Insight
SFTR and SEC Rule 10c-1: Two Roads to the Same Destination
CJ Emson
September 2023
Since the Financial Stability Board published its recommendations after the Global Financial Crisis, we’ve seen the Securities Financing Transactions Regulation (SFTR) come into effect in the EU and UK, while the U.S. may soon implement mandatory reporting of securities lending trades under the proposed SEC Rule 10c-1. Both regulations aim to bring greater transparency and stability to the financial markets, but approach this goal differently in their design, requirements and to some extent, objectives. So, where do the two meet or diverge?
Securities Financing Transaction Regulation (SFTR) 101
SFTR’s objective is to increase transparency and support macro-prudential policy to reduce risks to the overall stability of the financial system. It requires the comprehensive reporting of securities financing transactions (SFTs), covering securities lending and borrowing, repo, buy sell back transactions, and margin loans. Both parties to these transactions are required to report separately with each transaction requiring up to 155 data fields to be reported to the regulator, via a regulated trade repository at close of business on T+1. SFTR applies to all parties broadly established in the EU and UK and covers their securities finance activity globally.
The implementation of SFTR proved to be a significant undertaking for firms doing business in Europe. Many firms chose vendors to support the enrichment of their data to complete all the required fields. The regulation required the implementation of additional reconciliation procedures to ensure reported transactions could be matched with their counterparties trades, and firms had to adapt systems to capture key data fields not historically recorded or stored.
This implies a requirement for detailed reporting on SFTs that are finalized by all market participants, regardless of them being financial or non-financial entities. The specifics to be disclosed encompass a wide range of data, including the composition of the collateral, the status of collateral availability for reuse, any evidence of such reuse, the daily substitution of collateral and the applied haircuts. This enhancement in reporting requirements underlines ESMA’s strategic intention to extend the reach of SFTR, enabling a more profound insight into the complex dynamics of the securities finance industry.
As the implementation of SFTR tallies its 3rd year, an ESMA report published in April 2023 identified SFTR reported data quality as an area for further improvement. EquiLend is continually supporting clients to ensure that their SFTR data is accurate and complete before being reported to the trade repository.
SEC 10c-1 101
Proposed SEC Rule 10c-1 has very similar aspirations to SFTR but in addition to requiring transaction reporting for supervisory purposes and financial stability monitoring purposes, the SEC also notes a key objective as being the reduction of a perceived information asymmetry between different market participants. They propose to address this through public disclosures of certain reported activity on an anonymised basis. The proposed rule differs from SFTR in a number of key aspects. It only applies to securities lending transactions and not repo or margin loans. Only one side to the transaction (the lender) needs to report, and it appears from the text that significantly less data items will need to be reported. One of the biggest challenges noted by market participants is a requirement to report loans and modifications within 15 minutes of execution.
The SEC believes the proposed rule may reduce the cost of short selling, leading to improved liquidity and price discovery in the underlying security markets. A unique aspect of Rule 10c-1 is its emphasis on verifying securities availability for short selling. Firms are mandated to report securities available for lending and loans outstanding at the end of each business day, providing a potent tool for the SEC to monitor the securities lending market.
New Regulation and Global Regulators
Of the two regulations, SFTR has a greater global impact as SFTR requires double sided reporting and any trade which concludes in European entities and their branches or European branches of non-European entities is required to be reported. While SEC 10c-1 is a US regulation, there are some implications globally where lender side trades conclude on a US domestic security or entity. Jurisdictional reporting aside, many of the 15 required fields are common to both SFTR and 10c-1.
ISLA, a key Trade Association in EU markets, highlighted challenges in the SEC 10c-1 rule relating to the regulatory reporting timeframe, particularly the requirement to provide data within 15 minutes of a securities lending transaction being executed or modified which presents considerable challenges for those market participants not currently operating with real-time data tools such as is offered by DataLend and EquiLend Competitive Bid. This requirement contrasts with SFTR’s regulation in the EU, where SFTR reporting is required by the end of the business day, which they argue provides sufficient transparency for regulatory oversight and public reporting.
SFTR and SEC Rule 10c-1: Two Roads and Many Detours
While both SFTR and SEC Rule 10c-1 are fundamentally designed to increase transparency in securities lending, their approaches and impacts significantly differ. SFTR’s complexity in terms of required data and matching of counterparty transactions have brought about operational challenges. In contrast, SEC Rule 10c-1, proposes a more focused and simpler design, appears likely to have a profound influence on the operation of the U.S. securities lending market, provided its implementation can adequately address the concerns raised by the industry.
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.
