Insight
SEC Rule 10c-1a: Exploring its Purpose, Scope and the Legal Challenge to its Implementation
CJ Emson
December 2023
In our recent webinar discussing the final SEC 10c-1a ruling we covered many aspects of the final definitions included in the 353-page ruling, including what is covered in the final rule, what criteria must be met for a transaction be considered in scope and discussed the elements of ambiguity still open for discussion.
More recently, 10c-1a and another SEC rule covering disclosure of short sales have been legally challenged by trade associations representing the funds’ industry. Amongst other things, the associations argue that the SEC has not considered the costs and benefits of the combined impact of the two rules. A legal challenge to 10c-1a was not unexpected given general concerns about the SEC’s rule making agenda, which some consider excessive, and the fact that there was considerable push back from the market during the original consultation. In response to the original consultation exercise, the SEC did make some material adjustments to the final 10c-1a rule, and it remains to be seen as to whether the challenge will be successful. We would expect the SEC to vigorously defend the rule.
In the meantime, we continue to consider the issues that the rule raises for market participants and will be continuing our work to design an effective solution for clients through our working groups in the first half of 2024.
As a refresher for those who attended our webinar, and for anyone who was unable to join, the following is a summary of some of the main issues that were raised. This should not be considered legal advice, but rather EquiLend’s interpretation of the ruling. You can opt into our working groups for deeper and ongoing discussion on SEC 10c-1a by emailing us.
Why Does Securities Finance Need 10c-1a?
The crux of SEC Rule 10c-1a serves dual purposes: to implement a reporting requirement for market participants for securities lending transactional data, and to require FINRA to make information publicly available about market activity for the benefit of all investors. The scope of 10c-1a reporting as defined by the SEC is part of a wide scale and long running implementation of measures to achieve greater transparency and oversight in the securities lending market.
Scope and Requirements of 10c-1a Reporting: Transaction Type and Market Segments
Some key specifics of the original rule 10c-1 proposal were met with debate. There was some contention in a perceived lack of clarity regarding its scope, specifically what transactions and who was covered. The final ruling from the SEC has addressed many of these concerns adding new language and specifics on jurisdiction and market segment. New terms such as “covered person,” “reportable security” and “covered securities loan” add greater clarity for the requirements facing in-scope firms. Both wholesale and retail market segments will fall in-scope, but unlike SFTR in Europe, the ruling will stop short of covering repo transactions. 10c-1a will solely cover securities lending of both equities and fixed income securities (although loans of money market instruments issued with a maturity of less than one year will not be in scope).
Market participants had challenged the proposal to include both wholesale and retail markets in the rule citing that there were material differences between the two. The wholesale market covers the lending of securities by beneficial owners and lending agents, while the retail market covers activity between broker-dealers and their clients (typically hedge funds). The broker dealer community argued that the “loans” of securities they make to their clients to facilitate short sales are conducted under different legal agreements and structures to those made in the wholesale market, and that the SEC was implementing a separate short sale reporting rule. Despite such challenge both segments remain in scope.
Changes to Reporting Requirements
One of the most contentious elements in the proposal, the 15-minute rule for reporting loans and modifications, has been removed, in its place is an end of day transaction reporting regime. In response to feedback from market participants who requested the removal of the 15-minute reporting timeframe the rule now states that a covered person who agrees to a covered security loan is required to report new loans and modifications by the end of the day on which the loan is affected (although we expect that FINRA will require intra-day timestamps on the transaction data). Also, out of scope from the proposal is a requirement for lenders to report inventory information on T+1.
10c-1a: Scope of Reporting in Practice
The new rule applies to transactions defined as Covered Securities Loans, which are loans of Reportable Securities that are agreed by Covered Persons. To understand what this means it is necessary to consider what the SEC means by Reportable Securities and Covered Persons; both elements must be present for a loan to be considered a Covered Securities Loan and eligible for 10c-1a reporting. This is true of both equity and fixed income securities and a reporting agent can be appointed to submit reporting on behalf of the covered person.
Defining Reportable Securities
Reportable Securities include both equities and fixed income securities and are defined as securities which are required to be reported under the CAT (Consolidated Audit Trail), TRACE (Trade Reporting and Compliance Engine) or RTRS (Real-Time Reporting System). This means that the rule principally applies to U.S. securities and firms will need to have systems for ensuring they can identify in scope securities.
Understanding Covered Persons
Covered persons are individuals or entities that have engaged in a covered securities loan transaction. Generally, the lender is responsible for reporting these transactions. This applies to both agent lenders and principal lenders. However, there are exceptions. For instance, if a broker dealer facilitates loans of a client’s fully paid securities, the broker dealer becomes the covered person. There are some questions about whether non-U.S. participants are covered by the rule. Although the SEC expressly mentions non-U.S. based participants as being covered, we are aware that some questions have been expressed about the SEC’s authority to include them.
Role of Reporting Agents
A reporting agent can be selected by a covered person to handle the reporting on their behalf. If a reporting agent assumes this responsibility, they need to enter into a formal agreement with the covered person. The role of reporting agents is significant, as they can be entrusted with the reporting responsibilities if agreed upon by the covered person. The reporting agent will then be accountable for the accuracy and completeness of the data submitted.
Adhering to the guidelines regarding reportable securities, covered security loans and covered persons, is essential to ensure accurate and compliant reporting under 10c-1a.
How EquiLend Can Help with Reporting
EquiLend, as a registered broker dealer, can be appointed as a reporting agent to meet reporting obligations into FINRA. Our EquiLend ecosystem is uniquely positioned to help the market comply with the 10c-1a reporting requirements as we already capture a large proportion of the data required to be reported. The ecosystem includes our EquiLend Data & Analytics Solutions, such as DataLend, (through which we capture and analyze huge volumes of securities lending data each day), our EquiLend Trading Solutions, including the NGT and ECS platforms and our Post-Trade Solutions that focus on lifecycle management and risk monitoring. Moreover, EquiLend Spire, our Securities Finance Platform Solution, and our DLT-based single source of truth, known as 1Source, can further contribute to capturing and reporting loans and lifecycle events. By closely working with the market, we aim to minimize the burden on market participants and clients, making the reporting process as seamless as possible.
Adhering to the guidelines regarding reportable securities, covered security loans and covered persons, is essential to ensure accurate and compliant reporting under 10c-1a.
Setting up Industry Working Groups for Clients
Many of our clients have expressed interest in participating in industry working groups to address specific issues and concerns. We believe that setting up these working groups is an effective way to raise questions and find consensus with firms and within EquiLend. We plan to continue to have separate working groups for lenders and borrowers, as their issues may differ. Contact us to participate.
We have the expertise, infrastructure and extensive data capabilities to handle the reporting of various trade types and transactions. With EquiLend as your reporting agent, you can confidently meet your obligations and focus on your core business activities.
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.
