The International Securities Lending Association (ISLA) has published its response to the US Securities and Exchange Commission’s (SEC’s) proposals on transparency reporting under US Exchange Act Rule 10c-1.
Submitted on 7 January, ISLA’s response highlights potential challenges with implementing the SEC 10c-1 proposal and uncertainties regarding the scope and potential impact to ISLA members.
The SEC has now received more than 100 submissions in response to its consultation request issued on 18 November 2021.
Recognising that some US-based firms and trade associations have also submitted their own feedback to the SEC, ISLA indicates that it has limited itself to high-level comment relating to the SEC 10c-1 proposal.
Specifically, ISLA members have highlighted challenges in the SEC proposal relating to the regulatory reporting timeframe, particularly the requirement to provide data within 15 minutes of a securities lending transaction being executed or modified. This contrasts with requirements under the Securities Financing Transactions Regulation (SFTR) in the EU, where SFTR reporting is required by the end of the business day.
This end-of-day requirement, they say, provides sufficient transparency to enable detailed regulatory oversight and onward public reporting of summary data in anonymised form.
Some firms do submit data events before end of day in meeting SFTR reporting obligations, ISLA observes, but this is managed on a best efforts basis and principally to facilitate the dual-reporting requirement in SFTR.
ISLA also flags up the role played by data aggregators and other data vendor platforms in supporting standardised and validated output in meeting this SFTR dual-sided reporting requirement. This community does not currently have an equivalent role in providing reporting services under the proposed 10c-1 design.
With up to 18 per cent of lender transactions in the US involving funds outside of the US, ISLA members indicate that a significant volume of lending activity may not be captured under the reporting obligations in their proposed form.
With this point, ISLA members request clarification around issues of scope and extraterritoriality relating to the proposed 10c-1 regulation, along with further information regarding how dual-listed securities will be treated under the proposed Rule.
Drawing on experience from SFTR, ISLA notes that it has hosted regular meetings over the past three years to find solutions to data issues — and this review process is still ongoing. Its members are still finding issues with simple fields and events such as timestamps, settlement fails, execution venues, maturity dates, fees and legal entity identifiers.
Market participants are also tackling questions arising from conflicts between the primary legislation, subsequent updates and clarifications, and market practice.
ISLA concludes that, with hindsight, SFTR implementation would have been faster had a market standard data representation of a securities lending transaction been in place at an earlier point in the SFTR implementation timeline.
This would have reduced the need for “years of consultations and clarifications”, it would have reduced the adaptation burden for market participants and would have offered regulators a clean view of securities lending markets at an earlier point.
ISLA has been working with the International Swaps and Derivatives Association (ISDA), the International Capital Markets Association (ICMA) and with their respective members and other trade associations to set in place a consensus-derived market data standard, notably the Common Domain Model (CDM).
While ISLA acknowledges that a similar approach may be beyond the mandate of SEC 10c-1, it advises that the application of a market-derived data set should be considered to facilitate the transparency sought through 10c-1.
This may also be key in ensuring that 10c-1 aligns with the future development of the securities lending marketplace, embracing sustainable lending objectives and accommodating technology developments, including wider use of distributed ledgers and tokenisation, as these develop.
A more detailed evaluation of the SEC 10c-1 proposal, and industry feedback to the consultation process, will follow in SFT 295.
