On 18 November, the SEC issued a proposed rule, new Exchange Act Rule 10c-1, that would require securities lenders to provide the material terms of securities lending transactions to a registered national securities association (RSNA)(the ‘Proposal’). According to the Proposal, the securities lending market currently suffers from a lack of transparency, despite the availability of data from private vendors. The Commission believes this data is often incomplete and only from the vendor’s subscribers, leading to a lack of publicly available information that creates data gaps and inefficiencies in the securities lending market. Rule 10c-1 is thus designed to provide investors and others with access to pricing and other material information regarding securities lending transactions in a timely manner, improve price discovery and address information asymmetries.

Under the Proposal, any person that loans a security on behalf of itself of another person would be a “lender,” this includes banks, insurance companies and pension plans. Lenders would be required to provide the material terms of their securities lending transactions to an RSNA within 15 minutes after each loan; FINRA is currently the only RSNA. The reporting obligation would apply to all securities, not just equity securities, and be limited to only the lender of the securities to avoid potential double counting of transactions that could arise if both sides of the transaction provide the material terms to the RSNA. Lenders, including lending agents, who are not members of an RSNA, would need to contract with reporting agents (broker-dealers) that have direct connectivity to, and are overseen by, the RSNA.  Reporting agents would be required to maintain certain securities lending information for three years.

Banks, clearing agencies or broker-dealers that operate a securities lending portfolio on behalf of another entity (i.e., the beneficial owner/lender) are considered lending agents and therefore have the obligation to report to the RSNA on the entity’s behalf. A lending agent could also enter into a written agreement with a broker-dealer to provide information directly to the RSNA on its behalf. If the lender cannot or does not choose to pursue these options, it must directly report to the RSNA.

Lenders, their lending agent or reporting agent would be required to provide the following terms of their securities lending transactions to an RSNA, which would be made public:

• Legal name of the issuer of the securities to be borrowed;
• Ticker symbol of those securities;
• Time and date of the loan;
• Name of the platform or venue, if one is used;
• Amount of securities loaned;
• Rates, fees, charges and rebates for the loan as applicable;
• Type of collateral provided for the loan and the percentage of the collateral provided to the value of the loaned securities;
• Termination date of the loan if applicable; and
• Borrower type, e.g., broker, dealer, bank, customer, clearing agency or custodian.

The Proposal requires three additional loan terms that must be provided to the RSNA but would not be made public: (i) the legal names of the parties to the loan; (ii) when the lender is a broker-dealer, whether the security loaned to its customer is loaned from the broker-dealers’ inventory and (iii) whether the loan will be used to close out a failure to deliver pursuant to Rule 204 of Regulation SHO or whether the loan is being used to close out a failure to deliver outside of Regulation SHO. Loan modifications that involve any of the above loan terms, whether public or private, must also be reported to the RSNA; the terms of the loan modification would be made public.

Additionally, at the end of each business day, lenders, their lending agent or reporting agent would be required to provide information concerning securities on loan or available to loan. Such information would be made publicly available by the RSNA on an aggregated basis.

AIMA will schedule a member call to discuss the Proposal. In the meantime, please contact Daniel Austin with any questions.