RMA
Fran Garritt, Risk Management Association director of securities lending and market risk, speaks to Bob Currie about the SEC’s 10c-1 Proposed Rule and key points in the RMA’s response to consultation
The 10c-1 Proposed Rule appears to envisage a much ‘leaner’ reporting framework than SFTR, with 12 reporting fields in the current 10c-1 design, compared with 155+ for SFTR. Does RMA believe that additional fields may need to be added to provide a more accurate picture in terms of pricing transparency?
In terms of the number of reporting fields, RMA does believe the SEC will capture all the pertinent information related to pricing transparency with the proposal. From RMA’s perspective, excess data fields add limited benefit considering the additional cost of sourcing and transmitting the additional fields. It’s also worth noting that the scope of 10c-1 and the Securities Financing Transactions Regulation (SFTR) are different. 10c-1 would implement statutory authority for rulemaking with respect to securities lending specifically, while SFTR covers other kinds of transactions.
RMA’s 10c-1 response states that the SEC should modify the rule to require reporting by SEC-registered broker-dealers only, whether acting as borrower or lender serving in a principal or agency capacity. Can you expand on that position?
This response is based on two tenets. The first concerns the fact that FINRA does not regulate most agent lenders and beneficial owners, whereas they do have oversight of broker-dealers. The current proposal would require market participants that essentially have no contact with FINRA today to effectively become limited purpose members and for FINRA to expand its purview, all of which is costly. It seems reasonable to find a solution within their current purview. Additionally, there is a cost to setting up the reporting pipes and FINRA may charge an additional transactional charge.
In addition, under the current proposed construct it is a safe assumption that these costs will primarily be borne by agent lenders since they will be the primary reporting parties. RMA’s proposal aims, in large part, to establish a more equitable allocation of the costs of regulation. Given the current fee split structure with securities lending and the capital cost of running an indemnified agent lending programme, FINRA charges could essentially make a large segment of lending activity — notably general collateral lending — uneconomical for the agent lender community. This, in turn, could negatively impact market liquidity.
How has this recommendation been received by the securities lending community, particularly broker-dealers?
The broker-dealers may obviously have a different point of view, but that is why RMA plays an important role in voicing concerns of agent lenders.
RMA believes 10c-1 reporting should be limited to securities lending transactions which generate return through providing use of the securities to a borrower — and should exclude cash financing and collateral transformation trades. For securities lending transactions, this should be limited (at least at initial adoption) to liquid equities. Is that correct?
Yes, our view is that non demand driven trades would effectively skew the pricing data and lead to inaccurate or misleading price discovery. Unrelated or misleading activity could result in pricing data that will be less useful both to regulators and the securities lending and borrowing community. Regarding the scope of which securities should be included, our view is that liquid equities that are on National Market Systems (NMS) make the most sense for a starting point.
Non-NMS securities data would tend to lack any value in price discovery because the shares are so thinly traded in the institutional lending and borrowing community. In fact, most of these securities do not meet lenders’ minimum requirements to transact in. Further, given the existing transparency for government securities, and the small spread derived in general collateral trading in these securities, we believe the relative cost and benefit of including them in 10c-1 does not make sense.
What are the next steps in RMA’s engagement with the SEC and other stakeholders in shaping the final design of the 10c-1 Proposed Rule?
We are hoping to set up a meeting (or meetings) with the SEC staff to further discuss our concerns. We will also look to educate our members about the potential impact of this proposal.
