The upcoming SEC Rule 10C-1 will add new and potentially real time reporting requirements for securities loan transactions from US broker-dealers to Registered National Securities Associations (RNSAs, such as FINRA). SIFMA, FIF and other industry groups and lenders have submitted comment letters to the SEC regarding the proposal and the SEC has committed to publishing the final version of the rule 10C-1 by October 2023, with the compliance window anticipated to be 12-18 months.
Currently, the rule contains several proposals that will not only add new reporting feeds and fields to be sent to RNSAs but also several key provisions – such as reporting loans intraday within 15 minutes of “agreement of terms” between parties and the inclusion of RNSA reporting for short-arranged financing transactions. Industry forums suggest that 62% of impacted firms are still in the early planning stage as additional clarification of the terms and confirmation of the final rule from the SEC is pending.
Specifications will be provided to industry participants for a proposed minimum of 12 data elements related to securities lending that will need to be included in the data feeds. Reporting fields will include but not be limited to: Legal Name, Ticker, Time and Date of Loan, Execution Venue (if applicable), Number of Securities loaned, Rates and Fees charged, Collateral provided, Termination date, Borrower type, Counterparty Legal Name, Loaned from Inventory, Loan used to close out a failure pursuant to rule 204 of Regulation SHO.
US broker-dealers will need to evaluate internal controls, and technology platforms to ascertain what gaps exist with the transaction data and timing. While broker-dealers, agents and lenders have implemented changes related to securities lending based on SFTR, EMIR and other regulations impacting transactions in the recent past, the outputs needed, and timing of reporting differ significantly for the 10C-1 proposal.
Following the proposal, industry groups and lenders submitted comment letters addressing open questions - such as timing of broker-dealers to provide loan reporting, the final implementation date, public dissemination of loan data as well as requesting additional clarity related to scope of securities included and jurisdictional scope.
Importantly, industry groups are requesting for loans to be reported at the end of day at the effective settlement as opposed to within the 15 minute intra-day windows of agreement of terms. This would ease the burden of applying real time data in net new feeds to RNSAs. Additional clarity has been requested to determine what is classified as a change in the agreement to terms that would need to be reported, as terms and agreements can fluctuate regularly based on market conditions.
Additionally, the industry wants loan information reported by FINRA on an aggregated, anonymized basis, which would reduce the risk of market participants being able to identify proprietary positions. While the industry wants fees and rates disclosed in a blended manner and would prefer that short positions, short arranged financing, and securities “available to lend” are excluded. The industry also requests that the SEC should specify jurisdictional scope of the rule to limit requirements to U.S. registered securities and U.S. persons, which would allow multi-national institutions to plan for compliance. These suggestions to the current 10C-1 proposal will have an impact by possibly simplifying both the reporting process and what securities data is provided by broker-dealers.
Similar previously adopted regulations can provide a background for how firms have been able to adapt to new regulatory reporting regulations and provide a roadmap to meeting new challenges. SEC Rule 10C-1 has similarities to SFTR, a European regulation implemented in the last decade in addition to EMIR and other G20 regulations. Analyzing different aspects of the regulation highlights the similarities, differences and new challenges for 10C-1. These similarities may allow some booking models and templates to be leveraged along with adapting existing controls to cover the new regulations. The chart below highlights a comparison of various Securities Financing Global Regulations across several key dimensions.
Firms will need to implement significant enhancements to meet the requirements of 10C-1, and performing a current state assessment of existing capabilities prior to establishing the optimal target operating model will help them get there. By doing a current state assessment of the systems, firms can identify gaps in their current regulatory reporting framework and the necessary controls and processes that will need to be enhanced for security lending transactions.
A target operating model should be established to apply the necessary fields for reporting, technological enhancements to meet timing - in addition to reviewing options for buying vs building - and proper controls based on industry standard best practices. Firms can implement the optimal data and operational governance frameworks for escalation, remediation, and supervision.
Capco has extensive transactional reporting and compliance experience as well as a clear understanding of the operational impacts of regulatory reporting for firms to meet SEC 10C-1 Rule and apply best practices for the underlying businesses.
Our end-to-end assessment and delivery together with our comprehensive suite of regulatory services can help firms meet compliance requirements for 10C-1, supported by our global subject matter experts and best in class delivery accelerators.