SEC publishes final 10c-1a reporting rules

On 13 October, the US securities markets regulator published its 10c-1a Final Rule designed to promote transparency in US securities lending markets by requiring parties to report the material terms of the trade by end of day on T+0. In the second part of this article, Bob Currie reviews these rules changes and what these imply for market participants

The Securities and Exchange Commission (SEC) has now adopted Rule 10c-1a, which requires lenders of securities to report the material terms of securities lending transactions to a registered national securities association (RNSA).

This Exchange Act Rule 10c-1 upholds a Congressional mandate in the Dodd-Frank Act to promote transparency around securities lending transactions. This requires that market participants, financial supervisors and the public have access to fair, accurate and timely information relating to loan transactions.

SFT provided a detailed two-part appraisal of the proposal objectives and content of Rule 10c-1 when this was first advanced by the SEC for public consultation in November 2021, with the market initially given just 30 days to provide its feedback.

Perhaps moved by the weight of industry feeling about the unanswered questions in the original proposal and this extremely tight consultation window, falling over the final weeks of the calendar year, the SEC opted to reopen public consultation at the start of March 2022, providing respondents with an additional one month to share their views.

Almost 18 months after the close of this second round of consultation, the SEC has now released final rules for 10c-1a implementation. Securities Finance Times has published a detailed evaluation of the content of these final rules in the first part of this article, appearing in SFT Issue 339 on 31 October 2023.

Potentially the most noteworthy amendment in the 10c-1a final rules has been the removal of the 15-minute reporting window for new and modified trades that appeared in the original proposal. Instead, the final rule requires lenders to report loan data to an RNSA by the end of each trading day.

The Financial Industry Regulatory Authority (FINRA), which is currently the only RNSA that is approved to receive this trade reporting, will maintain this information confidentially and will release only a subset of this information for public viewing on the next business day.

This information released on T+1 will include details of the time of the loan transactions, the collateral used and pricing information such as the loan’s rate. FINRA will also release aggregated data for the previous day’s loan activity, broken down by security. However, FINRA will not disclose details of the loan amount on T+1. Rather, this information will remain confidential for a further 20 days.

The final rule will become effective 60 days after details are published in the Federal Register. This will give FINRA four months to finalise its rule sets and 12 months for this RNSA rule set to be implemented.

Reporting parties covered under Rule 10c-1 will be expected to start reporting securities lending trades to FINRA 24 months after this effective date. FINRA will be given a further 90 days from this point to make 10c-1a information publicly available.

Implementation timetable

In resuming our evaluation of these rule changes from the first part of this article, SFT asked market experts whether the implementation timetable — as proposed in the SEC’s statement of 13 October — is appropriate and workable.

“If anything, the implementation timetable is more generous than we had feared,” suggests EquiLend’s head of RegTech solutions Kevin McNulty. However, as with so many implementations, the clock will run down quickly, particularly as this coincides with new Basel rules and T+1 in North America. “It is crucial that firms consider their options for reporting sooner rather than later,” he adds.

For Jonathan Lee, money markets reporting director at Kaizen, the timetable is currently a little uncertain because the clock only really starts ticking when the adopting release has been published in the Federal Register, which is no less than 30 days following the publication of the rule. “I think 13 months will be a reasonable timeframe for implementation to cover 12 data elements and however many fields are required to meet these 12 data elements,” says Lee. “The industry has, after all, been on notice since November 2021.”

However, Lee believes that the challenges are really likely to arrive after the reporting regime is live and in production. Like the Securities Financing Transactions Regulation (SFTR) in the European Union and the UK, Lee believes that 10c-1a implementation will prove good motivation for firms to adopt best practices and standards and to streamline their post-trade processing.

For Igor Kaplun, global head of business development at S&P Global Market Intelligence Cappitech, the SEC’s proposed timetable is broadly appropriate for implementation of the Final Rule 10c-1. On paper, the industry has 24 months until the reporting requirements become effective, which will be around the end of 2025 or the beginning of 2026. S&P Cappitech will be examining the technical requirements from FINRA closely to see how, for example, registration and onboarding will work, how the data is actually reported and what format it has to be in. “Those are the specifics that firms need to plan for their implementation,” he says.

Depending how long FINRA takes to finalise their rules, Kaplun indicates that firms will have at least 12 months before they have to start reporting. However, he suggests that, for a new regulation, 12 months is not a lot of time to analyse, scope, build, test and implement a reporting solution. Past experience may help in this regard, with Cappitech currently supporting 14 different reporting regimes around the world, having delivered over 600 client implementations across banks, brokers, asset managers, hedge funds, corporates and commercial organisations.

Dialogue and preparation

As a registered broker-dealer and ATS, New York-based Provable Markets has engaged with the regulatory authorities in areas where it believes that its expertise can benefit market practice. Aurora — the company’s cloud-based alternative trading system for securities lending, security-based swaps and option block trading — has been designed to incorporate equity market type automated workflows to securities lending markets. Chief Executive Matt Cohen believes that this maps well to what the market requires to support end-to-end efficiency across these trading segments and to support efficient 10c-1a transaction reporting.

“At Provable Markets, our approach has been to integrate best practice from a relatively mature market structure, notably trading in cash equities, and to bring similar efficiencies in the technology that we offer to support securities lending,” explains Cohen. “In doing so, we can today offer the efficiencies of connectivity, messaging, and, if needed, reporting as a result of that system architecture.”

Firms falling into scope of the Final Rule that choose to report via a broker-dealer or another third-party vendor will need to look carefully at their vendor relationships, oversight and supporting contractual documentation. Kishore Ramakrishnan, managing director and capital markets advisory leader at regulatory consultancy Treliant LLC, explains that while the covered person may rely on reporting agents to submit the required information to an registered national securities association (RNSA), the covered person is still liable for the completeness and accuracy of the report.

Third-party service providers can also be employed by covered persons to assist with reporting to FINRA, as the sole authority currently registered as an RNSA. However, whereas use of a recognised “reporting agent” shifts liability for failure to report to the RNSA to the agent — provided that the agent is provided with the necessary information — use of another third-party vendor does not transfer this liability.

Ramakrishnan believes that funds engaged in covered securities loans will need to set written agreements in place with one or more reporting agents or they will need to assess whether there are reasons to rely on third-party vendors that are not reporting agents.

Managing 10c-1a transition

According to Jonathan Lee, Kaizen will await details from FINRA on their implementation rules, which are likely to appear in Q1 2024, before setting out its service offering. The FINRA rules will transform 12 data elements into around 20 to 30 reportable fields. “Kaizen will be on hand to assist with concerns around data quality on implementation, while sharing expertise built up in the market and from our extensive experience in SFTR, money markets statistical reporting (MMSR) and sterling money markets daily (SMMD) reporting,” he says. “Kaizen will be working with firms to ensure compliance with SEC 10c-1a, offering training, a control framework and quality assurance through regulatory testing when the Rule is live.”
Treliant’s Ramakrishnan suggests that, in managing their Rule 10c-1a preparations, broker-dealers that serve as lending agents must analyse their existing securities lending booking flows to ensure they supply all the data elements required for reporting and they must reconfigure their loan booking systems to capture any missing data elements.

“Firms will need to enhance their internal systems and trader workflows to capture all data required to report their loan transactions on a timely basis,” says Ramakrishnan. Additionally, reporting agents must enhance their reporting infrastructure to automatically capture the loan and aggregated inventory data published by the RNSA, as well as integrating this with their source systems, generating reporting files to FINRA, capturing a Unique Trade Identifier (UTI) for each loan provided by the RNSA in the feedback files and quoting these when reporting loan modifications.

EquiLend’s Kevin McNulty explains that the New-York based SFT execution, post-trade and data services specialist intends to offer a full 10c-1a reporting agent solution for clients and that, as a registered broker-dealer, it has the necessary authority to do so.

“It makes perfect sense for clients to use us as we already collect most of the data required in our existing trading and post-trade solutions set,” he says. “The solution we build takes the data available, supplements this with any additional requirements, formats the reporting to conform with FINRA specifications, and then submits these to the regulator.”

According to McNulty, the two-year implementation timetable means that clients can also utilise EquiLend’s 1Source initiative, the DLT-based single data source for trade details and downstream lifecycle event information. “As 1Source uses DLT and provides the market with a golden source record of all securities lending activity, it is the perfect base for regulatory reporting of timely and accurate data,” he says.

Provable Markets’ Cohen indicates that the company’s Aurora platform is designed to be interoperable with other execution and post-trade platforms, enabling users to access trading liquidity from multiple sources and to minimise the vulnerability of the broader securities lending ecosystem to single points of failure. Through this full-stack lending infrastructure, the company aims to support all customer types, including the needs of smaller buy-side firms and broker-dealers for whom building their own 10c-1a reporting capability — rather than using a reporting agent — would require a significant internal build and overhead cost.

According to Igor Kaplun, S&P Cappitech will provide a 10c-1 service as a third party vendor, enabling firms to mutualise the cost across many of their peers and to work with a trusted provider that has specific expertise in the SFT regulatory reporting segment. “We plan to build on our expertise in data, technology and regulation in the SFT marketplace to help clients meet their SEC 10c-1 obligations,” he says.

As a prominent player for SFT reporting under SFTR in the EU and UK, Cappitech aims to build on its community of customers across lenders, lending agents, and borrowers to offer a “fit for purpose” reporting solution for the US market. “Nine of the 12 data fields required under SEC 10c-1 are already captured under SFTR and there is already an existing technical, operational and relationship framework in place with many of the largest agent lenders and lenders in the SFT community,” he says. Cappitech’s objective is to help clients to meet their regulatory obligations in the most efficient, practical and cost effective manner.

Light touch?

While 10c-1 may seem to be light touch, Lee believes that the fragmented nature of SFT reporting in the US presents controls and compliance headaches of its own. The team at Kaizen also has experience of TRACE, the FINRA administered fixed income trade reporting regime, and has spoken out about the very different nature of securities lending when compared with the cash bond market. “FINRA has proven very proactive in ensuring compliance with TRACE and we do not expect any difference when it comes to administering 10c-1,” concludes Lee.

Lee indicates that Kaizen has been able to share its experience with regimes such as MMSR and SMMD – which in some ways are more similar to 10c-1 than SFTR — and to join the voices of concern about unjustified position disclosure requirements and their unintended consequences. The securities lending market is, after all, a very international market whose location is by no means guaranteed in many cases.

Drawing a contrast with SFTR implementation in Europe, EquiLend’s McNulty notes that European regulators and the SEC have taken different approaches and both have their pros and cons. Rule 10c-1 focuses on a smaller set of data fields and could arguably deliver transparency that is easier to understand regarding lending activity in US securities. However, this will not provide the SEC with data on loans of non-US securities by US lenders.

“One area to note is the overlap in scope between both regimes as 10c-1 considers first the securities that are lent and borrowed — essentially US securities and possibly cryptoassets — whereas reporting obligations under SFTR are determined firstly by the jurisdiction of the parties involved,” adds McNulty. “This will mean that some transactions will need to be reported under both regimes.”

The outcomes in the US will be different to Europe because the objectives and scope is different, proposes S&P Cappitech’s Kaplun. The SEC is focused on providing transparency in the market to the general public and has required FINRA to publish the data in aggregate on T+1 and transaction by transaction on T+20. SFTR only requires the data to be published in aggregate on a weekly basis and there is no transaction-level detail available. In contrast, SFTR was designed to give regulators access to SFT data for monitoring of system risk and market abuse.

Importantly, some of the data fields may need to be represented as multiple data points. For example, rates, fees, charges and rebates for the loan, as specified in the SEC Final rules, may be represented as separate data points in the FINRA technical requirements.That said, Kaplun concludes that 10c-1a will be easier to report than under SFTR — and, for those firms that already report under SFTR, the implementation will be significantly easier. Additionally, 10c-1 has explicitly excluded the reporting of repo transactions, while SFTR required the reporting of both SBL and repo trade information.

In concluding, Kaplun provides three key pieces of advice on how firms can best prepare for the SEC 10c-1a transition: they should start their preparations early; they should join working groups and community networks; and they should carefully review what they currently have in place (see box, p 20). Firms may already be meeting similar data requirements in fulfilling other regulatory reporting obligations and this may provide an effective springboard for managing their 10c-1a implementation.