been responsible for
providing the 10c-1 information to the RNSA.
G. Fully Paid Securities Lending Program: If a broker-dealer lends
a customer's securities that are fully paid, the broker-dealer would be
responsible for providing the 10c-1 information to the RNSA. In this
instance, the broker-dealer, acting as the lending agent, is loaning
the securities on behalf of its customer.
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
15. Should proposed Rule 10c-1 permit reporting agents to be
entities other than broker-dealers? If yes, what other persons should
be added to the list of persons with whom a Lender can
[[Page 69812]]
enter into a written agreement to provide the 10c-1 information to an
RNSA and why?
16. Should lending agents include other entities in addition to
banks, clearing agencies, and broker-dealers? If yes, what other
entities should be added to the list of persons with whom a Lender can
enter into a written agreement to provide the 10c-1 information to an
RNSA and why?
17. The proposed Rule requires a reporting agent that provides 10c-
1 information to an RNSA on behalf of another person to establish,
maintain, and enforce written policies and procedures that are
reasonably designed to ensure compliance with the proposed Rule by the
reporting agent. Is such a requirement necessary or should it be
modified? Please explain why or why not. The proposed Rule also
requires that a reporting agent retain records of 10c-1 information
provided to the RNSA for three years. Is such a requirement necessary
or should it be modified? Please explain. Are there other records or
supporting records that should be retained? If yes, what is the length
of time that a reporting agent should retain such records and why?
18. What impact, if any, would the recordkeeping requirements in
paragraph (a)(2)(iv) have on liquidity in the lending market or the
cash market for securities that are subject to the requirement to
provide 10c-1 information?
19. Should the proposed Rule require that a person who enters into
a written contract whereby a reporting agent agrees to provide 10c-1
information to an RNSA, pursuant to paragraphs (a)(1)(ii) of the
proposed Rule, make a determination that it is reasonable to rely on
the reporting agent to provide 10c-1 information? Please discuss.
Should the reporting agent be required to provide regular notice to its
principal of compliance by the reporting agent with its 10c-1 reporting
responsibilities (e.g., if the reporting agent fails to timely provide
the 10c-1 information to an RNSA)? Please discuss. Should the reporting
agent be required to provide notice to its principal and/or the RNSA if
it is unable to timely access the Lender's 10c-1 information? Please
discuss.
20. Should the Rule identify specific contractual terms that must
be included in the written agreement between the reporting agent and
the person with the requirement to provide 10c-1 information to the
RNSA? If so, what specific contractual terms should the Rule include,
e.g., notice when 10c-1 information is provided to the RNSA, notice
that information was provided late?
B. Information To Be Provided to an RNSA
As discussed throughout this release, to increase the transparency
of information available to market participants with respect to the
loan or borrowing of securities, proposed Rule 10c-1 contains data
elements consisting of the specified material terms of securities
lending transactions that Lenders must provide to an RNSA. The
Commission preliminarily believes that the data elements that would be
provided to an RNSA, and the subsequent public disclosure of certain of
these data elements, would vastly increase the transparency of
information available. Unlike the data that is currently available
through private vendors, the data that an RNSA would make public under
proposed Rule 10c-1 would be available to all without charge or usage
restrictions, would have consistently applied definitions and
requirements, and would capture all loans of securities. Proposed Rule
10c-1 may, therefore, provide a more complete and timely picture of
trading, including interest in short selling and price discovery for
securities lending. The data elements provided to an RNSA under
proposed Rule 10c-1 are also designed to provide RNSAs with data that
might be used for in-depth monitoring and surveillance.
Paragraphs (b) through (d) contain loan-level data elements. These
data elements would be required to be provided to an RNSA within 15
minutes after each loan is effected or modified, as applicable.\84\
Paragraph (e) contains additional data elements related to the total
amount of each security available to loan and total amount of each
security on loan that Lenders must provide to the RNSA by the end of
each business day that such person was required to provide information
to an RNSA under paragraph (a) or had an open securities loan about
which it was required provide information to an RNSA under paragraph
(a). Proposed Rule 10c-1 also requires RNSAs to make the data elements
provided under paragraphs (b), (c), and (e) \85\ publicly available as
soon as practicable, and in the case of paragraph (e) data, not later
than the next business day. For the purposes of proposed Rule 10c-1, a
loan would be effected when it is agreed to by the parties. Similarly,
a loan would be modified when the modification is agreed to by the
parties.
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\84\ As discussed in detail below, paragraph (c) would only
require that information about a modification be provided to an RNSA
in certain circumstances. See Part III.B.1.b); see also proposed
Rule 10c-1(c).
\85\ As discussed below, proposed Rule 10c-1(d) requires the
provision of certain data to an RNSA that will not be made public by
the RNSA. These data elements are important for regulatory purposes
but public release of the data would identify market participants or
could reveal information about the internal operations of a market
participant.
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As discussed in Part VI, the Commission preliminarily believes that
the requirement to provide to an RNSA the loan-level data elements in
proposed Rule 10c-1(b) through (d) within 15 minutes after each loan is
effected (or, for modifications, within 15 minutes after a loan is
modified) and the subsequent disclosure of certain of these data
elements by the RNSA as soon as practicable would increase the
transparency of information available to market participants by
allowing for the evaluation of the terms of recently effected loans and
any signals that these terms provide. Also, in a fast-moving market,
market participants would benefit from visibility into recent
transactions when considering whether to accept proposed terms for new
loans or accept requests to modify existing loans.
Further, as discussed in Part VI, the Commission also preliminarily
believes that the requirement to provide to an RNSA the data elements
concerning the total amount of securities available to lend and the
total amount of securities on loan in proposed Rule 10c-1(e) at the end
of each day will provide market participants with an understanding of
the available supply of securities and a simple, centralized daily
snapshot of the number of securities on loan.\86\ The total amount of
securities on loan varies over the course of the day, but the
Commission preliminarily believes that the intraday information would
not be necessary in light of other 10c-1 information that will be made
public intraday by the RNSA. For example, market participants can use
the intraday loan-level data made public by the RNSA under paragraphs
(b) and (c) and the most recent daily information made public by the
RNSA under paragraph (e) together to estimate intraday information.
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\86\ As discussed below, the Commission is not specifying the
parameters of ``the amount of the security'' to allow an RNSA
flexibility with respect to any proposed rules. For example, an RNSA
could propose rules that identify for different types of securities
the information that constitutes the ``amount of the security.'' See
infra Part III.B.1.a).
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Regardless of whether the data element is required to be provided
to an RNSA intraday or daily, proposed Rule 10c-1 would require the
RNSA to make certain data elements public as soon as practicable. The
Commission
[[Page 69813]]
preliminarily believes that not mandating a specific timeframe will
provide the RNSA with flexibility to structure its systems, policies,
and procedures but anticipates that the RNSA would make the data
publicly available on a rolling basis very shortly after receipt. With
respect to information under paragraph (e), such information would be
required to be made publicly available as soon as practicable but not
later than the next business day. Because the RNSA would be required to
perform calculations to aggregate by security the data elements
provided under paragraph (e), the Commission preliminarily believes
that specifying this timeframe would provide RNSAs with the time needed
to perform these calculations while also requiring that the information
be made publicly available in a timely manner.
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
21. Does the reporting of loan-level information within 15 minutes
after each loan is effected or modified, as applicable, provide
sufficient transparency? Please explain why or why not. If it would
not, please provide an alternative and explain why the alternative
would be preferable. For example, would end of day reporting for loan-
level information provide sufficient transparency--why or why not?
22. For the data elements provided to an RNSA under paragraphs (a)
through (c), should the Commission specify how quickly an RNSA should
make the information publicly available? If so, which information and
how long should an RNSA be given? Would limiting an RNSA's flexibility
to structure its systems, policies, and procedures by specifying a
timeframe create operational problems for the RNSA?
23. Should the Commission specify a different or more specific
timeframe than ``not later than the next business day'' for the RNSA to
make information provided under paragraph (e) publicly available? Does
the ``no later than the next business day'' timeframe provide RNSAs
with the time needed to perform these calculations while also requiring
that the information be made publicly available in a timely manner?
1. Data Elements Provided to an RNSA
As discussed, to facilitate transparency in the securities lending
market, proposed Rule 10c-1(b) through (e) would require Lenders to
report specified data elements to an RNSA and for the RNSA to make
certain data elements publicly available. As a preliminary matter,
because the RNSA would be required to implement rules regarding the
format and manner to administer the collection of information,\87\
proposed Rule 10c-1 lists the data elements that persons would be
required to provide to an RNSA, but does not specify granular
instructions for data elements or the formatting required for
submission to the RNSA.
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\87\ Proposed Rule 10c-1(f). For a further discussion of this
provision of proposed Rule 10c-1, see infra Part III.C.
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(a) Initial Loan-Level Data Elements
Proposed Rule 10c-1(b) contains loan-level data elements that would
be required to be provided to an RNSA within 15 minutes after a loan is
effected and would be made public by an RNSA as soon as practicable.
Proposed Rule 10c-1(b) also requires an RNSA to assign each loan a
unique transaction identification identifier.\88\ The specific data
elements in paragraph (b) generally fall into one of two categories:
(1) Data elements that identify each loan of securities and (2) data
elements that reflect the negotiated terms for each loan of securities.
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\88\ This unique reference identifier would be necessary to
provide an RNSA with modified loan terms under proposed Rule 10c-
1(c).
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The data elements in paragraphs (b)(1) through (b)(5) contain
material terms that are not negotiated between the parties. These data
elements would provide important information that would allow market
participants and regulators to track, understand, and perform analyses
on the negotiated material terms that are discussed below. These data
elements would also provide an RNSA with enough information to create a
unique transaction identifier as required by proposed Rule 10c-1(b).
Absent these data elements, market participants would not be able to
track the time or date that loans are made or the platform where the
loan was executed, or to identify which security was involved.
These data elements are (1) the legal name of the security issuer,
and the Legal Entity Identifier (``LEI'') of the issuer, if the issuer
has an active LEI; (2) the ticker symbol, ISIN, CUSIP, or FIGI of the
security, if assigned, or other identifier; (3) the date the loan was
effected; (4) the time the loan was effected; and (5) for a loan
executed on a platform or venue, the name of the platform or venue
where executed.
First, paragraphs (1) and (2) of proposed Rule 10c-1 identify the
particular security being lent. Paragraph (1) is designed to provide
information on the issuer, and paragraph (2) is designed to provide
information on the particular security. These paragraphs are designed
to be flexible and comprehensive so that every security that can be
loaned is able to be identified. In particular, with respect to
paragraph (b)(1), the Commission preliminarily believes that an issuer
that lacks an LEI would have a legal name. With respect to paragraph
(b)(2), the Commission preliminarily believes that securities usually
would have at least one of the items listed assigned to it. If not, the
RNSA could require an ``other identifier'' for further flexibility
under paragraph (2).
Next, both paragraphs containing the data elements concerning time
and date required to be provided to the RNSA, (b)(3) and (b)(4),
require that information be reported about the time and date that the
transaction was effected. Because the loan-level data elements in
paragraph (b) are designed for market participants to be able to
evaluate the terms of recently effected loans and any signals that
these terms provide, the Commission preliminarily believes that the
time and date the transaction was effected will be more useful to
market participants than other times and dates because market
participants will be able to have a clear picture of the signals that
the parties to that transaction were considering when entering into the
loan.\89\
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\89\ For example, the Commission could have chosen the time and
date that a transaction settles. Since settlement may take a period
of time to occur after agreement, however, there may be changes to
market dynamics in the time period between agreement and settlement.
In such a case, the information made publicly available by the RNSA
may not be as useful because the conditions of the market at the
time the loan was agreed to would not be known.
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For a loan effected on a platform or venue, paragraph (b)(5) would
require the name of the platform or venue where effected. The
Commission preliminarily believes that requiring the identity of a
platform or venue where transactions are taking place could increase
efficiency in the market by alerting investors to potential sources of
securities to borrow.\90\ As discussed in Part II.A, there are
currently digital platforms for securities lending, which provide
electronic trading in the securities lending market. There are also
efforts to develop and expand peer-to-
[[Page 69814]]
peer lending platforms involving multiple beneficial owners and
borrowers, where securities lending transactions take place without the
use of traditional intermediaries. The Commission is not defining
``platform or venue'' in proposed Rule 10c-1 to provide an RNSA with
the discretion to structure its rules so that different structures of
platforms or venues could be accommodated.
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\90\ Making information that would be provided to an RNSA under
paragraph (d) about the identity of the parties lending securities
publicly available would also alert investors to potential sources
of securities to borrow. As stated infra in Part III.B.1.c),
however, the Commission preliminarily believes that making this
information available to the public would be detrimental because it
would reveal a specific market participant's investment decisions.
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Based on the market conventions that are discussed in Part II.A,
the Commission preliminarily believes that the data elements in
paragraphs (b)(6) through (b)(12) reflect the material terms that
borrowers and Lenders negotiate when arranging loans of securities.
Because these terms are negotiated, increasing the transparency of
information will provide market participants with meaningful data that
could be used when structuring, pricing, or evaluating loans of
securities. Increasing transparency would also allow market
participants to analyze signals obtained from the securities lending
market when considering investment or trading decisions for a security.
Further, increasing transparency would also permit the RNSA to perform
in-depth monitoring and surveillance of securities lending transactions
to identify trends and any anomalous market patterns.
These data elements are: (6) The amount of the security loaned; (7)
for a loan not collateralized by cash, the securities lending fee or
rate, or any other fee or charges; (8) the type of collateral used to
secure the loan of securities; (9) for a loan collateralized by cash,
the rebate rate or any other fee or charges; (10) the percentage of
collateral to value of loaned securities required to secure such loan;
(11) the termination date of the loan, if applicable; and (12) whether
the borrower is a broker or dealer, a customer (if the person lending
securities is a broker or dealer), a clearing agency, a bank, a
custodian, or other person.
With respect to the data element in paragraph (b)(6), the amount of
the security loaned or borrowed, the Commission is not specifying the
parameters of ``the amount of the security'' to allow an RNSA
flexibility to propose rules that identify for different types of
securities what information constitutes the ``amount of the security.''
For example, an RNSA could propose rules that require the number of
shares be provided for equity securities and the par value of debt
securities to accommodate differences in the markets for these
securities. This data element would give market participants the
ability to infer an estimate of the total amount of each security
available to lend or on loan intraday by cross-referencing data made
public the prior day by the RNSA pursuant to paragraph (e).\91\ It
would also give market participants the ability to observe how the size
of loans affects other terms of loans.
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\91\ For a discussion of the data elements in paragraph (e), see
infra Part III.B.1.d).
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As discussed in Part II.A, loans of securities can be
collateralized in different ways and the structure of the payments
depends on the type of collateral used. The data elements in proposed
Rule paragraphs (b)(7) through (b)(10) would capture compensation
arrangements regardless of the collateral used.\92\ Accordingly, to
provide context, paragraph (b)(8) would require information about the
type of collateral used to secure the loan to be provided to the RNSA.
For this data element, the asset class of the collateral would be
provided, but the Commission is not including a list of asset classes
in order to provide the RNSA with the discretion to determine a
thorough list.\93\ To facilitate a deeper understanding of the
collateral posted, paragraph (b)(10) would require that the percentage
of collateral to value of loaned securities required to secure such
loan be provided to the RNSA. Paragraph (b)(7) would require that, for
a loan not collateralized by cash, the securities lending fee or rate,
or any other fee or charges be provided to the RNSA. In contrast, for
loans that are collateralized by cash, paragraph (b)(9) would require
that the rebate rate or any other fees or charges be provided to the
RNSA.
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\92\ Certain of these data elements may not apply to every loan.
For example, a Lender would not be able to provide data pursuant to
paragraph (b)(9) if the loan is not collateralized by cash. The
Commission is proposing to include each of these data elements in
proposed Rule 10c-1 to capture pricing and collateral information
for every loan, but the RNSA may provide Lenders with instructions
about how to provide information when a data element is not
applicable to a specific loan.
\93\ For example, an RNSA could look to the 9 categories of
collateral from the OFR Pilot Survey. These 9 categories were: (1)
U.S. Treasury Securities; (2) U.S. Government Agency Securities; (3)
Municipal Debt Securities; (4) Non-U.S. Sovereign or Multinational
Agency Debt Securities; (5) Corporate Bonds; (6) Private Structured
Debt Securities; (7) Equity Securities; (8) Cash as securities; and
(9) Others. See Off. of Fin. Research, Securities Lending Pilot Data
Collection, at 12 (Sep. 2015), available at <a href="https://www.financialresearch.gov/data/files/SecLending_Data_Collection_Instructions.pdf">https://www.financialresearch.gov/data/files/SecLending_Data_Collection_Instructions.pdf</a> (``Securities Lending
Pilot Data Collection'').
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Paragraph (b)(11) would require that the termination date of the
loan be provided to the RNSA, if applicable. As discussed above in Part
II.A, it is typical market practice for securities loans to be open-
ended, and, therefore, the securities may be recalled upon notice given
by the Lender. In contrast, some loans are for a specific term. The
Commission preliminarily believes that this information will provide
market participants with an understanding of the potential future
demand and supply of securities.\94\
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\94\ For further discussion about how proposed Rule 10c-1 may
affect the supply and demand of securities, see infra Part VI.
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Finally, paragraph (b)(12) requires that the borrower type for each
transaction be provided. The Commission preliminarily believes that
this data element will be useful to provide context for evaluating the
other data elements. For example, borrowers of securities that are
broker-dealers may determine that loans of securities to other broker-
dealers are a more appropriate benchmark than all loans of securities.
This data element, therefore, may enhance the transparency provided by
the other data elements.
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
24. What other data elements, if any, should be included to
increase the transparency of securities lending?
25. Would any of the listed data elements not be informative to the
public or to regulators? If not, why not? Should any of the data
elements be removed or modified? If so, why?
26. Should all of the data elements in paragraph (b) be made public
at the loan-level as proposed? As an alternative, should some be made
public in the aggregate or only made available to regulators? Would
providing aggregates of 10c-1 information provide the same or greater
benefits than loan-level information as proposed? Please discuss how
your response relates to the statutory objective of increasing
transparency.
27. Are there sufficient data elements to allow for the
identification of loans of securities and permit the creation of a
unique transaction identifier by the RNSA or should additional or
different data elements be required for this purpose?
28. Other than LEI, are there other issuer identifiers such as the
EDGAR Central Index Key (commonly abbreviated as ``CIK'') that could be
provided should the issuer have one? If yes, should the other
identifier be required in addition to LEI or in the alternative?
29. Are any of the data elements redundant such that an RNSA can
determine the information without being provided that particular data
element?
[[Page 69815]]
30. Are the data elements in paragraphs (b)(7), (b)(8), and (b)(9)
sufficient to capture the pricing terms of all loans? If not, how
should the data elements be revised to capture the pricing terms of all
loans?
31. Would each data element proposed to be included help to achieve
the goals of proposed Rule 10c-1 that are discussed above in Part
I.A.2? If so, please explain why. If not, please explain why not. If
any elements are not necessary please explain the benefits and costs of
excluding those data elements.
(b) Loan Modification Data
Subject to terms agreed to by the parties, loans of securities may
be modified after they are made. To ensure that the transaction data
reported and made public pursuant to proposed Rule 10c-1(b) reflects
currently outstanding loans of securities and to prevent evasion,
proposed Rule 10c-1(c) would require Lenders to provide data elements
concerning modifications to loans of securities to an RNSA within 15
minutes after each loan is modified. Proposed Rule 10c-1(c) would also
require an RNSA to make such information available to the public as
soon as practicable. Under paragraphs (c)(1) through (c)(3), Lenders
would be required to provide the date and time of the modification and
the unique transaction identifier of the original loan to the RNSA. The
Commission preliminarily believes that this information is necessary to
allow the RNSA to identify which loan is being modified, categorize the
type of modification, and make information about the modification
publicly available.
Under paragraph (c), the requirement to provide information about a
modification to an RNSA would be contingent on the modification
resulting in a change to information required to be provided to an RNSA
under paragraph (b). In these instances, Lenders would be required to
provide the date and time of the modification, a description of the
modification \95\ and the unique transaction identifier assigned to the
original loan, if any. For example, termination of a loan would be a
modification for which information would need to be provided to an RNSA
under paragraph (c) because the termination would result in a reduction
of the quantity of the securities initially provided to an RNSA for
that loan under paragraph (b)(6). Another example would be where a loan
that is collateralized by cash is modified so that the borrower pays a
one-time fee to the lender without changing the rebate rate since a
one-time fee would be an ``other fee or charge'' under paragraph
(b)(9).\96\
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\95\ The Commission is not specifying the parameters of the term
``description of the modification'' to allow an RNSA flexibility to
propose rules about the descriptions that could be needed for
different types of modifications and how such information would be
reflected in the updated information made public and stored in a
machine readable format as required by paragraph (g)(1).
\96\ An example of a modification that would not trigger the
requirement in paragraph (c) would be when a borrower posts
additional collateral in response to an increase in value of the
loaned securities. Information about this change would not need to
be provided under paragraph (c) because, while paragraph (b)(10)
requires the Lender to provide the percentage of collateral to value
of loaned securities required to secure such loan, it does not
require information about the value of collateral posted in dollar
terms.
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32. Are the circumstances that would trigger an obligation to
provide information to an RNSA about a modification under the proposed
Rule clear? If not, please provide specific examples of circumstances
where the proposed requirement to do so is unclear and explain why.
33. Are there any modifications to information provided to an RNSA
pursuant to proposed Rule 10c-1(b) that should not be required to be
provided to an RNSA? Why or why not? Please explain how excluding such
a term from reporting would not make the data already made public by an
RNSA potentially misleading.
34. Should additional data elements about modifications be provided
to an RNSA? If yes, please explain why and how these data elements
would increase transparency.
35. Should the Commission require a data element that would list
which party initiated the termination of the loan (e.g., whether shares
were recalled by the Lender or whether the borrower returned the shares
without a request from the Lender)? If yes, please explain the benefits
of requiring that this information be provided and how it would be
used.
(c) Material Transaction Data That Would Not Be Made Public
As discussed, proposed Rule 10c-1 is designed to increase the
transparency of information available to market participants with
respect to the loan or borrowing of securities. Proposed Rule 10c-1 is
also designed to provide regulators with data that could be used to
better understand securities trading, including interest in short
selling and price discovery for securities lending.\97\ The data
elements in proposed Rule 10c-1(e) are necessary for these regulatory
functions but the Commission preliminarily believes that making this
information available to the public would identify market participants
or reveal information about the internal operations of market
participants. Accordingly, although proposed Rule 10c-1(d) requires
certain data elements be provided to an RNSA within 15 minutes after
each loan is effected, the RNSA shall keep such information
confidential, subject to the provisions of applicable law.
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\97\ Under paragraph (g)(2), an RNSA would make the information
collected pursuant to paragraphs (b) through (f) available to the
Commission or other persons as the Commission may designate by order
upon a demonstrated regulatory need.
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First, paragraph (d)(1) requires the Lender to provide ``[t]he
legal name of each party to the transaction, CRD or IARD Number, if the
party has a CRD or IARD Number, MPID, if the party has an MPID, and the
LEI of each party to the transaction, if the party has an active LEI,
and whether such person is the lender, the borrower, or an intermediary
between the lender and the borrower.'' \98\ The Commission
preliminarily believes that the provision of this data element to the
RNSA will allow regulators to understand buildups in risk at market
participants.\99\ Further, this data element will provide the RNSA with
information that would be required to administer the collection of all
data elements provided to it under paragraphs (b) through (d) of
proposed Rule 10c-1, such as ensuring the completeness of submissions,
contacting persons that have errors in their provided data, and
troubleshooting person-specific technical issues. While this
information is important for regulatory purposes, the Commission
preliminarily believes that making this information available to the
public would be detrimental because it may reveal a specific market
participant's investment decisions.
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\98\ Unlike borrowers who may not know the identity of the
principal that has loaned them securities if a lending agent
administers the lender's program, the Commission preliminarily
believes that all lenders (or their lending agent) should have
access to the identity of the borrower because lenders must track
the parties to whom they have lent securities.
\99\ To facilitate this understanding, paragraph (g)(2) would
require RNSAs to make the information collected pursuant to
paragraphs (b) through (e) of this section available to the
Commission or other persons as the Commission may designate by order
upon a demonstrated regulatory need.
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If the Lender is a broker-dealer, proposed Rule 10c-1(d)(2) would
require information about ``[w]hether the security is loaned from a
broker's or dealer's securities inventory to a customer of such broker
or dealer'' to be provided to an RNSA. The Commission
[[Page 69816]]
preliminarily believes that this information would provide regulators
with information on the strategies that broker-dealers use to source
securities that are lent to their customers. This data element would
not apply to Lenders that are not broker-dealers. The Commission
preliminarily believes that making this information available to the
public would be detrimental because it may reveal confidential
information about the internal operations of a broker-dealer.
If a person that provides 10c-1 information knows \100\ that a loan
is being used to close out a fail to deliver as required by Rule 204 of
Regulation SHO,\101\ to close out a fail to deliver outside of
Regulation SHO, proposed Rule 10c-1(d)(3) requires such information be
provided to an RNSA. The Commission preliminarily believes that these
data elements will provide regulators with information about short
sales and the loans that broker-dealers provide to their customers with
fail to deliver positions.
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\100\ Because Lenders of securities may not be aware of the
borrowers' motivations for a transaction, the data elements in
paragraph (d)(3) would only need to be provided to an RNSA if known.
\101\ 17 CFR 242.204.
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In particular, Regulation SHO requires brokers-dealers that are
participants of a registered clearing agency to take action to close
out fail to deliver positions.\102\ One option for closing out a fail
to deliver position is to borrow securities of like kind and quantity.
Accordingly, broker-dealers may lend securities to their customers to
close out the failure to deliver, which may constrain the supply of
securities available to lend. Rule 204's close-out requirement is only
applicable to equity securities and broker-dealers may also arrange for
the borrowing of securities to cover a fail to deliver outside of
Regulation SHO for all other types of securities.\103\ Paragraph (d)(3)
would require the provision of this information, if known, to provide
regulators with insight into loans to cover fails of non-equity
securities. The Commission preliminarily believes that making these
data elements available to the public would be detrimental because it
may reveal information about the internal operations of market
participants.
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\102\ A fail to deliver occurs when a participant of a
registered clearing agency fails to deliver securities to a
registered clearing agency on the settlement date. See 17 CFR
242.204(a).
\103\ See 17 CFR 240.15c6-1 (Commission rule containing the
standard settlement cycle for most securities transactions; See also
Securities Transaction Settlement Cycle, Exchange Act Release No.
80295, 82 FR 15564, at 7-10 (Mar. 22, 2017), available at <a href="https://www.sec.gov/rules/final/2017/34-80295.pdf">https://www.sec.gov/rules/final/2017/34-80295.pdf</a> (portion of release
adopting changes to the settlement cycle discussing overview of
settlement requirements).
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While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
36. Would the disclosure of the data element in paragraph (d)(1)
(the identities of the parties) be helpful to investors, for example,
to understand proxy voting issues?
37. Should one or both of the data elements in paragraph (d)(2) or
(d)(3) be made available to the public? If yes, please explain why and
whether it should be at loan-level or in the aggregate.
38. Are Lenders already collecting the information required by
paragraph (d)(1)? In particular, are Lenders collecting a borrower's
CRD, IARD, MPID, or LEI, if applicable? If not, should proposed Rule
10c-1 only require Lenders to provide this information if the borrower
makes it known to the Lender? Why or why not? Would Lenders be required
to modify any existing agreements to provide this information to an
RNSA?
39. Should any of the data elements in paragraph (d) be modified or
removed? If so, which ones and why?
40. Should data elements be added to paragraph (d). If yes, please
explain.
41. Given the confidential 10c-1 information that the Lender and
reporting agent would provide to an RNSA should there be requirements
placed on the RNSA and/or the reporting agent to protect confidential
10c-1 information?
42. Should Lenders be required to provide all of the identifying
data elements listed in d(1) for every loan of securities or should
only one of those data elements be required? For example, would just
providing a CRD be sufficient to allow the RNSA to identify the parties
to a transaction? What are the costs and benefits of either approach?
Further, would the lack of an LEI make it more challenging to identify
entities across different data sets? Should borrowers be required to
obtain an LEI if they do not already have one?
(d) Total Amount of Securities Available to Loan and Total Amount of
Securities on Loan
Paragraph (e) of proposed Rule 10c-1 would require data elements
concerning securities available to loan and securities on loan be
provided to an RNSA. These data elements would need to be provided by
the end of each business day that a person included in paragraphs
(e)(1) or (e)(2) of proposed Rule 10c-1 either was required to provide
information to an RNSA under paragraph (a) or had an open securities
loan about which it was required provide information to an RNSA under
paragraph (a).\104\ For each security about which the RNSA receives
information under paragraph (e), paragraph (e)(3) would require the
RNSA to make available to the public only aggregated information for
that security, as well as the information required by (e)(1)(i) and
(ii) and (e)(2)(i) and (ii) as soon as practicable, but not later than
the next business day.\105\ The Commission preliminarily believes that
requiring the RNSA to make available to the public the information
required by paragraph (e)(1)(i) and (e)(2)(i) (the legal name of the
security issuer, and the LEI of the issuer, if the issuer has an active
LEI) and (e)(1)(ii) and (e)(2)(ii) (the ticker symbol, ISIN, CUSIP, or
FIGI of the security, if assigned, or other identifier) will provide
identifying information for each security for which aggregate
information would be made public. The data elements in proposed Rule
10c-1(d) are necessary for these regulatory functions but the
Commission preliminarily believes that making this information
available to the public would identify market participants or reveal
information about the internal operations of market participants.
Accordingly, under paragraph (e)(3), all identifying information about
lending agents, reporting agents, and other persons using reporting
agents, would not be made publicly available, and the RNSA would be
required to keep such information confidential, subject to the
provisions of applicable law.
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\104\ The Commission is not specifying exactly what time would
be considered the ``end of each business day'' or what holidays
should not be considered a ``business day'' to give the RNSA the
discretion to structure its systems and processes as it sees fit and
propose rules accordingly.
\105\ Releasing data as provided would identify market
participants. Consistent with the reasoning for not making the
information required to be provided by paragraph (d) publicly
available, the Commission preliminarily believes that this
information should not be made public by an RNSA. Further, as
described below, the Commission preliminarily believes that the
information in paragraph (e) will be used by market participants to
determine a utilization rate. Information aggregated by security is
the input for that calculation.
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To specify the information that would be required to be provided to
an RNSA under paragraph (e) and to ensure that all relevant securities
available to loan or on loan are included, the data elements of
paragraph (e) are separated between lending agents, who would provide
the data elements in paragraph (e)(1), and persons who do not employ a
lending agent, who would provide the data elements in paragraph (e)(2).
As fully discussed below, despite their
[[Page 69817]]
different locations in the text of paragraph (e), however, the first
two elements listed in paragraphs (e)(1) and (e)(2) are the same for
all persons. In addition, the last two data elements require the same
general information, but would provide certainty about the positions
that should be included in the information that is provided to an RNSA.
Further, both paragraphs would require that reporting agents provide
the identity of the person on whose behalf it is providing the
information to the RNSA. Identifying the person on whose behalf the
information is being provided would facilitate regulatory oversight
regarding compliance with the requirements of paragraph (e).
As a preliminary matter, as more thoroughly discussed in Part VI,
the Commission has designed the data elements provided to the RNSA
under paragraph (e) to allow for the calculation of a ``utilization
rate'' for each particular security. The utilization rate, which would
be calculated by dividing the total number of shares on loan by the
total number of shares available for loan, could be used by market
participants to evaluate whether the security will be difficult or
costly to borrow.
The first two data elements that would be required to be provided
to the RNSA by all persons under paragraph (e) would be the legal name
of the security issuer; and the LEI of the issuer, if the issuer has an
active LEI; and the ticker symbol, ISIN, CUSIP, or FIGI of the
security, if assigned, or other identifier.\106\ These data elements
are necessary to calculate the utilization rate from the total amount
of each security on loan and available to loan.
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\106\ Proposed Rule 10c-1(e)(1)(i) and 10c-1(e)(1)(ii)
(requirements applicable to lending agents) and Proposed Rule 10c-
1(e)(2)(i) and 10c-1(e)(2)(ii) (requirements applicable to all other
persons). The data elements in paragraphs (i) and (ii) of proposed
Rule 10c-1(e)(1) and (e)(2) mirror the same requirements under
paragraph (b)(1) and (b)(2). For an explanation of the flexibility
of these requirements, see supra Part III.B.1.a).
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Next, all persons would be required to provide information about
the total amount of each security that is available to lend and is on
loan. The language ``total amount of each security'' would provide
RNSAs with flexibility to accommodate market conventions of different
types of securities. For example, if it chooses to do so, this language
would give an RNSA the discretion to make rules that require the number
of shares be provided for equity securities and par value of debt
securities.\107\ Further, the language is designed to require that
security-specific information is provided to market participants so
that a security-specific utilization rate would be able to be
calculated.
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\107\ This example was previously discussed above in reference
to paragraph (b)(6). See supra Part III.B.1.a).
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All persons would be required to provide the total amount of each
security that is available to lend under either paragraph (e)(1)(iii)
or (e)(2)(iii). Per paragraph (e)(1)(iii), a security that is not
subject to legal restrictions that would prevent it from being lent
would be ``available to lend.'' \108\ For example, a lending agent that
provides information on behalf of a beneficial owner should exclude any
securities that the beneficial owner has specifically restricted from
the lending program. Some programs may be subject to overall portfolio
restrictions \109\ (e.g., no more than 20% of the portfolio may be lent
at any time),\110\ and/or specific counterparty restrictions (e.g.,
counterparty rating). However, because those restrictions apply to the
overall portfolio but not the specific securities held in those
portfolios, those securities would be available to lend unless the
securities are themselves subject to restrictions that prevent them
from being lent. The Commission preliminarily believes that this
approach would provide market participants with useful information
because all securities that generally would be available to lend would
be included.
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\108\ This definition is consistent with the approach of the
OFR's General Instructions for Preparation of the Securities Lending
Pilot Data Collection. See Securities Lending Pilot Data Collection,
supra note 93, at 2.
\109\ For example, Commission staff guidance forms the basis for
investment companies' securities lending practices. See Investment
Company Derivatives Rule, 85 FR 83228, n. 742. As a result,
investment companies typically do not have more than one-third of
the value of their portfolio on loan at any given point in time.
See, e.g., SEC Staff No-Action Letter, RE: The Brinson Funds, et
al., available at <a href="https://www.sec.gov/divisions/investment/noaction/1997/brinsonfunds112597.pdf">https://www.sec.gov/divisions/investment/noaction/1997/brinsonfunds112597.pdf</a>) (Nov. 25, 1997) (``One of the
guidelines is that a fund may not have on loan at any given time
securities representing more than one-third of its total assets.'').
This staff statement represents the views of the staff of the
Division of Investment Management. It is not a rule, regulation, or
statement of the Commission. The Commission has neither approved nor
disapproved its content. The staff statement, like all staff
statements, has no legal force or effect: It does not alter or amend
applicable law, and it creates no new or additional obligations for
any person.
\110\ For example, a beneficial owner that has program limits
permitting the loan of any portfolio security, up to 20% of the
portfolio would include 100% of the portfolio as lendable. A
beneficial owner that will only lend specified securities, which
represent 25% of the portfolio, would list only those specified
securities as lendable. Similarly, a beneficial owner that will lend
any security in its portfolio but has program limits in place to
avoid loaning more than one-third of the value of their portfolio at
any time would report 100% of its securities as available to lend.
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Next, all persons would be required to provide the total amount of
each security that is on loan under either paragraph (e)(1)(iv) or
(e)(2)(iv). Per paragraph (e)(1)(iv), a security would be ``on loan''
if the loan has been contractually booked and settled.\111\ Because a
loan should be considered effected when it is agreed to by the
parties,\112\ effected loans that have not been booked and settled
would not be included in the total amount of each security on loan that
is provided to the RNSA. The Commission preliminarily believes this
information will provide information that is more relevant for this
purpose of allowing market participants to plan their borrowing
activity, since loans that have been booked and settled are truly no
longer able to be lent by the Lender providing the information to the
RNSA.\113\
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\111\ Like the interpretation of ``available to loan'' discussed
in note 108, the interpretation of ``on loan'' is consistent with
the approach of the OFR's General Instructions for Preparation of
the Securities Lending Pilot Data Collection. See Securities Lending
Pilot Data Collection, supra note 93, at 2.
\112\ See Part III.B.
\113\ Further, while it may be possible to infer a rough
estimate of the amount of securities on loan from the information
provided under paragraphs (b) and (c) without using any information
provided under paragraph (e), the Commission preliminarily believes
that the information provided under paragraph (e) should allow
market participants to calculate a utilization rate that is likely
to be reliable.
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To illustrate when Lenders would be required to provide information
under paragraph (e) and the securities that would be considered
``available to loan'' and ``on loan'' with an example: Consider a
Lender that owns five shares of Issuer A, five shares of Issuer B, and
five shares of Issuer C, none of which are subject to legal
restrictions that prevent them from being lent. If on a business day
this Lender does not have any outstanding securities loans and does not
loan any securities, it would not be required to provide information
about any of its securities under paragraph (e). In contrast, if on a
business day this Lender loans three of its shares of issuer A, the
Lender would be required to provide information to an RNSA under
paragraph (e) because it would have been required to provide
information about this loan to an RNSA under paragraph (a). This Lender
would consider two shares of issuer A, five shares of Issuer B, and
five shares of Issuer C as ``available to loan'' because none of these
shares would be subject to legal or other restrictions that prevent
them from being lent. Further, if the loan of three shares of Issuer A
clears
[[Page 69818]]
and settles on that business day, this Lender would consider the three
shares of Issuer A as ``on loan.''
As noted above, to provide clarity about what would be required to
be provided to an RNSA under paragraph (e) and to ensure that all
relevant securities available to loan or on loan are included, the data
elements of paragraph (e) are separated between lending agents, who
would provide the data elements in paragraph (e)(1), and persons who do
not employ a lending agent, who would provide the data elements in
paragraph (e)(2).\114\
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\114\ Paragraph (a)(1)(i)(A) defines lending agent as a ``bank,
clearing agency, broker, or dealer that acts as an intermediary to a
loan of securities . . . on behalf of a [beneficial owner].'' Under
this definition, a lending agent that is not acting as a lending
agent with respect to a particular securities loan would still be a
lending agent, and, therefore be subject to paragraph (e)(1) and not
(e)(2).
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With respect to lending agents, paragraph (e)(1) contains different
requirements for lending agents that are broker-dealers and lending
agents that are not broker dealers. In particular, under paragraph
(e)(1)(iii), if a lending agent is a broker or dealer, the lending
agent would provide to the RNSA the total amount of each security
available to lend by the broker or dealer, including the securities
owned by the broker or dealer, the securities owned by its customers
who have agreed to participate in a fully paid lending program, and the
securities in its margin customers' accounts. If the lending agent is
not a broker-dealer, the lending agent would provide to the RNSA the
total amount of each security available to the lending agent to lend,
including any securities owned by the lending agent in the total amount
of each security available to lend provided.
Similarly, under paragraph (e)(1)(iv), if a lending agent is a
broker-dealer, the lending agent would provide to the RNSA the amount
of each security on loan by the broker or dealer, including the
securities owned by the broker or dealer, the securities owned by its
customers who have agreed to participate in a fully paid lending
program, and the securities that are in its margin customers' accounts
in the total amount of each security on loan. If the lending agent is
not a broker-dealer, the lending agent would provide to the RNSA the
total amount of each security on loan where the lending agent acted as
an intermediary on behalf of a beneficial owner and securities owned by
the lending agent in the total amount of each security on loan provided
to the RNSA.
The Commission preliminarily believes that the requirements for
lending agents will provide them with specificity around which
positions to include in the information that is provided to an RNSA
under paragraph (e). In addition, because some lending agents are
broker-dealers, the Commission preliminarily believes that the
applicable requirements should ensure that all relevant positions are
included.
With respect to all other persons, paragraphs (e)(2)(iii) and
(e)(2)(iv) contain the requirements for the positions that should be
included in the total amount of each security available to lend and on
loan. Unlike paragraph (e)(1), paragraph (e)(2) does not distinguish
among different types of persons in paragraph (e)(2) because, due to
the definition of lending agent in paragraph (a)(1)(i)(A), persons
subject to paragraph (e)(2) would not be loaning securities on behalf
of other persons. It is not necessary, therefore, to distinguish
between different types of market participants because these entities
would, by definition, only be loaning securities that they own.
Accordingly, persons subject to paragraph (e)(2)(iii) would provide to
the RNSA the total amount of each security that is owned by the person
and available to lend.\115\ In addition, under paragraph (e)(2)(iv),
these persons would provide to the RNSA the total amount of each
security on loan owned by the person.
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\115\ Proposed Rule 10c-1(e)(2)(iii).
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While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
43. Should the RNSA make the information reported under proposed
Rule 10c-1(e) public at the level it is provided (e.g., not aggregating
the information by security)? Why or why not?
44. Should Rule 10c-1 require the RNSA to make the information
required by paragraph (e) publicly available in a manner that
identifies the Lender if that Lender volunteers to make such
information public? Why or why not? If so, should only beneficial
owners be permitted to volunteer to make such information public and
not lending agents? Why or why not?
45. Should paragraph (e) be limited to only require information
about certain types of securities, such as only equity securities? If
so, please explain which securities should be included and why the
excluded securities should not be included.
46. Are the data elements required by paragraphs (e)(1)(i)/
(e)(2)(i) (the legal name of the security issuer, and the LEI of the
issuer, if the issuer has an active LEI) and (e)(1)(ii)/(e)(2)(ii) (the
ticker symbol, ISIN, CUSIP, or FIGI of the security, if assigned, or
other identifier) both necessary? Would only requiring one of these be
sufficient to allow identification of the security about which the
information is being provided? Would only requiring one of these reduce
the utility of the data in other ways, for example, by making it more
challenging to identify entities and/or securities across multiple data
sets?
47. As noted above, the language ``total amount of each security''
is intended to provide the RNSA with flexibility to accommodate market
conventions of different types of securities. For example, this
language is intended to give an RNSA the discretion to make rules, if
it chooses to do so, that require the number of shares be provided for
equity securities and par value of debt securities. Instead of this
approach, should the Commission specify the specific reporting
obligations applicable to specific types of securities under paragraph
(e) rather than leaving it to the discretion of an RNSA? If yes, please
explain why and provide a methodology for determining the total amount
of each security available for loan and on loan for various types of
securities.
48. The Commission recognizes that the definition of ``available to
lend'' may overstate the quantity of securities that could actually be
lent because the data would include securities that may become
restricted if a limit is reached. Should a different definition be
used? Is there another definition that would provide a better or more
accurate estimate of securities available for loan than the proposed
definition? In particular, please also explain how the alternative
approach would operationally work and give market Lenders certainty
around the securities it would classify as available to lend.
49. If the number of shares available to lend was not made publicly
available, are there alternative data that market participants could
use to evaluate whether the security will be difficult or costly to
borrow? For example, could a market participant look to the public
float of a security instead? Why or why not? Would there be other
impacts on the utility of the data?
50. To avoid the provision of information about individual market
participants' proprietary portfolios, should the Commission limit the
requirement to provide information under paragraph (e) to lending
programs that pool the securities of multiple beneficial owners? In
addition or as an
[[Page 69819]]
alternative, should the Commission remove the requirement that a
reporting agent would be required to provide the identity of the person
on whose behalf it is providing the information? Would this be
consistent with the purpose of the proposed rule, which is to increase
transparency in the securities lending market? Why or why not?
51. Do the definitions of ``available to lend'' or ``on loan''
conflict with market practice or other regulatory requirements? If yes,
please explain.
52. Do you believe that any of the information in paragraph (e) of
the proposed Rule should not be required to be provided or that any of
the requirements of paragraph (e) should be modified? Do you believe
that any information in addition to the information required to be
provided in paragraph (e) of the proposed Rule should be provided?
Please explain why.
53. Do you believe that the information provided pursuant to
paragraph (e) of the proposed Rule should be provided more frequently
or less frequently than each business day? Why or why not?
C. RNSA Rules To Administer the Collection of Information
The Commission is proposing Rule 10c-1(f), which would require the
RNSA to implement rules regarding the format and manner to administer
the collection of information in proposed paragraphs (b) through (e) of
this section and the distribution of such information pursuant to
Section 19(b) of the Exchange Act. The Commission preliminarily
believes that permitting an RNSA to implement rules regarding the
administration of the collection of securities lending transactions
would enable the RNSA to maintain and adapt potential technological
specifications and any changes that might occur in the future. Under
the proposal, and consistent with Exchange Act Section 19(b), the
Commission would retain oversight of the RNSA's adoption of rules to
administer the collection of information under proposed Rule 10c-
1.\116\
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\116\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
54. Should proposed Rule 10c-1 specify the format and manner that
information should be provided to the RNSA rather than require the RNSA
to adopt rules regarding such format and manner? Please discuss. Are
there disadvantages to having an RNSA adopt a rule regarding the format
and manner that information should be provided to the RNSA pursuant to
proposed Rule 10c-1? What advantages would there be if Rule 10c-1
specified the format and manner that information should be submitted to
the RNSA?
D. Data Retention and Availability
The Commission is proposing Rule 10c-1(g)(1) to require that an
RNSA retain the information collected pursuant to paragraphs (b)
through (e) of proposed Rule 10c-1 in a convenient and usable standard
electronic data format that is machine readable and text searchable
without any manual intervention for a period of five years. The
Commission preliminarily believes that requiring the RNSA to retain
records for five years is consistent with other retention obligations
of records that Exchange Act rules impose on an RNSA. For example, 17
CFR 240.17a-1, Exchange Act Rule 17a-1 requires RNSAs to keep documents
for a period of not less than five years. Similarly, 17 CFR
242.613(e)(8), Rule 613(e)(8) of Regulation NMS, on which the retention
period for proposed Rule 10c-1 is modeled, requires the central
repository to retain information in a convenient and usable standard
electronic data format that is directly available and searchable
electronically without any manual intervention for a period of not less
than five years. Rule 10c-1(g)(1) is using a standard for storage that
is similar to Rule 613(e)(8). The standard sets forth the criteria for
how information must be stored but does not specify any particular
technological means of storing such information, which should provide
flexibility to the RNSA to adapt to technological changes that develop
in the future. As with Exchange Act Rule 17a-1, the retention period is
intended to facilitate implementation of the broad inspection authority
given the Commission in Section 17(a) of the Exchange Act.\117\ The
Commission preliminarily believes that including a retention period
that is consistent with other rules applicable to RNSAs reduce the
burden for an RNSA to comply with the retention requirements in
proposed Rule 10c-1 because the RNSA will have developed experience and
controls around administering record retention programs that are
similar to the requirements of proposed Rule 10c-1(g)(1).
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\117\ See, e.g., Recordkeeping and Destruction of Records,
Exchange Act Release 10809 (May 17, 1974), 39 FR 18764 (May 30,
1974); see also Recordkeeping and Destruction of Records, Exchange
Act Release 10140 (May 10, 1974), 38 FR 12937 (May 17, 1973).
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Furthermore, the Commission is proposing Rule 10c-1(g)(2), which
would require the RNSA to make the information collected pursuant to
paragraph (a)(2)(iii) and paragraphs (b) through (e) of this section
available to the Commission or other persons, such as SROs or other
regulators, as the Commission may designate by order upon a
demonstrated regulatory need. The Commission preliminarily believes
that stating explicitly that it would have access to the information
that is being provided to the RNSA is appropriate because in times of
market stress or extreme trading conditions, including spikes in
volatility, the Commission will be able to quickly access and analyze
activity in the market place. In addition to the Commission and the
RNSA, other regulators may require access to the confidential
information for regulatory purposes, for example to ensure enforcement
of the regulatory requirements imposed on the entities that they
oversee.
The Commission is also proposing Rule 10c-1(g)(3), which would
require the RNSA to provide the information collected under paragraphs
(b) and (c) of this section and the aggregate of the information
provided pursuant to paragraph (e) of this section available to the
public without charge and without use restrictions, for at least a
five-year period. The Commission preliminarily believes that requiring
the RNSA to provide certain information to the public will further the
direction by Congress in Section 984(b) of the DFA for the Commission
to promulgate rules that are designed to increase the transparency of
information to brokers-dealers and investors, with respect to the loan
or borrowing of securities because the information required to be
disclosed by the RNSA will include the specified material terms of
securities lending transactions.
The Commission preliminarily believes that access to the publicly
available 10c-1 information as required by paragraph (g)(3) should be
available on the RNSA's website or similar means of electronic
distribution in the same manner such information is required to be
maintained pursuant to paragraph (g)(1) of this section (specifically,
``a convenient and usable standard electronic data format that is
machine readable and text searchable without any manual
intervention''), and be free and without use restrictions. The
Commission acknowledges that establishing and maintaining a system to
provide public access to certain 10c-1 information is not without cost.
The Commission, however, preliminarily believes that such costs should
be borne
[[Page 69820]]
by the RNSA in the first instance and permitted to be recouped by the
RNSA from market participants who report securities lending
transactions to the RNSA.\118\ Furthermore, proposed Rule 10c-1 would
require that the publicly available 10c-1 information be made available
without use restrictions. The Commission preliminarily believes that
any restrictions on how the publicly available 10c-1 information is
used will impede the utility of such information because such
restrictions may limit the ability of investors, commercial vendors,
and other third parties, such as academics, from developing uses and
analyses of the information.\119\
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\118\ See infra Part III.E.
\119\ The requirement to provide the 10c-1 information in the
same manner such information is maintained pursuant to paragraph
(g)(1) of this section on the RNSA's website without charge and
without use restrictions is not intended to preclude the RNSA from
creating alternative means to provide information to the public or
subscribers. For example, an RNSA might choose to file with the
Commission proposed rules to establish data feeds of the Rule 10c-1
information that vendors might subscribe to and repackage for onward
distribution.
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The Commission preliminarily believes that five years is the
appropriate length of time for the RNSA to make information available
to the public, because such a time period will provide broker-dealers
and investors with an opportunity to identify trends occurring in the
market and in individual securities based on changes to the material
terms of securities lending transactions.
The Commission is also proposing Rule 10c-1(g)(4), which would
require the RNSA to establish, maintain, and enforce reasonably
designed written policies and procedures to maintain the security and
confidentiality of the confidential information required by paragraphs
(d) and (e)(3). As discussed above in Parts III.B.1.c) and d), Rule
10c-1 would require Lenders to provide sensitive and confidential
information to the RNSA. Furthermore, paragraphs (d) and (e)(3) would
require that the RNSA keep such information confidential. The
Commission preliminarily believes that the RNSA needs to protect this
information from intentional or inadvertent disclosure to protect
investors that provide such information by establishing reasonably
designed written policies and procedures because the distribution of
such information would identify market participants or could reveal
information about the internal operations of market participants, which
could be adverse to those providing information to the RNSA. For
example, the disclosure of such information could reveal the portfolio
holdings, trading strategies, and activity of a Lender, which other
market participants might use to disadvantage the Lender.
While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
55. Is the retention of information collected by the RNSA for a
period of five years in proposed paragraph 10c-1(g)(1) appropriate? If
not, should the period under proposed paragraph 10c-1(g)(1) to preserve
records under proposed paragraph 10c-1(b) through (e) be different--20
years, 10 years, 3 years, or some other period of time and why? Should
the proposed Rule require an RNSA to maintain the information
indefinitely? What would be the benefits or costs if the proposed Rule
required an RNSA to retain information for the life of the RNSA? Would
investors, RNSAs, the Commission, or the public benefit from retention
period that is longer than five years? Is a recordkeeping requirement
in proposed Rule 10c-1(g)(1) necessary, or will an RNSA maintain the
records of its own accord or pursuant to other regulatory recordkeeping
obligations, such as Rule 17a-1?
56. Is the retention requirement in proposed paragraph 10c-1(g)(1)
unduly burdensome on the RNSA or overly costly? If so, in what ways
could modifications to the Rule as proposed reduce these burdens and
costs?
57. What, if any, impact would the recordkeeping requirements in
paragraph (g) have on liquidity in securities that are subject to the
requirement to provide 10c-1 information?
58. Is five years the appropriate length of time for the RNSA to
make information available to the public? If not, should the period of
time be for 20 years, 10 years, 3 years, or some other period of time?
Please explain why.
59. Are there other methods of distributing 10c-1 information that
Rule 10c-1 should require besides the RNSA's website or similar means
of electronic distribution? Please explain. Should Rule 10c-1 not
explicitly name any type of technology currently in existence, such as
a website? Should Rule 10c-1 require only that information has to be
publicly available and let the RNSA determine how to best accomplish
providing information to the public?
60. Should the Commission include additional requirements designed
to help ensure the confidentiality of information provided to the RNSA?
Please explain. Do commenters believe the confidential information is
as sensitive as discussed in this release? Please explain.
E. Report and Dissemination Fees
To fund the reporting and dissemination of data provided pursuant
to this Rule, the Commission is proposing paragraph 10c-1(h), which
would reflect that the RNSA has authority under Exchange Act Section
15A(b)(5) to establish and collect reasonable fees from each person who
provides any data in proposed paragraphs (b) through (e) of proposed
Rule 10c-1 directly to the RNSA. The Exchange Act allows RNSAs to adopt
rules that ``provide for the equitable allocation of reasonable dues,
fees, and other charges among members and issuers and other persons
using any facility or system which the association operates or
controls.'' \120\ The Commission preliminarily believes that it is
appropriate to establish and collect reasonable fees from each person
who directly provides the information \121\ set forth in the Rule to
the RNSA. The Commission acknowledges that this might result in persons
that are not members of an RNSA being required to pay fees to the RNSA
for the use of the facility or system operated by FINRA, but in the
absence of such a fee the RNSA and its members could be subsidizing the
free riding of non-member Lenders that would be required to provide
10c-1 information to the RNSA under the proposed Rule. Such an outcome
might not result in an equitable allocation of reasonable dues, fees,
and other charges among ``members and issuers and other persons''
providing 10c-1 information to a facility or system operated or
controlled by the RNSA.
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\120\ See 15 U.S.C. 78o-3(b)(5) (``The rules of the association
provide for the equitable allocation of reasonable dues, fees, and
other charges among members and issuers and other persons using any
facility or system which the association operates or controls'').
\121\ For example, lending agents and reporting agents would be
providing proposed Rule 10c-1 information to an RNSA on behalf of
beneficial owners and using the facility or system of the RNSA.
However, the beneficial owners relying on such lending agent or
reporting agent would not be using the facility or system of the
RNSA.
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The Commission has previously approved a rule that permits an RNSA
to charge fees to non-members that use the RNSA's systems to comply
with rules adopted by the Commission. FINRA Rule 6490, which implements
notice requirements of issuers for certain corporate actions pursuant
to Rule 10b-17, establishes a fee schedule that issuers pay to FINRA
for processing these corporate actions. The Commission exercised
oversight of the
[[Page 69821]]
fees imposed by FINRA on non-members by noticing FINRA's Rule 6490 for
comment, reviewing and considering comments, and approving Rule 6490.
Similarly, the Commission would oversee fees that the RNSA proposed to
charge by members and non-members to administer proposed Rule 10c-1.
Specifically, any such fees would have to be filed with the Commission
under Section 19(b) of the Exchange Act. The proposed fees would be
published for notice and public comment. Since FINRA is currently the
only RNSA, the Commission understands the potential for monopolistic
pricing by FINRA on Lenders that are required to provide 10c-1
information to FINRA. To the extent FINRA files a rule to charge fees
for Lenders to provide 10c-1 information, the Commission would be
analyzing costs to FINRA to establish the system required by proposed
Rule 10c-1 consistent with the requirements under Section 15A(b).\122\
For example, Section 15A(b)(5) requires an equitable allocation of
reasonable fees and other charges among members and issuers and other
persons using any facility or system which the association operates or
controls. Accordingly, to the extent FINRA fails to meet its burden in
a rule filing with the Commission that the fees meet the requirements
of the Exchange Act, the fees would not be permissible.
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\122\ See NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
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While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
61. Should proposed Rule 10c-1 explicitly state that an RNSA may
collect a fee from persons that provide 10c-1 information to the RNSA?
If so, why ?
62. Are there alternative means to fund a system for providing 10c-
1 information to the RNSA? If so, please explain.
IV. General Request for Comment
The Commission solicits comment on all aspects of proposed Rule
10c-1 and any other matter that might have an impact on the proposal
discussed above. In particular, the Commission asks commenters to
consider the following questions:
63. What, if any, impact would proposed Rule 10c-1 have on
liquidity in securities that are subject to the requirement to provide
10c-1 information? Please explain.
64. Are there additional or different ways to structure the
proposed Rule that would help provide additional transparency in the
securities lending market? Please explain.
65. Should the Rule be limited to certain securities? Why or why
not? Please explain.
66. How might the proposal positively or negatively affect investor
protection, the maintenance of a fair, orderly, and efficient
securities lending market, and capital formation?
67. As currently drafted the proposed Rule would require that
persons whose loans are processed through any of the lending programs
such as those operated by the OCC comply with the requirement to
provide 10c-1 information. Please discuss whether loans cleared through
OCC, or similar processes, should be exempt from the proposed Rule's
requirement to provide 10c-1 information or whether such exemptions
should be considered on a case-by-case basis pursuant to paragraph (i)
of the proposed Rule.
68. As currently drafted paragraphs (b), (c), and (d) of the
proposed Rule require that information be provided to the RNSA within
15 minutes after the loan is effected or modified. Please comment on
whether the time period for providing the information in paragraphs
(b), (c), and (d) should be shorter, for example within 90 seconds, or
longer, for example within 30 minutes, and explain why.
69. As currently drafted paragraphs (b) and (c) of the proposed
Rule require that the RNSA make the information provided to it pursuant
to those paragraphs available to the public as soon as practicable.
Please comment on whether making the information provided pursuant to
paragraphs (b) and (c) publicly available as soon as practicable
provides sufficient transparency in the securities lending market or
whether such information should be published in a shorter or longer
time frame and please explain why.
70. As currently drafted the information required to be provided in
paragraphs (b) and (c) of the proposed Rule would be made public by the
RNSA. Please comment on whether the information provided pursuant to
any of those paragraphs should not be made public and explain why. If
there are any additional data elements that you believe the Commission
should require to be provided, please include a description of such
elements that explains why they should be added to the requirement to
provide 10c-1 information and whether or not they should be made
public. If there are any data elements in paragraphs (b) or (c) of the
proposed Rule that should not be required to be provided, or that
should be modified, please explain why.
71. Please comment on whether the proposed Rule should include a
definition of ownership of securities, which would specify who owns and
can lend securities. For example, should the proposed Rule define
ownership as meaning that a person, or the person's agent, has title to
such security, has not pledged such security, and has custody or
control of such security? Please comment.
Comments are of great assistance to the Commission's rulemaking
initiative when they are accompanied by supporting data and analysis of
the issues addressed in those comments and if they are accompanied by
alternative suggestions to the proposal where appropriate.
V. Paperwork Reduction Act Analysis
A. Background
Certain provisions of proposed Rule 10c-1 impose ``collection of
information'' requirements within the meaning of the Paperwork
Reduction Act of 1995 (``PRA'').\123\
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\123\ 44 U.S.C. 3501, et seq.
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The Commission is submitting proposed Rule 10c-1 to the Office of
Management and Budget (``OMB'') for review in accordance with the
PRA.\124\ The title for the new information collection is ``Material
Terms of Securities Lending Transactions.'' An agency may not conduct
or sponsor, and a person is not required to respond to, a collection of
information unless it displays a current valid control number.
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\124\ See 44 U.S.C. 3507; 5 CFR 1320.11.
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As detailed above, to supplement the information available to the
public involving securities lending and close the data gaps in this
market, proposed Rule 10c-1 is designed to provide, in a timely manner,
investors and other market participants with unrestricted and free
access to material information regarding securities lending
transactions. The data elements provided to an RNSA under proposed Rule
10c-1 are also designed to provide the RNSA with data that might be
used for in-depth monitoring and surveillance. Further, the data
elements are designed to provide regulators with information to
understand: Whether market participants are building up risk; the
strategies that broker-dealers use to source securities that are lent
to their customers; and the loans that broker-dealers provide to their
customers with fail to deliver positions.
Because the Commission has not directly addressed the provision of
the
[[Page 69822]]
material terms of securities lending transactions for purposes of the
Federal securities laws, proposed Rule 10c-1 would create new
information collections burdens on certain Lenders and RNSAs, as
detailed below.
B. Proposed Use of Information
The information collections in Proposed Rule 10c-1 are designed to
increase the transparency and efficiency of the securities lending
market by requiring any person that loans a security on behalf of
itself or another person to provide the material terms of those
securities lending transactions to an RNSA. As discussed above, the
information available on securities lending transactions is spotty and
incomplete.\125\ The information collections are necessary to remediate
these issues by giving market participants and regulators unrestricted
and free access to material information regarding securities lending
transactions.
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\125\ See supra Part I.A, (quoting 2020 FSOC Annual Report,
supra note 14).
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C. Information Collections
As described in detail below, the information collections burdens
in proposed Rule 10c-1 are directly related to either (1) Lenders \126\
capturing data elements and providing information to an RNSA and (2) an
RNSA collecting the information and subsequently making certain data
elements publicly available. Given the differences in the information
collections applicable to these parties, the burdens applicable to
Lenders are separated from those applicable to an RNSA in the analysis
below for the sake of organization.
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\126\ The Commission is proposing to limit the obligation to
provide 10c-1 information to an RNSA only to the lender to avoid the
potential double counting of transactions that could arise if the
Rule required both sides of the securities lending transaction to
provide the 10c-1 information to an RNSA.
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D. Information Collections Applicable to Lenders
Proposed Rule 10c-1 would apply to all Lenders. As defined
above,\127\ Lenders include any person who loans a security on behalf
of itself or another person.\128\ Proposed Rule 10c-1 would require
that the data elements in paragraphs (b) through (e) within a specified
time period be provided to an RNSA. In particular, paragraphs (b)
through (d) contain loan-level data elements. These data elements would
be required to be provided to an RNSA within 15 minutes after a loan is
effected or modified, as applicable. Paragraph (e) contains data
elements requiring the enumeration of total amount of each specific
security available to loan and on loan. These data elements would be
required to be provided to an RNSA at the end of each business day.
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\127\ See supra note 9.
\128\ Because Rule 10c-1 is designed to increase the
transparency of information available to brokers, dealers, and
investors, with respect to the loan or borrowing of securities all
persons engaged in the lending of securities are Lenders, including
persons that are not registered with or directly regulated by the
Commission.
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To reduce the potential for double counting of securities lending
transactions and reduce the burden on Lenders, proposed Rule 10c-1
would provide a hierarchy of who is responsible for providing
information to an RNSA. First, although the proposed Rule places an
obligation on each person that loans a security on behalf of itself or
another person to provide information to an RNSA, if such Lender is
using a lending agent, such lending agent shall have the obligation to
provide the 10c-1 information to an RNSA on behalf of the lender.
Second, persons with a reporting obligation, including a lending agent,
may enter into a written agreement \129\ with a reporting agent.
Finally, Lenders are directly required to provide the RNSA with the
10c-1 information if the Lender is loaning its securities without a
lending agent or reporting agent.
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\129\ The Commission preliminarily believes it is appropriate to
permit a Lender, including a lending agent, to enter into a written
agreement with a reporting agent to permit the reporting agent to
provide the 10c-1 information to an RNSA because such an arrangement
will ease burdens on Lenders that do not have and do not want to
establish connectivity to FINRA. Additionally, the written
agreements will memorialize and provide proof of the contractual
obligations for the reporting agent to provide the 10c-1 information
to an RNSA. See supra Part III.A.2.b).
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In addition, paragraph (a)(2) would require that reporting agents
also enter into a written agreement with the RNSA. Such written
agreement must include terms that permit the reporting agent to provide
10c-1 information on behalf of another person. Reporting agents would
also be required to provide the RNSA with a list of each person and
lending agent on whose behalf the reporting agent is providing 10c-1
information to the RNSA.
For the purpose of organizing the below analysis, the Commission
has separated Lenders into three categories based on who would actually
provide the required data elements to the RNSA.\130\ These categories
are (1) lending agents; (2) reporting agents, and (3) Lenders that
would not employ a lending agent.\131\ The Commission preliminarily
believes that Lenders that employ a lending agent would not be subject
to any burdens because they would not be responsible for providing
information to an RNSA.
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\130\ While, as more fully discussed below, there would be some
variation between Lenders that are in the same category, the
Commission is organizing the analysis so that the discussion of
Lenders who share commonalities allows for a logical presentation
and discussion of burdens.
\131\ As an example of variability between Lenders in the same
category, the parties within the (1) lending agent category and the
(3) lenders that would not employ a lending agent category may
choose to employ a reporting agent. As discussed below, this choice
will result in information collection burdens being different for
Lenders within the same category.
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As a preliminary matter, the opacity of the securities lending
market makes estimating the number of respondents difficult. Indeed,
the objective of proposed Rule 10c-1 is to close the data gaps in this
market.\132\ Despite these data gaps the Commission has made estimates
of the number of Lenders in each category.
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\132\ See supra Part I.A.2.
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First, the Commission estimates that there would be 37 lending
agents. This estimate is based on a review of N-CEN reports filed with
the Commission that identify the lending agents used by investment
companies. Of these 37 lending agents, the Commission estimates that 3
would provide information directly to an RNSA and 34 would provide
information to a reporting agent.\133\
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\133\ Of the 37 lending agents identified, three are broker-
dealers. Broker-dealers have experience providing information
directly to RNSAs, so the Commission estimates that they would
provide information directly to an RNSA. The other 34 lending agents
are not broker-dealers, so the Commission estimates that they would
provide information to a reporting agent rather than establishing
connectivity directly to an RNSA.
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Next, the Commission estimates that there would be 94 reporting
agents. This estimate is based on the number of broker-dealers that
lent securities in 2020. The Commission estimates that these persons
would be reporting agents because they would likely have experience
providing RNSAs with information through other trade-reporting
requirements and have experience with securities lending.\134\
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\134\ It is possible that some of these broker-dealers may
choose not to be a reporting agent and that other persons may choose
to be a reporting agent. Given uncertainty regarding future
reactions to proposed Rule 10c-1 and a lack of granular data about
the current market, however, the Commission preliminarily believes
that the broker-dealers that lent securities in 2020 is a reasonable
estimate of the number of reporting agents.
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Finally, the Commission estimates that there would be 278 Lenders
that would not employ a lending agent. This estimate is based on the
number of investment companies that do not employ a lending agent based
on a review of N-CEN reports filed with the
[[Page 69823]]
Commission. Of these 278 Lenders, the Commission estimates that 139
will provide information to an RNSA and 139 will provide information to
a reporting agent.
1. Lending Agents
Under proposed Rule 10c-1(a)(1), lending agents would be required
to provide 10c-1 information to an RNSA (a ``providing lending agent'')
or enter into a written agreement with a reporting agent to provide
information to an RNSA (a ``non-providing lending agent''). In both
cases, lending agents would face information collection burdens to
comply with the rule.
(a) Providing Lending Agents
(i) Initial Burden
Providing lending agents would incur initial burden to develop and
reconfigure their current systems to capture the required data
elements.\135\ Providing lending agents would also be subject to
initial burden to establish connections that would allow it to provide
the information to a RNSA.\136\
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\135\ While providing lending agents are likely already tracking
the data elements as a part of the regular course of business,
capturing this information would be a new regulatory requirement.
\136\ In particular, they would be required to establish
connections with the RNSA and the persons on whose behalf they are
lending securities.
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The Commission preliminarily believes that burden for this
requirement is similar to that of establishing the appropriate systems
and processes required for collection and transmission of the required
information under the under 17 CFR 242.613, Exchange Act Rule 613
(commonly referred to as the ``Consolidated Audit Trail'' or the
``CAT'') \137\ because of the general similarity between the systems
established under that rule and the systems that would be required to
be established under proposed Rule 10c-1.\138\ While similar enough to
use as the basis for the estimate, the Commission preliminarily
believes that systems that comply with proposed Rule 10c-1 will be
significantly less complex than those required by the CAT because they
will need to capture less information overall.\139\ Despite this
difference, for the purposes of this analysis, out of an abundance of
caution, the Commission is using certain specific estimates of internal
burden from the CAT Approval Order, as detailed below. Unlike the
burden in the CAT Approval Order, however, the Commission preliminarily
believes that each party that would face PRA burdens under proposed
Rule 10c-1 will have internal staff \140\ that can handle this
task.\141\
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\137\ See Joint Industry Plan, Order Approving the National
Market System Plan Governing the Consolidated Audit Trail, Exchange
Act Release No. 79318 (Nov. 15, 2016), 81 FR 84696, 84921 (Nov. 23,
2016) (``CAT Approval Order'').
\138\ Both the CAT and proposed Rule 10c-1 would require the
provision of trade information to a third-party information
repository. The burden estimates in the CAT Approval Order are based
on a study of cost estimate calculations. See id. at 84857
(describing overview and methodology of the study).
\139\ Exchange Act Rule 613(c)(1) requires the CAT NMS Plan to
provide for an accurate, time-sequenced record of certain orders
beginning with the receipt or origination of an order by a broker-
dealer, and further documenting the life of the order through the
process of routing, modification, cancellation and execution (in
whole or in part) of the order. Proposed Rule 10c-1, on the other
hand, does not require order information be provided to an RNSA.
Further, more trades that are reportable to CAT are executed than
securities lending transactions. The Commission preliminarily
estimates that these two differences will result in fewer data items
under proposed Rule 10c-1 than the CAT. Accordingly, the systems
required to comply with proposed Rule 10c-1 would be substantially
less complex than the systems required to comply with the CAT.
\140\ In the CAT NMS Plan Release, the Commission estimated that
external costs may consist of, for example, the use of service
bureaus, technology consulting, and legal services. See, e.g., CAT
Approval Order, supra note 137, at 84935.
\141\ The Commission preliminarily believes that, because of the
sophisticated services associated with third-party providers'
business, third-party providers would employ internal staff with the
expertise required to comply with proposed Rule 10c-1.
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More specifically, the Commission is basing its estimates for
systems development and monitoring on the burdens applicable to non-
OATS \142\ reporters under the CAT.\143\ The Commission chose this
estimate because of the factors that were considered by the Commission
in the CAT Approval Order when it categorized firms and estimated
burdens. In particular, non-OATS reporters were estimated to be subject
to the smallest burdens under the CAT NMS because of the limited scope
of their reportable activity.\144\ Based on the overall size of the
securities lending market and the number that would be providing
information to an RNSA, the Commission preliminarily believes that the
volume of securities lending transactions for providing lending agents
will be, on average, of a similar scope to the volume of reports
estimated by non-OATS reporters under the CAT NMS Plan Release.
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\142\ The FINRA website states: ``FINRA has established the
Order Audit Trail System (OATS), as an integrated audit trail of
order, quote, and trade information for all NMS stocks and OTC
equity securities. FINRA uses this audit trail system to recreate
events in the life cycle of orders and more completely monitor the
trading practices of member firms.'' FINRA, Order Audit Trail System
(OATS), available at <a href="http://www.finra.org/industry/oats">http://www.finra.org/industry/oats</a> (listing
further information on OATS).
\143\ CAT NMS Plan Release at 756 (discussing the burdens
applicable to these broker-dealers).
\144\ The CAT NMS Plan Release estimated that non-OATS reporters
would have fewer than 350,000 reportable events each month. CAT
Approval Order, supra note 137, at 84928.
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The Commission, therefore, estimates that each providing lending
agent would incur 3,600 hours of initial burden to develop and
reconfigure their current systems to capture the required data
elements.\145\ Accordingly, the total industry-wide burden for this
requirement would be 10,800 hours.\146\
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\145\ In the CAT Approval Order, the Commission estimated that,
on average, the initial burden for non-OATS reporters would be two
full-time-equivalent (``FTE'') employees working for one year (2
FTEs x 1800 working hours per year = 3600 burden hours). See CAT
Approval Order, supra note 137, at 84938. The Commission is using
this estimate because of the similarities between the requirements
applicable to providing lending agents under proposed Rule 10c-1 and
the requirements applicable to non-OATS reporters under the CAT.
\146\ 3,600 hours x 3 providing lending agents = 10,800 hours.
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(ii) Ongoing Annual Burden
Once a providing lending agent has established the appropriate
systems and processes required for collection and provision of the
required information to the RNSA,\147\ the Commission preliminarily
estimates that proposed Rule 10c-1 would impose ongoing annual burdens
associated with, among other things, providing the data to the RNSA,
monitoring systems, implementing changes, and troubleshooting errors.
The Commission estimates that the ongoing burden will be equivalent to
the ongoing burden estimated for non-OATS reporters in the CAT Approval
Order for the same reasons discussed with respect to initial burden.
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\147\ The Commission expects that the process of providing
information to an RNSA will be highly automated so it is including
the burden for doing so in this category.
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The Commission, therefore, estimates that it would take 1,350
burden hours per year to comply with the rule per providing lending
agent,\148\ leading to a total industry-wide ongoing annual burden of
4,050 hours.\149\
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\148\ In the CAT NMS Plan Release, the Commission estimated
that, on average, the ongoing annual burden non-OATS reporters would
be .75 FTE employees (.75 FTEs x 1800 working hours per year = 1350
burden hours). See CAT Approval Order, supra note 137, at 84938. The
Commission is using this estimate because of the similarities
between the requirements applicable to providing lending agents
under proposed Rule 10c-1 and the requirements applicable to non-
OATS reporters under the CAT NMS Plan.
\149\ 1,350 hours x 3 providing lending agents = 4,050 hours.
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(b) Non-Providing Lending Agents
Instead of providing information to an RNSA, paragraph (a)(1)(ii)
would permit
[[Page 69824]]
non-providing lending agents to enter into a written agreement with a
reporting agent that would provide the required information to the
RNSA. These non-providing lending agents would be subject to distinct
information collection burdens from those applicable to providing
lending agents. First, because they would not have to establish
connectivity to an RNSA and may have flexibility in the format of the
information that it provides the reporting agent, non-providing lending
agents would be subject to less initial and ongoing burden for systems
development and monitoring. Second, non-providing lending agents would
be subject to initial burden to negotiate and execute a written
agreement with the reporting agent.
(i) Systems Development and Monitoring
(a) Initial Burden
Like providing lending agents, non-providing lending agents would
incur initial burden to develop and reconfigure their current systems
to capture the required data elements. The Commission preliminarily
believes that non-providing lending agents would be subject to less
burden than providing lending agents, however, because they would
likely have the flexibility to collaborate with a reporting agent to
determine the most efficient means of establishing systems that comply
with the proposed Rule. For example, if agreed to by both parties, the
non-providing lending agent could have the flexibility to provide
information that does not meet the specific format requirements of an
RNSA to the reporting agent if the reporting agent is able to reformat
the information once received.
Given potential efficiencies, the Commission preliminarily
estimates that a non-providing lending agent would be subject to half
the initial burden of a providing lending agent to develop and
reconfigure their current systems to capture the required data elements
as a providing lending agent. The Commission, therefore, estimates that
each non-providing lending agent would be subject to an initial burden
of 1,800 hours, leading to a total industry-wide initial burden for
this requirement of 61,200 hours.\150\
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\150\ 1,800 hours x 34 non-providing lending agents = 61,200
hours.
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(b) Ongoing Annual Burden
Once a non-providing lending agent has established the appropriate
systems and processes required for collection and provision of the
required information to the reporting agent, the Commission
preliminarily estimates that the proposed Rule would impose ongoing
annual burdens associated with, among other things, providing the data
to the reporting agent, monitoring systems, implementing changes, and
troubleshooting errors. As with initial burden for this requirement,
the Commission preliminarily believes that non-providing lending agents
would be subject to less burden than providing lending agents because
they would likely have the flexibility to collaborate with a reporting
agent to determine the most efficient means of establishing systems
that comply with the proposed Rule. For example, the reporting agent
could design programs that create direct links to a non-providing
lending agent's systems to facilitate the gathering of information such
that ongoing intervention would not be required by the non-providing
lending agent. In addition, non-providing lending agents and reporting
agents could negotiate terms that may allow it to avoid providing
certain 10c-1 information that can be gleaned from another data
element, such as not requiring the provision of a securities issuer's
name if a security has a valid CUSIP.
Given the potential efficiencies, the Commission estimates that a
non-providing lending agent would be subject to roughly half of the
ongoing annual burden of a providing lending agent to develop and
reconfigure their current systems to capture the required data elements
as a providing lending agent. The Commission, therefore, estimates that
each non-providing lending agent would be subject to an annual burden
of 675 hours,\151\ leading to a total industry-wide annual burden for
this requirement of 22,950 hours.\152\
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\151\ 1,350 hours (ongoing burden applicable to providing
agents) x 50% = 675 hours.
\152\ 675 hours x 34 non-providing lending agents == 22,950
hours.
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(ii) Entering Into Written Agreement With Reporting Agent
Paragraph (a)(1)(ii) of proposed Rule 10c-1 would require a non-
providing lending agent to enter into a written agreement with a
reporting agent. This requirement would subject non-providing lending
agents to initial burden to draft, negotiate, and execute the
agreements required by this paragraph. The Commission preliminarily
believes that this requirement would not subject non-providing lending
agents to ongoing annual burden once the agreement is signed because
there would be no need to modify the written agreement or take
additional action after it is executed.
The Commission preliminarily believes that these agreements would
likely be standardized across the industry since the data elements
would be consistent for all persons. The Commission preliminarily
estimates that the only terms that may require negotiation are price
and the format of the information that would be required to be
provided. To account for negotiation and any administrative tasks that
would go into processing and executing agreements, the Commission is
estimating non-providing lending agents would spend 30 hours on this
task.\153\ Accordingly, the Commission estimates that the total
industry-wide initial burden attributed to this proposed requirement
would be 1,020 hours.\154\
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\153\ The Commission preliminarily believes that each lending
agent would execute one such agreement because of the efficiencies
gained from only having one reporting agent and the commoditized
information that would be provided. Accordingly, the estimate of 30
hours would be the initial burden required for one agreement.
\154\ 30 hours x 34 non-providing lending agents = 1,020 hours.
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2. Reporting Agents
Three requirements of proposed Rule 10c-1 would subject reporting
agents to initial and ongoing annual PRA burdens. The first requirement
would be related to the development and monitoring of systems that
would facilitate the provision of information to an RNSA. Because
reporting agents would provide the same information as a providing
lending agent, the Commission preliminarily estimates that the initial
and ongoing annual burden for this task would be equivalent to the
initial burden attributable to the same task for providing lending
agents, as fully described below. The second would be related to the
written agreements with the persons who would be providing the
reporting agent information. Finally, the third would be related to
entering into an agreement with a RNSA to provide 10c-1 information.
(a) Systems Development and Monitoring
(i) Initial Burden
Under paragraph (a), reporting agents would provide 10c-1
information to an RNSA on behalf of another person. The Commission
preliminarily believes that a reporting agent would be subject to
initial burden to develop and reconfigure their current systems to
capture the required data elements because the Commission preliminarily
[[Page 69825]]
believes that they would need to change internal systems
[…truncated; see source link]Indexed from Federal Register on December 8, 2021.
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