SEC Adopts Rule to Increase Transparency in the Securities Lending Market

Following a corresponding consultation in November 2021 (EventID 13225), the U.S. Securities and Exchange Commission (SEC) has now published its final rule as regards the reporting of security lending transactions to a registered national securities association (RNSA), with the Financial Industry Regulatory Authority (FINRA) currently being the only RNSA in the United States.
#### Background
To recall, in an effort to bring about more transparency in the securities lending market, the SEC proposed to set up a framework for reporting securities lending transactions, loaned securities, and securities to be loaned to an RNSA which would then in turn publish certain data of such information on a daily basis. Essential information to be reported would thereby include the name of the security issuer, the ISIN, transaction dates and times (if applicable), or details on the borrower (again, if applicable), to name a few. In case of changes to the lending agreement, such modifications would also have to be reported to the RNSA.
#### Final Rule
The final rule requires „covered persons“ (as subsequently defined) to report relevant information about their securities loans to the RNSA. This information must be reported promptly in the specific format and manner required by the RNSA, either on the day the loan is initiated or when any modifications to the loan’s terms occur. „Covered persons“ will thereby include entities that act on behalf of lenders in facilitating securities loans, lenders who engage directly without intermediaries, and broker-dealers who borrow fully paid or excess margin securities under specific regulations.
Covered persons will also have the option to enlist reporting agents to carry out their reporting responsibilities. To do so, they need to establish written agreements with these reporting agents to
– permit the reporting agents to perform this task on their behalf and
– require adherence to this reporting rule by the reporting agent.
Certain recordkeeping obligations would also apply for such agreements for a period of three years.
Furthermore, covered persons are mandated to report a set of 12 specific „data elements“ for each covered securities loan. These elements comprise essential information like the name of the security issuer, the quantity of loaned securities, collateral details, and information regarding fees associated with the loans. A list of the required data elements is provided on page 347. In addition to the initial data reporting, any subsequent modifications to these data elements must also be reported to the RNSA. It is important to note in this context that the actual changes in the data elements, rather than just descriptions of the changes, are reported (see changes to the draft version).
As far as the responsibilities of the RNSA are concerned, the SEC will require FINRA to establish rules governing the format and manner in which it will collect the information. This means that FINRA must create clear guidelines and standards for how the required data is reported. Furthermore, FINRA will be required to share details of the collected data with the public. Specifically, for a securities loan, 11 out of the 12 data elements need to be made publicly available on the morning of the business day following a loan’s execution. The one exception is data element #6, which pertains to the „amount, such as size, volume, or both, of the reportable securities loaned.“ This particular information will have to be publicly disclosed 20 business days after the loan is executed. The same schedule applies to modifications made to these data elements.
While the rule mandates public disclosure of certain information, there’s also a responsibility to protect the confidentiality of data elements categorized as „confidential.“ These elements contain sensitive information about market participants or specific details about the internal operations and investment decisions of those participants. RNSAs must have policies and procedures in place to ensure the security and confidentiality of these confidential data elements.
#### Changes to the draft version
There are numerous changes to the draft version which are outlined beginning on page 20. Some of the most noteworthy changes are briefly discussed below; for all of them, please refer to the original legal document.
– Timing of the reporting: Any loan effected by the covered person or any changes thereto must be reported by the end of the day on which such execution / change takes place (before, the SEC sought to install a 15 minute deadline following execution);
– Reporting of „available to loan“ and securities „on loan“: This reporting requirement was entirely removed by the SEC and so was the requirement of the RNSA to make data available on such.
– Change description: The requirement to provide a description of the changes to a securities lending arrangement was removed. Instead – as noted above – firms will be required to only report the modified data elements.
– Definition of covered person: The SEC has modified to the definition of covered person to explicitly exclude clearing agencies „when engaged only in certain central counterparty or central securities depository activities“.