Insight
Demystifying 10c-1a: EquiLend
Navigates the Path to Transparency Part 2
Kevin McNulty
May 2024
Demystifying 10c-1a: EquiLend
We previously highlighted the challenges relating to effected vs. settlement, omnibus vs. allocation trades and rules for reporting evergreen trades under the SEC’s 10c-1a final rule. As we inch closer to the May 2 publication date of FINRA’s 10c-1a rule interpretation, we explore three additional ambiguities that, without clarification, could hinder smooth compliance.
Jurisdictional Reporting Implications
The 10c-1a rule mandates when a covered person effects, accepts or facilitates a covered securities loan in the U.S., it is a reportable security under Rule 10c-1a. One ambiguity in this requirement lies in how it applies to cross-border transactions, where the lender and borrower might be located in different jurisdictions but the trade settles in the U.S. Based on our discussions with FINRA and feedback from SEC, they are seeking an expansive interpretation which would require covered persons, who transact securities reportable under CAT, TRACE or RTRS, and which are effected, accepted or facilitated in the U.S. to adhere to 10c-1a reporting obligations. Covered persons are not restricted to U.S. parties only in the rule. For example, in a scenario where a UK bank lends a U.S. security to a U.S. firm, they would be in scope for 10c-1a reporting. Some market participants have questioned the SEC’s jurisdictional scope in this regard and suggest, for example, if the same UK bank lends to a German bank, they might not be required to report. It is EquiLend’s position that the SEC’s intent is clear and that a loan originating in another territory, but settled in the U.S., would be in scope for 10c-1a reporting. A similar question arises where securities are settled outside of the U.S., e.g. transactions in dual listed securities of U.S. issuers.
Reporting of Modifications
The rule mandates reporting “modifications” to pre-existing securities loan agreements prior to 2026. The specific details on whether firms need to report the original terms of the trade, or the latest terms, remain unclear. At a more granular level, the exact fields required for reporting of modifications on pre-existing trades also remain unclear. Many pre-existing trades might not have all the data elements required by the rule, readily available particularly where the loans have been outstanding for extended periods, and/or have been subject to large numbers of modifications. Based on our discussions with FINRA, we believe reporting the latest terms of the trades makes the most sense. We also understand that terms not previously required on trades (such as venue, inventory flag, etc.) will not be required for reporting modifications to pre-existing trades.
Reporting Complexities for Broker Dealers
Under the 10c-1a regulation, broker-dealers are required to report if a loan was sourced from their inventory, but the definition of “inventory” for broker-dealers remains unclear. Broker-dealers may fulfill a loan via arranged financing or rehypothecation; at present it is not clear if these constitute “inventory” in a 10c-1a context. We are working closely with FINRA to understand the specific guidance on what constitutes inventory in this context.
Additionally, covered persons are required to report if the borrow is being used to close a failed to deliver pursuant to Regulation Sho, if known. In most cases covered persons such as agent lenders may not know the purpose of the loan, while broker-dealers may have more transparency regarding the purpose of the loan. The “if known” provision for the Reg SHO flag might create a situation where some brokers report more comprehensively than other covered persons, potentially impacting data accuracy. Many industry participants have shared their frustrations with meeting this requirement because, in the majority, the purpose of the loan is unknown.
In conversations with FINRA, we have raised our concerns regarding these ambiguities, and we look forward to FINRAs publication this month to shed light on these outstanding questions.
EquiLend: Navigating 10c-1a Implementation Challenges
As we navigate this new regulatory terrain together, EquiLend RegTech Solutions is here to support you to fulfill your 10c-1a reporting obligations. We understand that ambiguities may still exist, and the landscape will continue to evolve. However, with a solid foundation in the rule’s core principles and the insights gained from continuous industry discussions, our solution will ensure you meet your reporting obligations. EquiLend’s 10c-1a solution is specifically designed to address the challenges of Rule 10c-1a reporting. Our team of experts are here to guide you through the implementation process and ensure you meet all regulatory requirements.
Don’t hesitate to reach out to us to discuss your specific needs at regtech@equilend.com.
Who We Are
EquiLend is a global financial technology firm offering Trading, Post-Trade, Data & Analytics, RegTech and Platform Solutions for the securities finance industry. EquiLend has offices in North America, EMEA and Asia-Pacific and is regulated in jurisdictions around the globe. The company is Great Place to Work Certified™ in the U.S., UK, Ireland and India and was named Best Post-Trade Service Provider Globally, Best Market Data Provider Globally and awarded for its Diversity & Inclusion in the Securities Finance Times Industry Excellence Awards 2023.
