Reporting of Securities Loans, 69802-69853 [2021-25739]

Download as PDF 69802 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules SECURITIES AND EXCHANGE COMMISSION 17 CFR Part 240 [Release No. 34–93613; File No. S7–18–21] RIN 3235–AN01 Reporting of Securities Loans Securities and Exchange Commission. ACTION: Proposed rule. AGENCY: The Securities and Exchange Commission (‘‘Commission’’ or ‘‘SEC’’) is proposing a rule to increase the transparency and efficiency of the securities lending market by requiring any person that loans a security on behalf of itself or another person to report the material terms of those securities lending transactions and related information regarding the securities the person has on loan and available to loan to a registered national securities association (‘‘RNSA’’). The proposed rule would also require that the RNSA make available to the public certain information concerning each transaction and aggregate information on securities on loan and available to loan. DATES: Comments should be received on or before January 7, 2022. ADDRESSES: Comments may be submitted by any of the following methods: SUMMARY: jspears on DSK121TN23PROD with PROPOSALS2 Electronic Comments • Use the Commission’s internet comment form (https://www.sec.gov/ regulatory-actions/how-to-submitcomments); or • Send an email to rule-comments@ sec.gov. Please include File Number S7– 18–21 on the subject line. Paper Comments • Send paper comments to Vanessa A. Countryman, Secretary, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549–1090. All submissions should refer to File Number S7–18–21. This file number should be included on the subject line if email is used. To help us process and review your comments more efficiently, please use only one method. The Commission will post all comments on the Commission’s internet website (https://www.sec.gov/rules/ proposed.shtml). Comments are also available for website viewing and printing in the Commission’s Public Reference Room, 100 F Street NE, Washington, DC 20549–1090 on official business days between the hours of 10 a.m. and 3 p.m. Operating conditions VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 may limit access to the Commission’s public reference room. All comments received will be posted without change. Persons submitting comments are cautioned that we do not redact or edit personal identifying information from comment submissions. You should submit only information that you wish to make available publicly. Studies, memoranda, or other substantive items may be added by the Commission or staff to the comment file during this rulemaking. A notification of the inclusion in the comment file of any such materials will be made available on our website. To ensure direct electronic receipt of such notifications, sign up through the ‘‘Stay Connected’’ option at www.sec.gov to receive notifications by email. FOR FURTHER INFORMATION CONTACT: Theresa Hajost, Special Counsel, Samuel Litz, Special Counsel, John Guidroz, Branch Chief, Josephine Tao, Assistant Director, Office of Trading Practices, Division of Trading and Markets, Securities and Exchange Commission, 100 F Street NE, Washington, DC 20549, at (202) 551– 5777. SUPPLEMENTARY INFORMATION: The Commission is proposing for public comment 17 CFR 240.10c–1 (‘‘proposed Rule 10c–1’’ or ‘‘proposed Rule’’), under the Securities Exchange Act of 1934 (‘‘Exchange Act’’) [15 U.S.C. 78a et seq.]. Proposed Rule 10c–1 would apply to any person that loans a security (‘‘securities lending transactions’’) on behalf of itself or another person. It would require such persons to report the specified material terms for each securities lending transaction and related information to an RNSA. Proposed Rule 10c–1 would also require that the RNSA disseminate certain information concerning each securities lending transaction to the public and certain aggregate loan information. Table of Contents I. Executive Summary A. Introduction 1. Market Background 2. Intended Objectives II. Background A. Market Structure B. Transaction Reporting 1. Data Available From Private Vendors III. Discussion of Proposed Rule A. Reporting 1. Obligation To Provide Information to an RNSA (a) Obligation of Lender To Provide 10c– 1 Information (b) Providing Information to an RNSA 2. Persons Responsible for Providing Information to an RNSA (a) Lending Agent Provides Information to an RNSA PO 00000 Frm 00002 Fmt 4701 Sfmt 4702 (b) Reporting Agent Provides Information to an RNSA (c) Beneficial Owner Provides Information to an RNSA (d) Examples of Who Is Responsible for Providing Information to an RNSA B. Information To Be Provided to an RNSA 1. Data Elements Provided to an RNSA (a) Initial Loan-Level Data Elements (b) Loan Modification Data (c) Material Transaction Data That Would Not Be Made Public (d) Total Amount of Securities Available to Loan and Total Amount of Securities on Loan C. RNSA Rules To Administer the Collection of Information D. Data Retention and Availability E. Report and Dissemination Fees IV. General Request for Comment V. Paperwork Reduction Act Analysis A. Background B. Proposed Use of Information C. Information Collections D. Information Collections Applicable to Lenders 1. Lending Agents (a) Providing Lending Agents (i) Initial Burden (ii) Ongoing annual burden (b) Non-Providing Lending Agents (i) Systems Development and Monitoring (ii) Entering into Written Agreement With Reporting Agent 2. Reporting Agents (a) Systems Development and Monitoring (i) Initial Burden (ii) Ongoing Annual Burden (b) Entering Into Written Agreements With Persons on Whose Behalf the Reporting Agent Would be Providing Information (c) Entering Into Written Agreement with RNSA (d) Recordkeeping Requirement 3. Lenders That Would Not Employ a Lending Agent (a) Self-Providing Lenders (i) Initial Burden (ii) Ongoing Annual Burden (b) Lenders That Would Directly Employ a Reporting Agent (i) Systems Development and Monitoring (ii) Entering Into a Written Agreement with a Reporting Agent E. Information Collection Applicable to RNSAs 1. RNSA Collection of Information From Lenders and Providing Information to the Public and the Commission (a) Initial Burden (b) Ongoing Annual Burden 2. RNSA Retention of Collected Information F. Collection of Information is Mandatory G. Confidentiality H. Retention Period of Recordkeeping Requirement I. Request for Comment VI. Economic Analysis A. Introduction and Market Failure 1. Introduction 2. Market Failures B. Baseline 1. Securities Lending 2. Current State of Transparency in Securities Lending E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules 3. Characteristics of the Securities Lending Market 4. Structure of the Securities Lending Market (a) Market for Borrowing and Borrowing Services (b) Market for Lending Services 5. Market for Securities Lending Data and Analytics C. Economic Effects of the Proposed Rule 1. Effects of Increased Transparency in the Lending Market (a) Reduction in Information Asymmetry (b) Improved Information for Participants in the Securities Lending Market (c) Improved Market Function Through Effects on Short Selling (d) Improved Financial Management for Financial Institutions 2. Regulatory Benefits (a) Surveillance and Enforcement Uses (b) Market Reconstruction Uses (c) Market Research Uses 3. Direct Compliance Costs 4. Indirect Costs 5. Risk of Circumvention Through Repurchase Agreements D. Impact on Efficiency, Competition, and Capital Formation 1. Efficiency 2. Competition 3. Capital Formation E. Alternatives 1. Broker-Dealer Reporting 2. Publicly Releasing the Information in 10c–1(d) 3. Additional Information in the Reported or Disseminated Information 4. Alternative Timeframes for Reporting or Dissemination 5. Allow an RNSA to Charge Fees to Distribute the Data 6. Longer Holding Period Requirement 7. Report to the Commission Rather Than to an RNSA 8. Report Through an NMS Plan F. Request for Comment VII. Regulatory Flexibility Act Certification VIII. Consideration of Impact on the Economy IX. Statutory Authority List of Subjects in 17 CFR parts 240 I. Executive Summary A. Introduction jspears on DSK121TN23PROD with PROPOSALS2 1. Market Background The securities lending market is opaque.1 Section 984 of the Dodd-Frank 1 See infra Part II.B. The corporate bond and municipal securities markets are now more transparent and efficient markets. The regulatory concerns that led to these transformations included the lack of publicly available pricing information, which is similar to the concerns that would be addressed by proposed Rule 10c–1. The changes to these markets have provided investors with greater pricing transparency, lower search costs and greater price competition. See, e.g., Louis Loss, Joel Seligman & Troy Paredes, Chapter 7.A.2—Bond Trading, in Fundamentals of Securities Regulation (6th ed. Supp. 2021). See also Interim Report of the Financial Stability Board Workstream on Securities Lending and Repos, Securities Lending and Repos: Market Overview and Financial Stability Issues, at 14 (Apr. 27, 2012), available at https://www.fsb.org/ wp-content/uploads/r_120427.pdf. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 Act provides the Commission with the authority to increase transparency, among other things, with respect to the loan or borrowing of securities.2 It also mandates that the Commission promulgate rules designed to increase the transparency of information available to brokers, dealers, and investors.3 Although various market participants, such as registered investment companies (‘‘investment companies’’), are required to make specified disclosures regarding their securities lending activities,4 parties to securities lending transactions are not currently required to report the material terms of those transactions.5 The value of securities on loan in the United States as of September 30, 2020, was estimated at almost $1.5 trillion.6 Yet, despite its size, the securities lending market in the United States has a general lack of information available to its market participants, the public and regulators.7 Based on the lack of transparency and statutory objective 8 to increase transparency in securities lending transactions, the Commission is proposing Rule 10c–1 under the Exchange Act, which would require any person who loans a security on behalf of itself or another person (a ‘‘Lender’’) 9 2 Public Law 111–203, 984(b), 124 Stat. 1376 (2010). Section 984(a) of the Dodd-Frank Act (‘‘DFA’’), now Section 10(c)(1) of the Exchange Act, makes it ‘‘unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce or the mails, or of any facility of any national securities exchange . . . to effect, accept or facilitate a transaction involving the loan or borrowing of securities in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.’’ Section 984 of the DFA focuses on the loan or borrowing of securities; therefore, the Commission is not proposing to include repurchase agreements within the scope of the rule. 3 Id. Section 984(b) of the DFA directs the SEC to ‘‘promulgate rules that are designed to increase the transparency of information available to brokers, dealers, and investors with respect to loan or borrowing securities.’’ 4 Investment companies are required to disclose certain information about their securities lending activities. See, e.g., Form N–CEN, Item C.6 (requiring disclosures relating to an investment company’s securities lending activities) and Form N–PORT, Items B.4 and C.12 (requiring disclosure by investment companies of certain information on borrowers of loaned securities and collateral received for loaned securities). See also 81 FR 81870 (Nov. 18, 2016) (discussing requirements for securities lending disclosures by investment companies). 5 See infra Part II.B. 6 See Financial Stability Oversight Council (FSOC), 2020 Annual Report, figure 3.4.2.8, at 41, available at https://home.treasury.gov/system/files/ 261/FSOC2020AnnualReport.pdf. (‘‘FSOC 2020 Annual Report’’). See infra note 14. 7 See infra Part VI.A.2. 8 See supra note 3. 9 Lender, when used in this release, refers to any persons that loans a security on behalf of itself or PO 00000 Frm 00003 Fmt 4701 Sfmt 4702 69803 to provide the specified material terms of their securities lending transactions to an RNSA, as discussed more fully below. Private data vendors have attempted to address the opacity in the securities lending market by developing systems that provide data to clients who both subscribe to those systems and provide their transaction data to the data vendor. Only subscribers can use those systems to receive information regarding securities lending transactions.10 Moreover, as the private systems capture data only from their subscribers, the available data is not complete, nor is the transaction data captured by these private vendors available to the general public without a subscription, or available in one centralized location. Industry observers and market participants have suggested that the Commission consider measures to provide additional transparency in the securities lending market.11 Furthermore, there have been other calls for additional transparency, including in testimony during a hearing before the House Financial Services Committee on March 17, 2021. Such testimony supported the creation of a ‘‘consolidated tape’’ or a public data feed of securities lending transactions.12 The lack of public information and data gaps creates inefficiencies in the securities lending market. The gaps in securities lending data render it difficult for borrowers and lenders alike to ascertain market conditions and to know whether the terms that they receive are consistent with market conditions.13 These gaps also impact the another person, including persons that own the securities being loaned (‘‘beneficial owners’’), as well as third party intermediaries, including banks, clearing agencies, or broker-dealers that intermediate the loan of securities on behalf of beneficial owners (‘‘lending agent’’). The term Lender does not extend to the borrower of securities in a securities lending transaction or any third party the intermediates the borrowing of securities on behalf of the borrower. 10 See infra Part II.B.1. 11 During a March 17, 2021, hearing before the House Financial Services Committee, Dennis Kelleher, CEO of Better Markets, former SEC Commissioner Michael Piwowar, now Executive Director of the Milken Institute Center for Financial Markets, and Michael Blaugrund, COO of the NYSE, each testified that additional transparency in the securities lending market is warranted. See Game Stopped? Who Wins and Loses When Short Sellers, Social Media, and Retail Investors Collide, Part II: Hearing Before the H. Comm. on Fin. Serv., 117th Cong. (2021). As Michael Blaugrund stated during the hearing, ‘‘[a] system that anonymously published the material terms for each stock loan would provide the necessary data to understand shifts in short-selling activity while protecting the intellectual property of individual market participants.’’ 12 Id. 13 See infra Part VI.A.2. E:\FR\FM\08DEP2.SGM 08DEP2 69804 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules ability of the Commission, RNSAs and other self-regulatory organizations (‘‘SROs’’), and other Federal financial regulators (collectively ‘‘regulators’’) to oversee transactions that are vital to fair, orderly, and efficient markets.14 Indeed, the size of the U.S. securities lending market can only be estimated as the data currently ‘‘available on . . . securities lending transactions are spotty and incomplete.’’ 15 Furthermore, the FSOC 2020 Annual Report noted data gaps in ‘‘certain important financial markets including transaction data . . . for securities lending arrangements. . .’’ 16 jspears on DSK121TN23PROD with PROPOSALS2 2. Intended Objectives To supplement the publicly available information involving securities lending, close the data gaps in this market, and minimize information asymmetries between market participants, proposed Rule 10c–1 is designed to provide investors and other market participants with access to pricing and other material information regarding securities lending transactions in a timely manner. For example, the Commission preliminarily believes that the data collected and made available by the proposed Rule would improve price discovery in the securities lending market and lead to a reduction of the information asymmetry faced by end borrowers and beneficial owners in the securities lending market. The Commission preliminarily believes the proposed Rule would close securities lending data gaps, would also increase market efficiency, and lead to increased competition among providers of securities lending analytics services and to reduced administrative costs for broker-dealers and lending programs.17 The data elements provided to an RNSA under proposed Rule 10c–1 are also designed to provide the RNSA with 14 In its 2020 Annual Report, FSOC describes securities lending as ‘‘support[ing] the orderly operation of capital markets, principally by enabling the establishment of short positions and thereby facilitating price discovery and hedging . . . it is estimated that at the end of September 2020 the global securities lending volume outstanding was $2.5 trillion, with around 57 percent of it attributed to the U.S.’’ Financial Stability Oversight Council (FSOC), 2020 Annual Report, at 45, available at https:// home.treasury.gov/system/files/261/ FSOC2020AnnualReport.pdf. See also Viktoria Baklanova, Adam Copeland & Rebecca McCaughrin, Reference Guide to U.S. Repo and Securities Lending Markets (Off. of Fin. Research, Working Paper No. 15–17, 2015) at 5, available at https:// www.financialresearch.gov/working-papers/files/ OFRwp-2015-17_Reference-Guide-to-U.S.-Repoand-Securities-Lending-Markets.pdf (‘‘OFR Reference Guide’’). 15 OFR Reference Guide, supra note 14, at 5. 16 FSOC 2020 Annual Report, supra note 14, at 187. 17 See infra Part VI.A.1. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 data that could be used for important regulatory functions, including facilitating and improving its in-depth monitoring of member activity and surveillance of securities markets. Further, the data elements are designed to provide regulators with information to understand: Whether market participants are building up risk; the strategies that broker-dealers use to source securities that are lent to their customers; and the loans that brokerdealers provide to their customers with fail to deliver positions. Enhancing the transparency of data on securities lending transactions should provide more information to help illuminate investor behavior in the securities lending market and the broader securities market more generally. It will also provide beneficial owners and borrowers with better tools to ascertain current market conditions for securities loans and allow them to determine whether the terms that they receive for their loans are consistent with market conditions. The Commission preliminarily believes that public disclosure of specified material information regarding securities lending transactions could improve efficiency in the securities lending market and the securities market in general by reducing frictions that can exist where pricing information is not publicly available.18 In particular, providing access to timely, granular information about certain material terms of securities lending transactions would allow investors, including borrowers and lenders, to evaluate not only the rates for such transactions, but also any signals that rates provide, e.g., that changes in supply and demand for a particular security may indicate an increase in short sales of that security.19 In addition, increasing the accessibility of data could lower barriers to entry for would-be participants in the securities lending market as well as the securities markets more broadly because all market participants, not just counterparties to a trade or those that subscribe to certain services, would be 18 Frictions in trading costs and price can stem from general lack of information on current market conditions, which can lead to inefficient prices for securities loans. See infra Part VI.A.2. 19 Subject to certain exceptions, Rule 203 of Regulation SHO requires a broker-dealer to identify shares of a security that are available for borrowing prior to initiating a short sale in that security. See 17 CFR 242.203(b). Rule 204 of Regulation SHO requires a participant of a registered clearing agency to ‘‘close out’’ open short sale positions within specified timeframes by either purchasing or borrowing shares in order to make delivery. 17 CFR 242.204. As a result, heightened demand for borrowing shares of a security is frequently associated with an increased level of short selling activity in that security. PO 00000 Frm 00004 Fmt 4701 Sfmt 4702 able to view and analyze transactions that are taking place in the securities lending market. As a result, the disclosure of the specified material terms of securities lending transactions might improve the efficiency and resiliency of the securities market by reducing frictions in the cost of borrowing securities, which may also have positive effects on the markets for the securities themselves. Additional benefits from increased transparency could include increased savings and profits for investors, improved terms for beneficial owners participating in lending programs, and improved competitiveness in the lending agent and broker-dealer businesses. The proposal might also reduce the cost of short selling and lead to an increase in fundamental research, which contributes to more efficient prices.20 Finally, access to additional data can contribute to more informed portfolio management and lending decisions.21 II. Background A. Market Structure Securities lending is the market practice by which securities are transferred temporarily from one party, a securities lender, to another, a securities borrower, for a fee.22 A securities loan is typically a fully collateralized transaction. Securities lenders, referred to as ‘‘beneficial owners,’’ are generally large institutional investors including investment companies, central banks, sovereign wealth funds, pension funds, endowments, and insurance companies.23 Beneficial owners of large, static, unleveraged portfolios, mainly pension funds, increasingly cite securities lending as an important incomeenhancing strategy with minimal, or at least controlled, risk.24 This incremental income not only helps defined-benefit pension funds to generate income, but also provides investment company investors with additional returns.25 20 Fundamental research typically involves analyzing and interpreting publicly-available company information to determine whether a stock is under- or overvalued. See, e.g., Zvi Bodie, Alex Kane & Alan J. Marcus, Investments 363 (2008). 21 See infra Part VI.C.1.b). 22 See, e.g., OFR Reference Guide, supra note 14, at 24. 23 Id. at 29. 24 See Lipson, Sabel & Keane, infra note 37, at 1; OFR Reference Guide, supra note 14, at 29; A Pilot Survey of Agent Securities Lending Activity (Off. of Fin. Research, Working Paper No. 16–08, 2016) at 4. https://www.financialresearch.gov/workingpapers/2016/08/23/pilot-survey-of-agent-securitieslending-activity/ (‘‘OFR Pilot Survey’’). 25 OFR Reference Guide, supra note 14, at 29. See also Zoltan Pozsar, Shadow Banking: The Money E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 Broker-dealers are the primary borrowers of securities; they borrow for their market making activities or on behalf of their customers.26 Brokerdealers who borrow securities typically re-lend those securities or use the securities to cover fails to deliver or short sales 27 arising from proprietary or customer transactions.28 While the identities of the ultimate securities borrowers are usually unknown, anecdotally, hedge funds rank among the largest securities borrowers and access the lending market mainly through their prime brokers.29 Brokers and dealers may also lend securities that are owned by the broker or dealer, customer securities that have not been fully paid for (i.e., have been purchased with a margin loan from the brokerdealer), and the securities of customers View (Off. of Fin. Research, Working Paper No. 14– 04, 2014), available at https:// www.financialresearch.gov/working-papers/files/ OFRwp2014-04_Pozsar_ ShadowBankingTheMoneyView.pdf. The majority of passive and exchange traded funds (ETFs) also engage in securities lending. In each case, securities lending has been an important revenue source that can compound each year to offset fees and transaction costs, protect an asset manager’s profit margins, and improve fund investor returns. See, e.g., Tomasz Mizio5ek, Ewa Feder-Sempach & Adam Zaremba, The Basics of Exchange-Traded Funds, in International Equity Exchange-Traded Funds, at 97–98 (1st ed. 2020). 26 Dealers, which often act as market makers, borrow securities to settle buy orders from customers. See OFR Reference Guide, supra note 14, at 33. See also Comptroller’s Handbook: Custody Services/Asset Management, Off. of the Comptroller of the Currency, at 28 (Jan. 2002), https://www.occ.treas.gov/publications-andresources/publications/comptrollers-handbook/ files/custody-services/index-custody-services.html (‘‘Comptroller’s Handbook’’); OFR Pilot Survey, supra note 24, at 2–3. 27 Regulation SHO requires, among other things, that fails to deliver be closed out by purchasing securities of like kind and quantity by no later than the settlement day after settlement is due, or no later than two settlement days after settlement is due for short sales resulting from long sales or from bona fide market making activity. As previously emphasized by the Commission, the determination of whether a short sale qualifies for the bona fide market making is based on a variety of facts and circumstances surrounding a transaction, and must be made on a trade-by-trade basis. See Exchange Act Release No. 58775 (Oct. 14, 2008), 73 FR 61690 (Oct. 17, 2008), available at https://www.sec.gov/ rules/final/2008/34-58775fr.pdf. 28 Brokers’ and dealers’ securities lending and borrowing activities are governed by a number of regulations including 17 CFR 240.15c3–3 (‘‘Exchange Act Rule 15c3–3’’; commonly referred to as the ‘‘Customer Protection Rule’’), 17 CFR 240.15c3–1 (‘‘Exchange Act Rule 15c3–1; commonly referred to as the ‘‘Net Capital Rule’’), 17 CFR 240.8c–1 and 17 CFR 240.15c2–1 (‘‘Exchange Act Rules 8c–1 and 15c2–1 commonly referred to as the ‘‘hypothecation rules’’). See also Comptroller’s Handbook, supra note 26, at 28. 29 OFR Reference Guide, supra note 14, at 33. Many trading strategies rely on the ability of the trader to borrow securities. For example, traders often borrow securities to establish a short position in one security to hedge a long position in another security. Id. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 who have agreed to participate in a fully paid securities lending program offered by their broker-dealer.30 Securities lending transactions are usually facilitated by a third party. Custodian banks have traditionally been the primary lending agent or intermediary and lend securities on behalf of their custodial clients for a fee.31 Advances in technology and operational efficiency have made it easier to separate securities lending services from custody services. Such developments have given rise to specialist third-party agent lenders, who have established themselves as an alternative to custodial banks.32 Agent lenders provide potential borrowers with the inventory of securities available for lending on a daily basis.33 In addition to agent intermediaries, 34 there are also principal intermediaries, such as prime brokers, securities dealers, and specialist intermediaries. The role of the principal intermediary is to provide credit transformation for lending clients who are not willing to assume exposure to certain types of borrowers. For example, a prime broker assumes credit exposure to the borrower.35 In short, agent intermediaries aggregate supply on lendable assets, while principal intermediaries aggregate demand for lendable assets.36 Some large investment companies and their fund managers have created their own securities lending programs and use their own employees to staff the program rather than using the services of a custodial bank lending desk or third-party agent lender.37 30 See Exchange Act Rule 15c3–3. infra Part VI. See, e.g., Comptroller’s Handbook, supra note 26, at 27. Beneficial owners typically share a portion of their total compensation with the agent and it is common for the beneficial owner to retain most of it. See, e.g., OFR Pilot Survey, supra note 26, at 2. 32 OFR Reference Guide, supra note 14, at 31. 33 Id. at 34. 34 Agent intermediaries include custodian banks, agent lenders and other third parties, such as asset managers or specialized consultants. Id. at 30–31. 35 Id. at 32. 36 Id. 37 As a low-margin business, beneficial owners’ portfolios need to be of a sufficient size for a securities lending program to be economically feasible. See OFR Reference Guide, supra note 14, at 29. See also Anthony A. Nazzaro, Chapter 4— Evaluating Lending Options, in Securities Finance, at 83–84 (Frank J. Fabozzi & Steven V. Mann ed. 2005). See also Fidelity, Fidelity Agency Lending, available at https://capitalmarkets.fidelity.com/ fidelity-agency-lending; Fidelity, Q&A: New Securities Lending Agent for the Fidelity Funds (July 8, 2020), available at https:// institutional.fidelity.com/app/proxy/ content?literatureURL=/9899781.PDF. Also a few large pension and endowment funds lend directly. See Paul C. Lipson, Bradley K. Sabel & Frank M. Keane, Securities Lending, Federal Reserve Bank of 31 See PO 00000 Frm 00005 Fmt 4701 Sfmt 4702 69805 Traditionally, securities lending and borrowing transactions have been conducted on a bilateral basis.38 Generally, when an end investor wishes to borrow securities, and its brokerdealer does not have those securities available in its own inventory or through customer margin accounts to loan, the broker-dealer will borrow the securities from a lending agent with whom it has a relationship. The brokerdealer will then re-lend the securities to its customer. Loans from lending programs to broker-dealers occur in what is referred to as the ‘‘Wholesale Market’’, while loans from a brokerdealer to the end borrower occur in what is referred to as the ‘‘Retail Market’’. Obtaining a securities loan often involves an extensive search for counterparties by broker-dealers.39 There are also digital platforms for secured financing transactions, including securities lending, which provide electronic trading in the securities lending market.40 Another approach to securities lending is based on a competitive blind auction to determine the optimal lending strategy for beneficial owners who opt to use the auction route. The auction process is intended to improve price transparency for borrowers who pay for access to lendable assets.41 There are also efforts to develop and expand peer-to-peer lending platforms involving multiple beneficial owners and borrowers, where securities lending transactions take place without the use of traditional intermediaries.42 Additionally, the Options Clearing Corporation (‘‘OCC’’) has two stock loan New York Staff Report no. 555, at 2 (Mar. 2012), available at www.newyorkfed.org/research/staff_ reports/sr555.pdf. 38 See, e.g., id. at 36. Typically, the parties enter into a written contract that sets out their legal rights and obligations. See OFR Reference Guide, supra note 14, at 36. While there are some differences in the contract provisions used, usually the general terms are the same. See Lipson, Sabel & Keane, supra note 37, at 44–45. In the United States, a Master Securities Loan Agreement (MSLA) is normally used to set out the legal rights and obligations of the parties in securities lending transactions. See OFR Reference Guide, supra note 14, at 36. A copy of the Master Securities Lending Agreement (‘‘MSLA’’) published by SIFMA is available at https://www.sifma.org/resources/ general/mra-gmra-msla-and-msftas/. 39 See, e.g., Adam C. Kolasinski, Adam V. Reed & Matthew C. Ringgenberg, A Multiple Lender Approach to Understanding Supply and Search in the Equity Lending Market, 68 J. Fin. 559–95 (2013). 40 See, e.g., Equilend, Next-Generation Trading (NGT), https://www.equilend.com/services/ngt/. 41 See, e.g., eSecLending, The eSecLending Difference, https://www.eseclending.com/whyeseclending/. See also OFR Reference Guide, supra note 14, at 32. 42 See, e.g., The Global Peer Financing Association, available at https:// globalpeerfinancingassociation.org. E:\FR\FM\08DEP2.SGM 08DEP2 69806 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 programs: The Stock Loan Program (formerly ‘‘Hedge’’) and the Market Loan program.43 The Stock Loan Program allows OCC clearing members to use borrowed and loaned securities to reduce OCC margin requirements, which OCC considers as reflecting the real risks of their intermarket hedged positions. In this program OCC serves as a principal counterparty, by becoming the lender to the borrower and the borrower to the lender for each transaction. In its Market Loan program OCC processes and maintains stock loan positions that have originated through a Loan Market.44 OCC acts as central counterparty to these matched loans and provides clearing and settlement services to the market and OCC clearing members.45 Securities loans may be either for a specific term or open-ended with no fixed maturity date. The typical market practice is for securities loans to be open-ended, allowing the security on loan to be recalled by the beneficial owner. The open recall feature of a securities loan is driven by the assumption that participation in securities lending should not impact the investment strategy of the lender.46 For example, a security may be recalled when its beneficial owner would like to sell it or exercise its voting rights.47 Loans that provide the borrower with certainty regarding the length of the loan can be more valuable to the borrower.48 43 See The Options Clearing Corporation, Stock Loan Programs, https://www.theocc.com/Clearanceand-Settlement/Stock-Loan-Programs; see also The Options Clearing Corporation, Market Loan Program FAQs, https://www.theocc.com/Clearanceand-Settlement/Stock-Loan-Programs/OCC-MarketLoan-Program-FAQs. 44 OCC currently clears securities lending transactions for Automated Equity Finance Markets, Inc., a wholly owned subsidiary of EquiLend Clearing LLC. See The Options Clearing Corporation, Market Loan Program FAQs, https:// www.theocc.com/Clearance-and-Settlement/StockLoan-Programs/OCC-Market-Loan-Program-FAQs. 45 The Depository Trust & Clearing Corporation (DTCC), through its equities clearing subsidiary, National Securities Clearing Corporation (NSCC), has proposed a rule change for regulatory approval to centrally clear securities financing transactions, which would include securities loans. See SEC, Notice of Filing of Proposed Rule Change to Establish the Securities Financing Transaction Clearing Service and Make Other Changes, SR– NSCC–2021–010 (Aug. 5, 2021), available at https:// www.sec.gov/rules/sro/nscc.htm#SR-NSCC-2021010. 46 OFR Reference Guide, supra note 14, at 34. 47 OFR Reference Guide, supra note 14, at 29. 48 See, e.g., Mark C. Faulkner, Chapter 1—An Introduction to Securities Lending, in Securities Finance, at 8 (Frank J. Fabozzi & Steven V. Mann ed. 2005). A relatively static portfolio with low securities turnover is more attractive to securities borrowers because it minimizes recalls of loaned securities. See also OFR Reference Guide, supra note 14, at 29. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 Normally, the beneficial owner has specific guidelines regarding which counterparties can borrow its securities and the type of collateral it accepts. Lenders who are able and willing to be flexible on the type of collateral they will accept to secure the loan are more attractive to some borrowers.49 Beneficial owners may have different approaches to securities lending and associated risks.50 For example, some beneficial owners may prefer ‘‘volume lending,’’ in which large volumes of easier to lend securities are lent and returns can be enhanced with varying risk, such as the type of collateral accepted or investment of cash collateral in higher-yielding and riskier vehicles. Other beneficial owners may take a ‘‘value lending’’ approach where they lend in-demand securities, which generate higher borrower fees, and take a more conservative approach to the type of collateral accepted or the reinvestment of cash collateral.51 Different types of beneficial owners also operate under different laws and regulatory frameworks, which may or may not include regulations or regulatory guidance on securities lending activities. For example, investment companies are registered with the SEC under the Investment Company Act of 1940 and rules thereunder.52 Defined benefit plans are subject to the Employee Retirement Security Act (‘‘ERISA’’), as administered by the U.S. Department of Labor. Insurance companies are regulated at the state level. In the United States, the most common form of collateral for equity security loans is cash. The borrower of the security typically deposits 102% or 105% of the current value of the asset being loaned as collateral.53 The Lender then reinvests this collateral, usually in low-risk interest-bearing securities, then rebates a portion of the interest earned back to the borrower. The difference between the interest earned and what is rebated to the borrower is the lending fee earned by the Lender. The portion of the interest earned on the reinvested collateral that is returned to the borrower is called the rebate rate, and is a guaranteed amount set forth in the terms of the loan. It is possible for the Lender to lose money on the loan if the 49 Faulkner, supra note 48, at 6. OFR Reference Guide, supra note 14, at 30. 51 See Mizio5ek, et al., supra note 25, at 12. 52 See supra note 4. 53 OFR Pilot Survey, supra note 26, at 12. ‘‘Margins on securities loans are negotiable. The variation around the standard margins of 102 percent and 105 percent can be attributed to firmspecific differences in margining policies and the quality and type of the collateral security.’’ 50 See PO 00000 Frm 00006 Fmt 4701 Sfmt 4702 interest earned on the reinvestment of the collateral does not exceed the rebate rate. If the security is in high demand in the borrowing market, the rebate rate may be negative, indicating that the borrower does not receive any rebate and must also provide additional compensation to the Lender. When collateral for a security loan is in the form of other securities, the borrower pays the Lender a set fee. The fee depends on the availability of the security being borrowed; securities in high demand command a higher fee.54 While a security is on loan the borrower receives any dividends, interest payments, and, in the case of equity security loans, holds the voting rights associated with the shares.55 Usually the terms of the loan stipulate that dividends and interest payments must be passed back to the beneficial owner in the form of substitute payments. B. Transaction Reporting As discussed above, certain institutional investors, including pension funds (which provide retirement benefits) and mutual funds (which retail and institutional investors rely on to meet financial needs) lend out their securities to earn incremental income, help pension funds generate income, and provide additional returns for their long-term savers.56 As discussed below, the existing data are not comprehensive or centralized, and there are significant information asymmetries between market participants.57 The transaction information that would be provided to an RNSA under proposed Rule 10c–1 would include securities lending transaction information from all Lenders, and most of the information would be made publicly available. The Commission preliminarily believes the proposed Rule would provide material, granular, and timely data regarding the terms of securities lending transactions thereby allowing market participants, the public, and regulators access to key market information. 1. Data Available From Private Vendors Currently, the predominant sources of pricing information for securities loans are private vendors who offer a variety of systems for borrowers and lenders of securities to provide and receive information regarding securities lending transactions. Some, if not all, of the 54 OFR 55 See, Pilot Survey, supra note 26, at 2. e.g., OFR Reference Guide, supra note 14, at 36. 56 See supra Part II.A. See also OFR Reference Guide, supra note 14, at 30. 57 See, e.g., infra Part VI.A.2. E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules private vendors operate their systems on a ‘‘give-to-get’’ model, which effectively precludes access to their systems unless the would-be subscriber has securities lending transaction information to provide. Some private securities lending data vendors provide an intraday data feed or end of day information on securities lending transactions by various market participants as well as analytic services involving such data. The data are collected from securities lending transaction participants, including beneficial owners, brokerdealers, agent lenders and custodians. Commonly collected data elements include CUSIP identifiers for securities on loan, quantity, borrowing cost, utilization of available supply, owner domicile, and type of collateral held.58 However, the available data are incomplete, as private vendors do not have access to pricing information that reflects all transactions. This in part, reflects the voluntary submission of transaction information by subscribers to vendors and is compounded by the unknown comparability of data due to, among other things, the variability of the transaction terms disseminated, as well as how those terms are defined. As no single vendor has information for all securities lending transactions that take place, some persons pay to subscribe to multiple vendors’ systems in order to capture as much of the currently available data as they determine to purchase, which can be expensive.59 III. Discussion of Proposed Rule A. Reporting jspears on DSK121TN23PROD with PROPOSALS2 1. Obligation To Provide Information to an RNSA The Commission is proposing Rule 10c–1(a), which would require any person that loans a security 60 on behalf of itself or another person to provide to an RNSA the information required by paragraphs (b) through (e) of proposed Rule 10c–1 (‘‘10c–1 information’’) as discussed below 61 in the format and manner required by the rules of the RNSA. (a) Obligation of Lender to Provide 10c– 1 Information Proposed Rule 10c–1 would apply to all Lenders. Section 10(c)(1) of the Exchange Act makes it unlawful for any person, directly or indirectly, by use of any means or instrumentality of 58 See OFR Reference Guide, supra note 14, at 63. e.g., Beneficial Owners Demand Independent Benchmarking, Global Inv., 2017 WLNR 5380098 (Feb. 2, 2017). 60 See Section 3(a)(10) of the Exchange Act, which defines the term ‘‘security.’’ 15 U.S.C. 78c(a)(10). 61 See infra Part III.B. interstate commerce or of the mails, or of any facility of any national securities exchange to effect, accept, or facilitate a transaction involving the loan or borrowing of securities in contravention of such rules and regulations as the Commission may prescribe as necessary or appropriate in the public interest or for the protection of investors.62 The term ‘‘person,’’ for purposes of the Exchange Act, means a natural person, company, government, or political subdivision, agency, or instrumentality of a government.63 Accordingly, Section 10(c)(1) of the Exchange Act provides the Commission with broad authority to implement rules regarding securities lending transactions involving any person, including banks, insurance companies, and pension plans, so long as the rules involving the loan or borrowing of securities prescribed by the Commission are necessary or appropriate in the public interest or for the protection of investors. The Commission preliminarily believes that the proposed Rule is necessary or appropriate in the public interest or for the protection of investors. As discussed further in Part VI, the securities lending market lacks public information regarding securities lending transactions, which creates inefficiencies in the securities lending market. The proposed Rule is designed to address these inefficiencies in the securities lending market by making more comprehensive information regarding securities lending transactions publicly available, which could better protect investors by eliminating certain information asymmetries that currently exist in the securities lending market. The removal of such information asymmetries may improve market efficiencies in the securities market and enhance fair, orderly, and efficient markets for borrowing of the securities and the market for such underlying securities. Additionally, as discussed in greater detail in Part VI.C.2, proposed Rule 10c–1 would provide a number of regulatory benefits related to surveillance and enforcement, reconstruction of market events, and research. Proposed Rule 10c–1(a) would require Lenders to provide certain terms of securities lending transactions to an RNSA.64 The Commission preliminarily believes that any person that loans a security on behalf of itself or another 59 See, VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 62 15 U.S.C. 78j(c). U.S.C. 78c(a)(9). 64 See infra Part III.A.2 (Discussion of which Lenders are required to provide the 10c–1 information to the RNSA). 63 15 PO 00000 Frm 00007 Fmt 4701 Sfmt 4702 69807 person,65 which would include banks, insurance companies, and pension plans, should be required to provide the material terms of lending transactions to ensure that proposed Rule 10c–1 is appropriately ‘‘designed to increase the transparency of information available to brokers, dealers, and investors, with respect to the loan or borrowing of securities.’’ 66 Although the majority of securities lending transactions involve broker-dealers, over which the Commission has direct regulatory oversight,67 a significant percentage of securities lending transactions occur away from broker-dealers.68 The Commission preliminarily believes that any person that loans a security on behalf of itself or another person should be required to provide the specified terms of a securities lending transaction because excluding certain persons— such as banks, insurance companies, and pension plans—would lead to incomplete information regarding securities lending transactions, which might reduce the benefits of the public availability of 10c–1 information and potentially lead to competitive advantages for those Lenders that are not required to provide 10c–1 information to an RNSA. The Commission proposes to limit the obligation to provide the specified material terms to an RNSA only to the Lender to avoid the potential double counting of transactions that could arise if the Rule required both sides of the securities lending transaction to provide the material terms. Furthermore, the Commission preliminarily believes that the Lender is in the better position to provide the material terms of the securities lending transactions. Lenders are more likely to have access to all of the 10c–1 information. For example, a borrower will not be privy to information required to be provided to the RNSA under paragraph (e) of proposed Rule 10c–1, such as the number of securities available to loan. Additionally, entities such as investment companies, broker-dealers, and banks, which engage in securities lending transactions, typically tend to be larger institutions because of the 65 See infra Part III.A.2 (Discussion of the hierarchy regarding who is required to provide information to the RNSA). 66 Public Law 111–203, 984(b), 124 Stat. 1376 (2010). 67 See 15 U.S.C. 78o. 68 While the Commission preliminarily believes that the majority of transactions involve brokerdealers the precise percentage is currently unknown. Based on 2015 survey data the Commission estimates that broker-dealers facilitate between 60% and 90% of transactions in the equity lending market. See OFR Pilot Survey, supra note 26, at 7–8. E:\FR\FM\08DEP2.SGM 08DEP2 69808 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 scale necessary to make the lending of securities cost-effective.69 To the extent that smaller entities engage in securities lending, they generally employ lending agents, which as discussed below in Part III.A.2.a), would relieve these smaller lending entities from having to provide the 10c–1 information to the RNSA. Accordingly, the Commission preliminarily believes that requiring only the Lender to provide the 10c–1 information will alleviate the potential for the double counting of transactions and limit the burdens of proposed Rule 10c–1 to larger institutions. Proposed Rule 10c–1 would apply to all securities.70 The Commission preliminarily believes that proposed Rule 10c–1 should apply to all securities to ensure that a complete picture of transactions involving the loan of securities is provided to the RNSA. According to the OFR Pilot Survey, nearly half of the dollar value of assets on loan in 2015 were debt instruments.71 If the Commission were to limit the scope of the proposed Rule (e.g., to only equity securities) then a significant number of securities lending transactions would be excluded and the market efficiencies and reduction of information asymmetry that the Commission anticipates will result from proposed Rule 10c–1 would not accrue to non-equity securities.72 Accordingly, the proposed Rule includes 10c–1 information for all securities lending transactions and is not limited to loans of equity securities. While the Commission welcomes any public input on this topic, the Commission asks commenters to consider the following questions: 1. Should persons required to provide information regarding securities lending transactions to an RNSA under proposed Rule 10c–1 be limited to only persons registered with the Commission, such as brokers-dealers, investment companies, investment advisers, and clearing agencies? If so, why? What would be the impact or limitations on the information made available to the public and regulators if proposed Rule 10c–1 limited the requirement to provide information to an RNSA to persons registered with the Commission? Please identify any 69 See, e.g., Faulkner, supra note 48, at 6 (the economies of scale offered by agents that pool together the securities of different clients enable smaller owners of assets to participate in the market. The costs associated with running an efficient securities lending operation are beyond many smaller funds). 70 See Exchange Act Section 3(a)(10), supra note 60. 71 See OFR Pilot Survey, supra note 26, at 8. 72 Additionally, Congress did not limit or specify the classes of securities in Section 984 of the DFA. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 relevant data, such as the number of securities lending transactions that would not be provided to an RNSA if the rule were limited to registered persons and the dollar value of such transactions, which would be useful for the Commission in considering the effects of the proposed Rule. 2. What, if any, are the broader impacts of requiring that certain information be provided to an RNSA, for example to help borrowers and lenders evaluate rates and signals, such as whether a security is hard to borrow or heavily shorted? Would such a requirement bring more efficiency to the market? Please explain. 3. Are there certain types or categories of Lenders that should be excluded from the requirements under proposed Rule 10c–1 to provide 10c–1 information to an RNSA? If so, please identify such Lender or Lenders, and explain why they should be excluded from the requirements under proposed Rule 10c– 1. For example, should clearing agencies be excluded from the requirements under proposed Rule 10c–1 to provide Rule 10c–1 information to an RNSA? If so, why? How would such an exclusion impact the information available to the public and regulators? Should a brokerdealer that is borrowing securities from a Lender that is not a broker-dealer have a requirement to provide 10c–1 information to an RNSA rather than the non-broker-dealer Lender? If so, why? 4. Should borrowers be required to provide 10c–1 information instead of, or in addition to, Lenders providing such information? Would such a requirement increase the overall costs and burden of the requirement to provide 10c–1 information to an RNSA? Is there information that a borrower of securities is in a better position to provide? Do commenters agree that the requirement to provide 10c–1 information to an RNSA is appropriately placed on Lenders? If not, why not? 5. Does the proposed Rule not cover any transactions that commenters believe should be covered? Does the scope of the proposed Rule create opportunities for gaming or evasion of the reporting requirements, whether through other economically equivalent instruments or otherwise? If so, please explain. 6. The Commission is proposing to include all securities in the scope of the Rule. Is this appropriate, or should certain types of securities be excluded from the Rule? If so, which types of securities should be excluded, and why? Are certain types of securities not lent? 7. Should the proposed Rule include an exception or exemption for certain securities, such as government PO 00000 Frm 00008 Fmt 4701 Sfmt 4702 securities, from the requirement to provide 10c–1 information to an RNSA in proposed Rule 10c–1? If so, please identify the type of security and the rationale for excluding such security from the requirement to provide 10c–1 information to an RNSA in proposed Rule 10c–1. 8. Should the Commission define what it means to ‘‘loan a security’’? Should such a definition be included in the Rule? What further information is needed? 9. Is the discussion and overview of the securities lending market included in this release accurate? If not, what is inaccurate regarding the discussion of the securities lending market? Are there differences in the securities lending market depending on the type of security loaned, including whether the terms and structures of loans are the same or different depending on security type. 10. As drafted, would the proposed Rule cover all securities lending transactions? If not, what transactions would not be covered by the proposed Rule? How might a Lender structure a securities lending transaction to avoid providing information to an RNSA? (b) Providing Information to an RNSA The Commission preliminarily believes that Lenders should be required to provide the material terms of securities lending transactions to an RNSA. Currently, FINRA is the only RNSA and has experience establishing and maintaining systems that are designed to capture transaction reporting, such as the system in proposed Rule 10c–1. For example, FINRA has established and operates several systems for the reporting of transactions in equity and fixed income securities.73 Indeed, the majority of securities lending transactions are through broker-dealers that are members of FINRA.74 Most broker-dealers already have connectivity to FINRA’s systems to report trades in equity and fixed income 73 FINRA operates a number of transparency reporting systems including the Alternative Display Facility (displaying quotations, reporting trades, and comparing trades); OTC Transparency (overthe-counter (OTC) trading information on a delayed basis for each alternative trading system (ATS) and member firm with a trade reporting obligation under FINRA rules); OTC Reporting Facility (ORF) (reporting of trades in OTC Equity Securities executed other than on or through an exchange and for trades in restricted equity securities effected under Rule 144A under the Securities Act of 1933 and dissemination of last sale reports); Trade Reporting and Compliance Engine (TRACE) (facilitates the mandatory reporting of over-thecounter transactions in eligible fixed income securities); and Trade Reporting Facility (TRF) (reporting of transactions effected otherwise than on an exchange). 74 See supra note 68. E:\FR\FM\08DEP2.SGM 08DEP2 jspears on DSK121TN23PROD with PROPOSALS2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules securities. Accordingly, this requirement might help reduce the cost of providing information to an RNSA because most FINRA members will already have established connectivity to FINRA’s systems. Furthermore, as discussed below,75 the proposal would allow Lenders, including lending agents, who are not members of FINRA to contract with reporting agents that have connectivity to FINRA. The Commission preliminarily believes that this could reduce the costs for a nonFINRA-member Lender because rather than incur the costs associated with directly reporting 10c–1 information, including the costs of establishing connectivity with FINRA, it will have the option to use a third party with existing connectivity to provide the Lender’s 10c–1 information to FINRA. In addition, requiring 10c–1 information be provided to FINRA could assist FINRA with its surveillance of FINRA Rules 4314 (Securities Loans and Borrowings), 4320 (Short Sale Delivery Requirements), and 4330 (Customer Protection—Permissible Use of Customers’ Securities) regarding securities lending and short selling. Under Section 10 of the Exchange Act, the Commission has the authority to require persons that are not members of an RNSA to provide information to an RNSA, and has previously exercised this authority. Exchange Act Rule 10b– 17 requires any issuer of a class of securities publicly traded by the use of any means or instrumentality of interstate commerce or of the mails to provide certain information to an RNSA within a prescribed period of time to give notice to the market regarding certain corporate events, such as the payment of dividends, stock splits, or rights offerings.76 The Commission approved FINRA rules and fees to support its administration of Exchange Act Rule 10b–17, which provided for oversight of non-FINRA members’ compliance with Rule 10b–17.77 The Commission could take an alternative approach to providing 10c– 1 information to an RNSA. For example, as discussed in Part VI below, the Commission could require that Lenders provide 10c–1 information directly to the Commission. The Commission does not currently have the systems designed to facilitate trade-by-trade reporting and disclosure as contemplated by the proposed Rule. As noted above, FINRA has established and maintained systems 75 See infra Part III.A.2. CFR 240.10b–17. 77 See FINRA Rule 6490; See also Exchange Act Release 62434 (July 1, 2010); 75 FR 39603 (July 9, 2010) (approving FINRA Rule 6490). 76 17 VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 similar to what is contemplated in the proposed Rule. As such, the Commission preliminarily believes that requiring Lenders to provide 10c–1 information to FINRA rather than to the Commission, will effectively accomplish the policy objectives of the Rule. As discussed throughout this release, the Commission preliminarily believes that FINRA is well-positioned to accommodate the trade-by-trade reporting of securities lending transactions. While the Commission welcomes any public input on this topic, the Commission asks commenters to consider the following questions: 11. Are there methods for the Commission to improve transparency in the securities lending market other than requiring Lenders to provide the material terms of a securities lending transaction to an RNSA? If so, how would the commenter suggest improving transparency in the securities lending market? 12. Would Lenders use a reporting agent to provide 10c–1 information to an RNSA? Why might a Lender choose not to use a reporting agent? Would Lenders be unwilling to use reporting agents due to concerns regarding maintaining the confidentiality of the information that the reporting agent would be required to provide an RNSA? 13. Should proposed Rule 10c–1 require that Lenders provide material information to an entity other than an RNSA? For example, should proposed Rule 10c–1 require the material terms of a securities lending transaction be provided directly to the Commission, a clearing agency, or some other entity? If so, should the proposed Rule require that such entity be registered with the Commission? If the commenter believes the entity does not need to be registered with the Commission please explain how the Commission would oversee the repository of the information? 14. Do commenters believe that FINRA, as the only current RNSA, is the appropriate organization to receive, store, and disseminate the 10c–1 information? What concerns do commenters have, if any, about requiring Lenders that are not FINRA members to either provide information to FINRA themselves, or contract with a reporting agent to provide the information to FINRA on their behalf? Do commenters believe the proposed approach of establishing RNSAs as the exclusive recipients and disseminators of 10c–1 information has implications for data quality, compared to alternative approaches? If so, are there alternative approaches commenters believe would address or mitigate those implications? PO 00000 Frm 00009 Fmt 4701 Sfmt 4702 69809 2. Persons Responsible for Providing Information to an RNSA To reduce the potential for double counting of securities lending transactions and limit the burden on Lenders, proposed Rule 10c–1 would specify who is responsible for providing information to an RNSA in certain factual circumstances. First, although the proposed Rule places an obligation on any person that loans a security on behalf of itself or another person, if such Lender is using an intermediary such as a bank, clearing agency,78 or brokerdealer for the loan of securities, such lending agent shall have the obligation to provide the 10c–1 information to an RNSA on behalf of the Lender.79 Second, persons with a reporting obligation, including a lending agent, could enter into a written agreement with a broker-dealer that agrees to provide the 10c–1 information to the RNSA on its behalf (‘‘reporting agent’’). Finally, Lenders are required to directly provide the RNSA with the 10c–1 information if the Lender is not using a lending agent or not employing a reporting agent to provide the 10c–1 information to an RNSA. (a) Lending Agent Provides Information to an RNSA The Commission preliminarily believes it is appropriate to require lending agents to provide 10c–1 information to the RNSA on behalf of beneficial owners that employ lending agents, because lending agents are in the best position to know when securities have been loaned from the portfolios that the lending agent represents. Indeed, a beneficial owner might not know that the lending agent has lent securities from the portfolio until after the time prescribed by proposed Rule 10c–1 to provide 10c–1 information to the RNSA. Furthermore, by requiring the lending agent to provide 10c–1 information to the RNSA, the proposed 78 The Commission understands that certain clearing agencies currently are offering to act as an intermediary on behalf of beneficial owners to lend the beneficial owners’ securities. In this circumstance, a clearing agency would be acting as a lending agent and would be required to provide 10c–1 information to an RNSA. Specifically, it is the clearing agency’s action as an intermediary on behalf of a beneficial owner to loan the beneficial owner’s securities that triggers the requirement to provide the proposed 10c–1 information to an RNSA and not the clearance of the securities lending transaction by itself. 79 As discussed in supra Part II.A, certain digital platforms provide electronic trading in the securities lending market. These platforms, to the extent they serve as lending agents on behalf of beneficial owners, would be required to provide the 10c–1 information to an RNSA. If a platform is not serving as a lending agent, the beneficial owner would be required to provide the 10c–1 information to an RNSA. E:\FR\FM\08DEP2.SGM 08DEP2 69810 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules Rule would require the party intermediating the loan (i.e., the lending agent) to also be responsible for providing the material terms of the loan to the RNSA. Specifically, lending agents are directly involved with the loan of securities on behalf of a beneficial owner. In such a circumstance, the beneficial owner is passive. For purposes of proposed Rule 10c–1, a beneficial owner that makes available the securities in its portfolio for a lending agent to lend on its behalf is not directly involved with the lending of its securities. Rather, it is the active steps taken by the lending agent that directly results in a loan of securities. For example, a customer of a brokerdealer that participates in their brokerdealer’s fully paid lending program might lack the ability to provide 10c–1 information to the RNSA.80 Additionally, the beneficial owner may lack access to some of the 10c–1 information, such as the identifying information of the borrower. Similarly, an institutional investor that uses a lending agent to manage its securities lending program might not know within 15 minutes that the lending agent has loaned securities from the institutional investor’s portfolio, or details on the specific borrower, negotiated fees, or rebate rates.81 Accordingly, under proposed Rule 10c–1(a)(1)(i)(B) the beneficial owner would not be required to provide the 10c–1 information to an RNSA for any loan of securities intermediated by a lending agent. The Commission preliminarily believes that responsibility for failing to provide 10c– 1 information to an RNSA should be on the lending agent and not the beneficial owners because the lending agent is directly responsible for the loan of securities. Furthermore, placing responsibility on beneficial owners who do not have access to all the necessary information to provide information to the RNSA might have a chilling effect on persons being willing to loan securities, which could negatively impact the securities market generally. jspears on DSK121TN23PROD with PROPOSALS2 (b) Reporting Agent Provides Information to an RNSA The Commission preliminarily believes it is appropriate that a Lender, including a lending agent, be able to 80 See Exchange Act Rule 15c3–3(b)(3). 17 CFR 240.15c3–3(b)(3). 81 For additional discussion of how lending agents manage the portfolios of the beneficial owners that they lend shares on behalf of, see infra Part VI.B.4.b) (discussing how lending programs generally pool shares across accounts with which they have lending agreements to create a common pool of shares available to lend). VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 enter into a written agreement with a broker-dealer acting as a reporting agent to permit the reporting agent to provide the 10c–1 information to an RNSA on behalf of the Lender because such an arrangement will ease burdens on Lenders, including lending agents, that do not have or do not want to establish connectivity to the RNSA. In order to employ a reporting agent to report the 10c–1 information to the RNSA on behalf of the Lender, proposed Rule 10c–1 would require the Lender and reporting agent to enter into a written agreement. Such written agreements under proposed Rule 10c–1(a)(1)(ii)(A) would memorialize and provide proof of the contractual obligations for the reporting agent to provide the 10c–1 information to an RNSA. Proposed Rule 10c–1(a)(1)(ii)(B) would require the reporting agent to provide the 10c–1 information to an RNSA if the reporting agent has entered into a written agreement to provide the 10c–1 information to an RNSA pursuant to Rule 10c–1(a)(1)(ii)(A) and such reporting agent is provided timely access to such 10c–1 information. The Commission preliminarily believes that it is appropriate for a reporting agent to be responsible for providing information to the RNSA if it contractually agrees to provide such information to the RNSA and it has timely access to such information. In such an instance, the person who enters into the written agreement with the reporting agent is not required to provide the 10c–1 information to the RNSA. If, however, the reporting agent is unable to provide 10c–1 information to the RNSA because it lacks timely access to it, the person who enters into the written agreement with the reporting agent is responsible for providing such information to the RNSA.82 For purposes of proposed Rule 10c–1 ‘‘timely access’’ would mean that the reporting agent has access to the 10c–1 information with sufficient time to provide such information to the RNSA within the fifteen minutes after the securities loan is effected or the terms of the loan are modified. This paragraph of proposed Rule 10c–1 is designed to ensure that persons provide the 10c–1 information to a reporting agent so that the reporting agent can provide the information to an RNSA 82 For example, if a reporting agent establishes an automated system that pulls 10c–1 information directly from the records management system of a beneficial owner but the beneficial owner disables the connectivity to the automated system for any reason, the reporting agent would not have access to the 10c–1 information. As a result, the beneficial owner would be required to provide 10c–1 information to an RNSA under paragraph (a)(1)(ii)(C) of proposed Rule 10c–1. PO 00000 Frm 00010 Fmt 4701 Sfmt 4702 within the required timeframe. The Commission preliminarily believes that clearly delineating who is responsible for providing the 10c–1 information to the RNSA would aid in compliance with proposed Rule 10c–1 because each party will have a clear understanding of its obligations when it enters into a reporting agreement. Namely, the person or lending agent would have an obligation to provide access to the 10c– 1 information to the reporting agent in a timely manner; and the reporting agent would have an obligation to provide the 10c–1 information to the RNSA. Furthermore, proposed Rule 10c– 1(a)(2)(ii) would require that the reporting agent enter into a written agreement with the RNSA. Such written agreement must explicitly permit the reporting agent to provide 10c–1 information on behalf of Lenders. Additionally, proposed Rule 10c– 1(a)(2)(iii) would require the reporting agent to provide the RNSA with a list of each beneficial owner or lending agent on whose behalf the reporting agent is providing 10c–1 information and to update the list by the end of the day when the list changes. By requiring a written agreement between the reporting agents and the RNSA, the proposed Rule would require that the parties create documentation regarding the agreement to provide 10c–1 information, which would further provide evidence of the commitment by the reporting agent to provide 10c–1 information to the RNSA. Additionally, requiring the reporting agent to provide the identities of each person and lending agent on whose behalf the reporting agent is providing 10c–1 information to the RNSA provides the Commission with the ability to obtain the identities of such Lenders and broker-dealers (as discussed below) from the RNSA, which would aid the Commission with its oversight of the Lenders that have entered into agreements with reporting agents, including with their compliance with the proposed Rule. Under the proposed Rule, only a broker-dealer could serve as a reporting agent. The Commission preliminarily believes that limiting who can act as a reporting agent to broker-dealers, which are regulated directly by the Commission, is in the public interest and would protect investors because it would aid the Commission in overseeing compliance with proposed Rule 10c–1. Specifically, by limiting reporting agents to broker-dealers the Commission could directly oversee the reporting agent’s compliance with the requirement to provide 10c–1 E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 information to the RNSA. Additionally, requiring that reporting agents be broker-dealers provides the RNSA, as well as other self-regulatory organizations (‘‘SROs’’), with the ability to oversee the activity of its members that perform a reporting agent function. If reporting agents were to include other entities the Commission might lack an efficient way to oversee how the entity is complying with its responsibility to provide 10c–1 information to an RNSA under proposed Rule 10c–1. Proposed Rule 10c–1(a)(2)(i) would require any reporting agent that enters into a written agreement to provide information on behalf of another person to establish, maintain, and enforce reasonably designed written policies and procedures to provide 10c–1 information to an RNSA in the manner, format, and time consistent with Rule 10c–1. Accordingly, a broker-dealer could not act as a reporting agent unless the broker-dealer establishes, maintains, and enforces such written policies and procedures. The requirement for a reporting agent to have such written policies and procedures would provide regulators with a means to examine and enforce a reporting agent’s compliance with proposed Rule 10c–1. Proposed Rule 10c–1(a)(2)(iv) would also require that the reporting agent maintain certain information for a period of three years, the first two years in an easily accessible place. The information required to be maintained would include the 10c–1 information provided by the beneficial owner or the lending agent to the reporting agent, including the time of receipt, as well as the 10c–1 information that the reporting agent sent to the RNSA, and time of transmission. Additionally, the reporting agent would have to retain the written agreements between the reporting agents and beneficial owners, lending agents, and the RNSA. The recordkeeping requirements are designed to help facilitate the Commission’s oversight of reporting agents and review the reporting agents’ compliance with the requirement to provide the 10c–1 information to the RNSA. (c) Beneficial Owner Provides Information to an RNSA As discussed above, proposed Rule 10c–1(a)(1)(i)(B) and (a)(1)(ii)(C) provide that if a lending agent or reporting agent is responsible for providing information required by Rule 10c–1 to an RNSA pursuant to paragraphs (a)(1)(i) or (ii), the beneficial owner is not required to provide the 10c–1 information to the RNSA. Accordingly, if a beneficial owner does not employ a lending agent VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 or enter into a written agreement with a reporting agent, the beneficial owner would be responsible for complying with the requirements of proposed Rule 10c–1(a) to provide 10c–1 information to the RNSA. The Commission preliminarily believes that only large beneficial owners run their own lending programs without the assistance of a lending agent because securities lending is a low-margin business and portfolios need to be of a sufficient size for a securities lending program to be economically feasible.83 Furthermore, to the extent a beneficial owner is not using a lending agent, the Commission preliminarily believes that it would likely enter into a written agreement with a reporting agent. (d) Examples of Who Is Responsible for Providing Information to an RNSA To provide clarity regarding who is responsible for providing 10c–1 information to an RNSA the Commission offers the following examples: A. Beneficial Owner and Lending Agent: A beneficial owner is represented by a lending agent that is a bank. The lending agent intermediates the loan of securities to a broker-dealer (the borrower) on behalf of the beneficial owner. In this scenario, the lending agent would be responsible for providing the 10c–1 information to the RNSA. If, however, the beneficial owner uses a person to intermediate the securities lending transaction that is not a bank, clearing agency, or broker-dealer the beneficial owner would be responsible for providing the 10c–1 information to the RNSA. B. Beneficial Owner and Clearing Agency: As noted above, some clearing agencies have established programs to intermediate the loan of securities on behalf of beneficial owners. In such a scenario, the clearing agency would be a lending agent and, similar to example A, would be responsible for providing the 10c–1 information to the RNSA. A clearing agency not acting as a lending agent would not have a responsibility to provide 10c–1 information to an RNSA. For example, if the clearing agent cleared a securities lending transaction but did not act as an intermediary on behalf of a beneficial owner for the loan of securities, the clearing agency would not be responsible for providing the 10c–1 information to an RNSA. C. Lending Agent and Reporting Agent: Same scenario as example A, however, this time the lending agent has entered into a written agreement with a reporting agent, which happens to be 83 See PO 00000 supra note 37. Frm 00011 Fmt 4701 Sfmt 4702 69811 the same broker-dealer that borrowed the shares in example A. In this scenario, the reporting agent– even though it is the broker-dealer that borrowed the securities—would be responsible for providing the 10c–1 information to the RNSA. D. Onward Lending: Same scenario as example A, however, the broker-dealer that borrowed the securities in example A loans the borrowed securities to a hedge fund. In this scenario, the brokerdealer would be responsible for providing the 10c–1 information to the RNSA regarding the securities lending transaction between the broker-dealer and the hedge fund because the brokerdealer is lending the securities that it borrowed. In this instance, the brokerdealer is loaning the securities on behalf of itself. The obligations to provide information as described in example A for the first lending transaction would remain unchanged. E. No Lending Agent or Reporting Agent: If a beneficial owner does not employ a lending agent or reporting agent, and loans its securities, the beneficial owner would be responsible for providing the 10c–1 information to the RNSA. F. Reporting Agent Fails to Provide 10c–1 Information to the RNSA on Behalf of a Person or Lending Agent: A lending agent enters into a written agreement with a reporting agent to provide 10c–1 information to an RNSA. The lending agent provides the reporting agent with timely access to the 10c–1 information, but the reporting agent fails to provide such information to the RNSA. The reporting agent would have violated proposed Rule 10c–1 because it would have been responsible for providing 10c–1 information to the RNSA. However, if the reporting agent was not provided with timely access to the 10c–1 information by the lending agent, the lending agent would have been responsible for providing the 10c– 1 information to the RNSA. G. Fully Paid Securities Lending Program: If a broker-dealer lends a customer’s securities that are fully paid, the broker-dealer would be responsible for providing the 10c–1 information to the RNSA. In this instance, the brokerdealer, acting as the lending agent, is loaning the securities on behalf of its customer. While the Commission welcomes any public input on this topic, the Commission asks commenters to consider the following questions: 15. Should proposed Rule 10c–1 permit reporting agents to be entities other than broker-dealers? If yes, what other persons should be added to the list of persons with whom a Lender can E:\FR\FM\08DEP2.SGM 08DEP2 jspears on DSK121TN23PROD with PROPOSALS2 69812 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules enter into a written agreement to provide the 10c–1 information to an RNSA and why? 16. Should lending agents include other entities in addition to banks, clearing agencies, and broker-dealers? If yes, what other entities should be added to the list of persons with whom a Lender can enter into a written agreement to provide the 10c–1 information to an RNSA and why? 17. The proposed Rule requires a reporting agent that provides 10c–1 information to an RNSA on behalf of another person to establish, maintain, and enforce written policies and procedures that are reasonably designed to ensure compliance with the proposed Rule by the reporting agent. Is such a requirement necessary or should it be modified? Please explain why or why not. The proposed Rule also requires that a reporting agent retain records of 10c–1 information provided to the RNSA for three years. Is such a requirement necessary or should it be modified? Please explain. Are there other records or supporting records that should be retained? If yes, what is the length of time that a reporting agent should retain such records and why? 18. What impact, if any, would the recordkeeping requirements in paragraph (a)(2)(iv) have on liquidity in the lending market or the cash market for securities that are subject to the requirement to provide 10c–1 information? 19. Should the proposed Rule require that a person who enters into a written contract whereby a reporting agent agrees to provide 10c–1 information to an RNSA, pursuant to paragraphs (a)(1)(ii) of the proposed Rule, make a determination that it is reasonable to rely on the reporting agent to provide 10c–1 information? Please discuss. Should the reporting agent be required to provide regular notice to its principal of compliance by the reporting agent with its 10c–1 reporting responsibilities (e.g., if the reporting agent fails to timely provide the 10c–1 information to an RNSA)? Please discuss. Should the reporting agent be required to provide notice to its principal and/or the RNSA if it is unable to timely access the Lender’s 10c–1 information? Please discuss. 20. Should the Rule identify specific contractual terms that must be included in the written agreement between the reporting agent and the person with the requirement to provide 10c–1 information to the RNSA? If so, what specific contractual terms should the Rule include, e.g., notice when 10c–1 information is provided to the RNSA, VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 notice that information was provided late? B. Information To Be Provided to an RNSA As discussed throughout this release, to increase the transparency of information available to market participants with respect to the loan or borrowing of securities, proposed Rule 10c–1 contains data elements consisting of the specified material terms of securities lending transactions that Lenders must provide to an RNSA. The Commission preliminarily believes that the data elements that would be provided to an RNSA, and the subsequent public disclosure of certain of these data elements, would vastly increase the transparency of information available. Unlike the data that is currently available through private vendors, the data that an RNSA would make public under proposed Rule 10c– 1 would be available to all without charge or usage restrictions, would have consistently applied definitions and requirements, and would capture all loans of securities. Proposed Rule 10c– 1 may, therefore, provide a more complete and timely picture of trading, including interest in short selling and price discovery for securities lending. The data elements provided to an RNSA under proposed Rule 10c–1 are also designed to provide RNSAs with data that might be used for in-depth monitoring and surveillance. Paragraphs (b) through (d) contain loan-level data elements. These data elements would be required to be provided to an RNSA within 15 minutes after each loan is effected or modified, as applicable.84 Paragraph (e) contains additional data elements related to the total amount of each security available to loan and total amount of each security on loan that Lenders must provide to the RNSA by the end of each business day that such person was required to provide information to an RNSA under paragraph (a) or had an open securities loan about which it was required provide information to an RNSA under paragraph (a). Proposed Rule 10c–1 also requires RNSAs to make the data elements provided under paragraphs (b), (c), and (e) 85 publicly 84 As discussed in detail below, paragraph (c) would only require that information about a modification be provided to an RNSA in certain circumstances. See Part III.B.1.b); see also proposed Rule 10c–1(c). 85 As discussed below, proposed Rule 10c–1(d) requires the provision of certain data to an RNSA that will not be made public by the RNSA. These data elements are important for regulatory purposes but public release of the data would identify market participants or could reveal information about the internal operations of a market participant. PO 00000 Frm 00012 Fmt 4701 Sfmt 4702 available as soon as practicable, and in the case of paragraph (e) data, not later than the next business day. For the purposes of proposed Rule 10c–1, a loan would be effected when it is agreed to by the parties. Similarly, a loan would be modified when the modification is agreed to by the parties. As discussed in Part VI, the Commission preliminarily believes that the requirement to provide to an RNSA the loan-level data elements in proposed Rule 10c–1(b) through (d) within 15 minutes after each loan is effected (or, for modifications, within 15 minutes after a loan is modified) and the subsequent disclosure of certain of these data elements by the RNSA as soon as practicable would increase the transparency of information available to market participants by allowing for the evaluation of the terms of recently effected loans and any signals that these terms provide. Also, in a fast-moving market, market participants would benefit from visibility into recent transactions when considering whether to accept proposed terms for new loans or accept requests to modify existing loans. Further, as discussed in Part VI, the Commission also preliminarily believes that the requirement to provide to an RNSA the data elements concerning the total amount of securities available to lend and the total amount of securities on loan in proposed Rule 10c–1(e) at the end of each day will provide market participants with an understanding of the available supply of securities and a simple, centralized daily snapshot of the number of securities on loan.86 The total amount of securities on loan varies over the course of the day, but the Commission preliminarily believes that the intraday information would not be necessary in light of other 10c–1 information that will be made public intraday by the RNSA. For example, market participants can use the intraday loan-level data made public by the RNSA under paragraphs (b) and (c) and the most recent daily information made public by the RNSA under paragraph (e) together to estimate intraday information. Regardless of whether the data element is required to be provided to an RNSA intraday or daily, proposed Rule 10c–1 would require the RNSA to make certain data elements public as soon as practicable. The Commission 86 As discussed below, the Commission is not specifying the parameters of ‘‘the amount of the security’’ to allow an RNSA flexibility with respect to any proposed rules. For example, an RNSA could propose rules that identify for different types of securities the information that constitutes the ‘‘amount of the security.’’ See infra Part III.B.1.a). E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 preliminarily believes that not mandating a specific timeframe will provide the RNSA with flexibility to structure its systems, policies, and procedures but anticipates that the RNSA would make the data publicly available on a rolling basis very shortly after receipt. With respect to information under paragraph (e), such information would be required to be made publicly available as soon as practicable but not later than the next business day. Because the RNSA would be required to perform calculations to aggregate by security the data elements provided under paragraph (e), the Commission preliminarily believes that specifying this timeframe would provide RNSAs with the time needed to perform these calculations while also requiring that the information be made publicly available in a timely manner. While the Commission welcomes any public input on this topic, the Commission asks commenters to consider the following questions: 21. Does the reporting of loan-level information within 15 minutes after each loan is effected or modified, as applicable, provide sufficient transparency? Please explain why or why not. If it would not, please provide an alternative and explain why the alternative would be preferable. For example, would end of day reporting for loan-level information provide sufficient transparency—why or why not? 22. For the data elements provided to an RNSA under paragraphs (a) through (c), should the Commission specify how quickly an RNSA should make the information publicly available? If so, which information and how long should an RNSA be given? Would limiting an RNSA’s flexibility to structure its systems, policies, and procedures by specifying a timeframe create operational problems for the RNSA? 23. Should the Commission specify a different or more specific timeframe than ‘‘not later than the next business day’’ for the RNSA to make information provided under paragraph (e) publicly available? Does the ‘‘no later than the next business day’’ timeframe provide RNSAs with the time needed to perform these calculations while also requiring that the information be made publicly available in a timely manner? 1. Data Elements Provided to an RNSA As discussed, to facilitate transparency in the securities lending market, proposed Rule 10c–1(b) through (e) would require Lenders to report specified data elements to an RNSA and for the RNSA to make certain data elements publicly available. As a VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 preliminary matter, because the RNSA would be required to implement rules regarding the format and manner to administer the collection of information,87 proposed Rule 10c–1 lists the data elements that persons would be required to provide to an RNSA, but does not specify granular instructions for data elements or the formatting required for submission to the RNSA. (a) Initial Loan-Level Data Elements Proposed Rule 10c–1(b) contains loanlevel data elements that would be required to be provided to an RNSA within 15 minutes after a loan is effected and would be made public by an RNSA as soon as practicable. Proposed Rule 10c–1(b) also requires an RNSA to assign each loan a unique transaction identification identifier.88 The specific data elements in paragraph (b) generally fall into one of two categories: (1) Data elements that identify each loan of securities and (2) data elements that reflect the negotiated terms for each loan of securities. The data elements in paragraphs (b)(1) through (b)(5) contain material terms that are not negotiated between the parties. These data elements would provide important information that would allow market participants and regulators to track, understand, and perform analyses on the negotiated material terms that are discussed below. These data elements would also provide an RNSA with enough information to create a unique transaction identifier as required by proposed Rule 10c–1(b). Absent these data elements, market participants would not be able to track the time or date that loans are made or the platform where the loan was executed, or to identify which security was involved. These data elements are (1) the legal name of the security issuer, and the Legal Entity Identifier (‘‘LEI’’) of the issuer, if the issuer has an active LEI; (2) the ticker symbol, ISIN, CUSIP, or FIGI of the security, if assigned, or other identifier; (3) the date the loan was effected; (4) the time the loan was effected; and (5) for a loan executed on a platform or venue, the name of the platform or venue where executed. First, paragraphs (1) and (2) of proposed Rule 10c–1 identify the particular security being lent. Paragraph (1) is designed to provide information on the issuer, and paragraph (2) is 87 Proposed Rule 10c–1(f). For a further discussion of this provision of proposed Rule 10c– 1, see infra Part III.C. 88 This unique reference identifier would be necessary to provide an RNSA with modified loan terms under proposed Rule 10c–1(c). PO 00000 Frm 00013 Fmt 4701 Sfmt 4702 69813 designed to provide information on the particular security. These paragraphs are designed to be flexible and comprehensive so that every security that can be loaned is able to be identified. In particular, with respect to paragraph (b)(1), the Commission preliminarily believes that an issuer that lacks an LEI would have a legal name. With respect to paragraph (b)(2), the Commission preliminarily believes that securities usually would have at least one of the items listed assigned to it. If not, the RNSA could require an ‘‘other identifier’’ for further flexibility under paragraph (2). Next, both paragraphs containing the data elements concerning time and date required to be provided to the RNSA, (b)(3) and (b)(4), require that information be reported about the time and date that the transaction was effected. Because the loan-level data elements in paragraph (b) are designed for market participants to be able to evaluate the terms of recently effected loans and any signals that these terms provide, the Commission preliminarily believes that the time and date the transaction was effected will be more useful to market participants than other times and dates because market participants will be able to have a clear picture of the signals that the parties to that transaction were considering when entering into the loan.89 For a loan effected on a platform or venue, paragraph (b)(5) would require the name of the platform or venue where effected. The Commission preliminarily believes that requiring the identity of a platform or venue where transactions are taking place could increase efficiency in the market by alerting investors to potential sources of securities to borrow.90 As discussed in Part II.A, there are currently digital platforms for securities lending, which provide electronic trading in the securities lending market. There are also efforts to develop and expand peer-to89 For example, the Commission could have chosen the time and date that a transaction settles. Since settlement may take a period of time to occur after agreement, however, there may be changes to market dynamics in the time period between agreement and settlement. In such a case, the information made publicly available by the RNSA may not be as useful because the conditions of the market at the time the loan was agreed to would not be known. 90 Making information that would be provided to an RNSA under paragraph (d) about the identity of the parties lending securities publicly available would also alert investors to potential sources of securities to borrow. As stated infra in Part III.B.1.c), however, the Commission preliminarily believes that making this information available to the public would be detrimental because it would reveal a specific market participant’s investment decisions. E:\FR\FM\08DEP2.SGM 08DEP2 jspears on DSK121TN23PROD with PROPOSALS2 69814 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules peer lending platforms involving multiple beneficial owners and borrowers, where securities lending transactions take place without the use of traditional intermediaries. The Commission is not defining ‘‘platform or venue’’ in proposed Rule 10c–1 to provide an RNSA with the discretion to structure its rules so that different structures of platforms or venues could be accommodated. Based on the market conventions that are discussed in Part II.A, the Commission preliminarily believes that the data elements in paragraphs (b)(6) through (b)(12) reflect the material terms that borrowers and Lenders negotiate when arranging loans of securities. Because these terms are negotiated, increasing the transparency of information will provide market participants with meaningful data that could be used when structuring, pricing, or evaluating loans of securities. Increasing transparency would also allow market participants to analyze signals obtained from the securities lending market when considering investment or trading decisions for a security. Further, increasing transparency would also permit the RNSA to perform in-depth monitoring and surveillance of securities lending transactions to identify trends and any anomalous market patterns. These data elements are: (6) The amount of the security loaned; (7) for a loan not collateralized by cash, the securities lending fee or rate, or any other fee or charges; (8) the type of collateral used to secure the loan of securities; (9) for a loan collateralized by cash, the rebate rate or any other fee or charges; (10) the percentage of collateral to value of loaned securities required to secure such loan; (11) the termination date of the loan, if applicable; and (12) whether the borrower is a broker or dealer, a customer (if the person lending securities is a broker or dealer), a clearing agency, a bank, a custodian, or other person. With respect to the data element in paragraph (b)(6), the amount of the security loaned or borrowed, the Commission is not specifying the parameters of ‘‘the amount of the security’’ to allow an RNSA flexibility to propose rules that identify for different types of securities what information constitutes the ‘‘amount of the security.’’ For example, an RNSA could propose rules that require the number of shares be provided for equity securities and the par value of debt securities to accommodate differences in the markets for these securities. This data element would give market participants the ability to infer an estimate of the total VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 amount of each security available to lend or on loan intraday by crossreferencing data made public the prior day by the RNSA pursuant to paragraph (e).91 It would also give market participants the ability to observe how the size of loans affects other terms of loans. As discussed in Part II.A, loans of securities can be collateralized in different ways and the structure of the payments depends on the type of collateral used. The data elements in proposed Rule paragraphs (b)(7) through (b)(10) would capture compensation arrangements regardless of the collateral used.92 Accordingly, to provide context, paragraph (b)(8) would require information about the type of collateral used to secure the loan to be provided to the RNSA. For this data element, the asset class of the collateral would be provided, but the Commission is not including a list of asset classes in order to provide the RNSA with the discretion to determine a thorough list.93 To facilitate a deeper understanding of the collateral posted, paragraph (b)(10) would require that the percentage of collateral to value of loaned securities required to secure such loan be provided to the RNSA. Paragraph (b)(7) would require that, for a loan not collateralized by cash, the securities lending fee or rate, or any other fee or charges be provided to the RNSA. In contrast, for loans that are collateralized by cash, paragraph (b)(9) would require that the rebate rate or any other fees or charges be provided to the RNSA. Paragraph (b)(11) would require that the termination date of the loan be provided to the RNSA, if applicable. As discussed above in Part II.A, it is typical market practice for securities loans to be open-ended, and, therefore, the 91 For a discussion of the data elements in paragraph (e), see infra Part III.B.1.d). 92 Certain of these data elements may not apply to every loan. For example, a Lender would not be able to provide data pursuant to paragraph (b)(9) if the loan is not collateralized by cash. The Commission is proposing to include each of these data elements in proposed Rule 10c–1 to capture pricing and collateral information for every loan, but the RNSA may provide Lenders with instructions about how to provide information when a data element is not applicable to a specific loan. 93 For example, an RNSA could look to the 9 categories of collateral from the OFR Pilot Survey. These 9 categories were: (1) U.S. Treasury Securities; (2) U.S. Government Agency Securities; (3) Municipal Debt Securities; (4) Non-U.S. Sovereign or Multinational Agency Debt Securities; (5) Corporate Bonds; (6) Private Structured Debt Securities; (7) Equity Securities; (8) Cash as securities; and (9) Others. See Off. of Fin. Research, Securities Lending Pilot Data Collection, at 12 (Sep. 2015), available at https:// www.financialresearch.gov/data/files/SecLending_ Data_Collection_Instructions.pdf (‘‘Securities Lending Pilot Data Collection’’). PO 00000 Frm 00014 Fmt 4701 Sfmt 4702 securities may be recalled upon notice given by the Lender. In contrast, some loans are for a specific term. The Commission preliminarily believes that this information will provide market participants with an understanding of the potential future demand and supply of securities.94 Finally, paragraph (b)(12) requires that the borrower type for each transaction be provided. The Commission preliminarily believes that this data element will be useful to provide context for evaluating the other data elements. For example, borrowers of securities that are broker-dealers may determine that loans of securities to other broker-dealers are a more appropriate benchmark than all loans of securities. This data element, therefore, may enhance the transparency provided by the other data elements. While the Commission welcomes any public input on this topic, the Commission asks commenters to consider the following questions: 24. What other data elements, if any, should be included to increase the transparency of securities lending? 25. Would any of the listed data elements not be informative to the public or to regulators? If not, why not? Should any of the data elements be removed or modified? If so, why? 26. Should all of the data elements in paragraph (b) be made public at the loan-level as proposed? As an alternative, should some be made public in the aggregate or only made available to regulators? Would providing aggregates of 10c–1 information provide the same or greater benefits than loanlevel information as proposed? Please discuss how your response relates to the statutory objective of increasing transparency. 27. Are there sufficient data elements to allow for the identification of loans of securities and permit the creation of a unique transaction identifier by the RNSA or should additional or different data elements be required for this purpose? 28. Other than LEI, are there other issuer identifiers such as the EDGAR Central Index Key (commonly abbreviated as ‘‘CIK’’) that could be provided should the issuer have one? If yes, should the other identifier be required in addition to LEI or in the alternative? 29. Are any of the data elements redundant such that an RNSA can determine the information without being provided that particular data element? 94 For further discussion about how proposed Rule 10c–1 may affect the supply and demand of securities, see infra Part VI. E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 30. Are the data elements in paragraphs (b)(7), (b)(8), and (b)(9) sufficient to capture the pricing terms of all loans? If not, how should the data elements be revised to capture the pricing terms of all loans? 31. Would each data element proposed to be included help to achieve the goals of proposed Rule 10c–1 that are discussed above in Part I.A.2? If so, please explain why. If not, please explain why not. If any elements are not necessary please explain the benefits and costs of excluding those data elements. (b) Loan Modification Data Subject to terms agreed to by the parties, loans of securities may be modified after they are made. To ensure that the transaction data reported and made public pursuant to proposed Rule 10c–1(b) reflects currently outstanding loans of securities and to prevent evasion, proposed Rule 10c–1(c) would require Lenders to provide data elements concerning modifications to loans of securities to an RNSA within 15 minutes after each loan is modified. Proposed Rule 10c–1(c) would also require an RNSA to make such information available to the public as soon as practicable. Under paragraphs (c)(1) through (c)(3), Lenders would be required to provide the date and time of the modification and the unique transaction identifier of the original loan to the RNSA. The Commission preliminarily believes that this information is necessary to allow the RNSA to identify which loan is being modified, categorize the type of modification, and make information about the modification publicly available. Under paragraph (c), the requirement to provide information about a modification to an RNSA would be contingent on the modification resulting in a change to information required to be provided to an RNSA under paragraph (b). In these instances, Lenders would be required to provide the date and time of the modification, a description of the modification 95 and the unique transaction identifier assigned to the original loan, if any. For example, termination of a loan would be a modification for which information would need to be provided to an RNSA under paragraph (c) because the 95 The Commission is not specifying the parameters of the term ‘‘description of the modification’’ to allow an RNSA flexibility to propose rules about the descriptions that could be needed for different types of modifications and how such information would be reflected in the updated information made public and stored in a machine readable format as required by paragraph (g)(1). VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 termination would result in a reduction of the quantity of the securities initially provided to an RNSA for that loan under paragraph (b)(6). Another example would be where a loan that is collateralized by cash is modified so that the borrower pays a one-time fee to the lender without changing the rebate rate since a one-time fee would be an ‘‘other fee or charge’’ under paragraph (b)(9).96 32. Are the circumstances that would trigger an obligation to provide information to an RNSA about a modification under the proposed Rule clear? If not, please provide specific examples of circumstances where the proposed requirement to do so is unclear and explain why. 33. Are there any modifications to information provided to an RNSA pursuant to proposed Rule 10c–1(b) that should not be required to be provided to an RNSA? Why or why not? Please explain how excluding such a term from reporting would not make the data already made public by an RNSA potentially misleading. 34. Should additional data elements about modifications be provided to an RNSA? If yes, please explain why and how these data elements would increase transparency. 35. Should the Commission require a data element that would list which party initiated the termination of the loan (e.g., whether shares were recalled by the Lender or whether the borrower returned the shares without a request from the Lender)? If yes, please explain the benefits of requiring that this information be provided and how it would be used. (c) Material Transaction Data That Would Not Be Made Public As discussed, proposed Rule 10c–1 is designed to increase the transparency of information available to market participants with respect to the loan or borrowing of securities. Proposed Rule 10c–1 is also designed to provide regulators with data that could be used to better understand securities trading, including interest in short selling and price discovery for securities lending.97 96 An example of a modification that would not trigger the requirement in paragraph (c) would be when a borrower posts additional collateral in response to an increase in value of the loaned securities. Information about this change would not need to be provided under paragraph (c) because, while paragraph (b)(10) requires the Lender to provide the percentage of collateral to value of loaned securities required to secure such loan, it does not require information about the value of collateral posted in dollar terms. 97 Under paragraph (g)(2), an RNSA would make the information collected pursuant to paragraphs (b) through (f) available to the Commission or other PO 00000 Frm 00015 Fmt 4701 Sfmt 4702 69815 The data elements in proposed Rule 10c–1(e) are necessary for these regulatory functions but the Commission preliminarily believes that making this information available to the public would identify market participants or reveal information about the internal operations of market participants. Accordingly, although proposed Rule 10c–1(d) requires certain data elements be provided to an RNSA within 15 minutes after each loan is effected, the RNSA shall keep such information confidential, subject to the provisions of applicable law. First, paragraph (d)(1) requires the Lender to provide ‘‘[t]he legal name of each party to the transaction, CRD or IARD Number, if the party has a CRD or IARD Number, MPID, if the party has an MPID, and the LEI of each party to the transaction, if the party has an active LEI, and whether such person is the lender, the borrower, or an intermediary between the lender and the borrower.’’ 98 The Commission preliminarily believes that the provision of this data element to the RNSA will allow regulators to understand buildups in risk at market participants.99 Further, this data element will provide the RNSA with information that would be required to administer the collection of all data elements provided to it under paragraphs (b) through (d) of proposed Rule 10c–1, such as ensuring the completeness of submissions, contacting persons that have errors in their provided data, and troubleshooting person-specific technical issues. While this information is important for regulatory purposes, the Commission preliminarily believes that making this information available to the public would be detrimental because it may reveal a specific market participant’s investment decisions. If the Lender is a broker-dealer, proposed Rule 10c–1(d)(2) would require information about ‘‘[w]hether the security is loaned from a broker’s or dealer’s securities inventory to a customer of such broker or dealer’’ to be provided to an RNSA. The Commission persons as the Commission may designate by order upon a demonstrated regulatory need. 98 Unlike borrowers who may not know the identity of the principal that has loaned them securities if a lending agent administers the lender’s program, the Commission preliminarily believes that all lenders (or their lending agent) should have access to the identity of the borrower because lenders must track the parties to whom they have lent securities. 99 To facilitate this understanding, paragraph (g)(2) would require RNSAs to make the information collected pursuant to paragraphs (b) through (e) of this section available to the Commission or other persons as the Commission may designate by order upon a demonstrated regulatory need. E:\FR\FM\08DEP2.SGM 08DEP2 69816 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 preliminarily believes that this information would provide regulators with information on the strategies that broker-dealers use to source securities that are lent to their customers. This data element would not apply to Lenders that are not broker-dealers. The Commission preliminarily believes that making this information available to the public would be detrimental because it may reveal confidential information about the internal operations of a broker-dealer. If a person that provides 10c–1 information knows 100 that a loan is being used to close out a fail to deliver as required by Rule 204 of Regulation SHO,101 to close out a fail to deliver outside of Regulation SHO, proposed Rule 10c–1(d)(3) requires such information be provided to an RNSA. The Commission preliminarily believes that these data elements will provide regulators with information about short sales and the loans that broker-dealers provide to their customers with fail to deliver positions. In particular, Regulation SHO requires brokers-dealers that are participants of a registered clearing agency to take action to close out fail to deliver positions.102 One option for closing out a fail to deliver position is to borrow securities of like kind and quantity. Accordingly, broker-dealers may lend securities to their customers to close out the failure to deliver, which may constrain the supply of securities available to lend. Rule 204’s close-out requirement is only applicable to equity securities and broker-dealers may also arrange for the borrowing of securities to cover a fail to deliver outside of Regulation SHO for all other types of securities.103 Paragraph (d)(3) would require the provision of this information, if known, to provide regulators with insight into loans to cover fails of non-equity securities. The Commission preliminarily believes that making these data elements available to the public would be detrimental because it may 100 Because Lenders of securities may not be aware of the borrowers’ motivations for a transaction, the data elements in paragraph (d)(3) would only need to be provided to an RNSA if known. 101 17 CFR 242.204. 102 A fail to deliver occurs when a participant of a registered clearing agency fails to deliver securities to a registered clearing agency on the settlement date. See 17 CFR 242.204(a). 103 See 17 CFR 240.15c6–1 (Commission rule containing the standard settlement cycle for most securities transactions; See also Securities Transaction Settlement Cycle, Exchange Act Release No. 80295, 82 FR 15564, at 7–10 (Mar. 22, 2017), available at https://www.sec.gov/rules/final/ 2017/34-80295.pdf (portion of release adopting changes to the settlement cycle discussing overview of settlement requirements). VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 reveal information about the internal operations of market participants. While the Commission welcomes any public input on this topic, the Commission asks commenters to consider the following questions: 36. Would the disclosure of the data element in paragraph (d)(1) (the identities of the parties) be helpful to investors, for example, to understand proxy voting issues? 37. Should one or both of the data elements in paragraph (d)(2) or (d)(3) be made available to the public? If yes, please explain why and whether it should be at loan-level or in the aggregate. 38. Are Lenders already collecting the information required by paragraph (d)(1)? In particular, are Lenders collecting a borrower’s CRD, IARD, MPID, or LEI, if applicable? If not, should proposed Rule 10c–1 only require Lenders to provide this information if the borrower makes it known to the Lender? Why or why not? Would Lenders be required to modify any existing agreements to provide this information to an RNSA? 39. Should any of the data elements in paragraph (d) be modified or removed? If so, which ones and why? 40. Should data elements be added to paragraph (d). If yes, please explain. 41. Given the confidential 10c–1 information that the Lender and reporting agent would provide to an RNSA should there be requirements placed on the RNSA and/or the reporting agent to protect confidential 10c–1 information? 42. Should Lenders be required to provide all of the identifying data elements listed in d(1) for every loan of securities or should only one of those data elements be required? For example, would just providing a CRD be sufficient to allow the RNSA to identify the parties to a transaction? What are the costs and benefits of either approach? Further, would the lack of an LEI make it more challenging to identify entities across different data sets? Should borrowers be required to obtain an LEI if they do not already have one? (d) Total Amount of Securities Available to Loan and Total Amount of Securities on Loan Paragraph (e) of proposed Rule 10c– 1 would require data elements concerning securities available to loan and securities on loan be provided to an RNSA. These data elements would need to be provided by the end of each business day that a person included in paragraphs (e)(1) or (e)(2) of proposed Rule 10c–1 either was required to provide information to an RNSA under PO 00000 Frm 00016 Fmt 4701 Sfmt 4702 paragraph (a) or had an open securities loan about which it was required provide information to an RNSA under paragraph (a).104 For each security about which the RNSA receives information under paragraph (e), paragraph (e)(3) would require the RNSA to make available to the public only aggregated information for that security, as well as the information required by (e)(1)(i) and (ii) and (e)(2)(i) and (ii) as soon as practicable, but not later than the next business day.105 The Commission preliminarily believes that requiring the RNSA to make available to the public the information required by paragraph (e)(1)(i) and (e)(2)(i) (the legal name of the security issuer, and the LEI of the issuer, if the issuer has an active LEI) and (e)(1)(ii) and (e)(2)(ii) (the ticker symbol, ISIN, CUSIP, or FIGI of the security, if assigned, or other identifier) will provide identifying information for each security for which aggregate information would be made public. The data elements in proposed Rule 10c– 1(d) are necessary for these regulatory functions but the Commission preliminarily believes that making this information available to the public would identify market participants or reveal information about the internal operations of market participants. Accordingly, under paragraph (e)(3), all identifying information about lending agents, reporting agents, and other persons using reporting agents, would not be made publicly available, and the RNSA would be required to keep such information confidential, subject to the provisions of applicable law. To specify the information that would be required to be provided to an RNSA under paragraph (e) and to ensure that all relevant securities available to loan or on loan are included, the data elements of paragraph (e) are separated between lending agents, who would provide the data elements in paragraph (e)(1), and persons who do not employ a lending agent, who would provide the data elements in paragraph (e)(2). As fully discussed below, despite their 104 The Commission is not specifying exactly what time would be considered the ‘‘end of each business day’’ or what holidays should not be considered a ‘‘business day’’ to give the RNSA the discretion to structure its systems and processes as it sees fit and propose rules accordingly. 105 Releasing data as provided would identify market participants. Consistent with the reasoning for not making the information required to be provided by paragraph (d) publicly available, the Commission preliminarily believes that this information should not be made public by an RNSA. Further, as described below, the Commission preliminarily believes that the information in paragraph (e) will be used by market participants to determine a utilization rate. Information aggregated by security is the input for that calculation. E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 different locations in the text of paragraph (e), however, the first two elements listed in paragraphs (e)(1) and (e)(2) are the same for all persons. In addition, the last two data elements require the same general information, but would provide certainty about the positions that should be included in the information that is provided to an RNSA. Further, both paragraphs would require that reporting agents provide the identity of the person on whose behalf it is providing the information to the RNSA. Identifying the person on whose behalf the information is being provided would facilitate regulatory oversight regarding compliance with the requirements of paragraph (e). As a preliminary matter, as more thoroughly discussed in Part VI, the Commission has designed the data elements provided to the RNSA under paragraph (e) to allow for the calculation of a ‘‘utilization rate’’ for each particular security. The utilization rate, which would be calculated by dividing the total number of shares on loan by the total number of shares available for loan, could be used by market participants to evaluate whether the security will be difficult or costly to borrow. The first two data elements that would be required to be provided to the RNSA by all persons under paragraph (e) would be the legal name of the security issuer; and the LEI of the issuer, if the issuer has an active LEI; and the ticker symbol, ISIN, CUSIP, or FIGI of the security, if assigned, or other identifier.106 These data elements are necessary to calculate the utilization rate from the total amount of each security on loan and available to loan. Next, all persons would be required to provide information about the total amount of each security that is available to lend and is on loan. The language ‘‘total amount of each security’’ would provide RNSAs with flexibility to accommodate market conventions of different types of securities. For example, if it chooses to do so, this language would give an RNSA the discretion to make rules that require the number of shares be provided for equity securities and par value of debt securities.107 Further, the language is 106 Proposed Rule 10c–1(e)(1)(i) and 10c– 1(e)(1)(ii) (requirements applicable to lending agents) and Proposed Rule 10c–1(e)(2)(i) and 10c– 1(e)(2)(ii) (requirements applicable to all other persons). The data elements in paragraphs (i) and (ii) of proposed Rule 10c–1(e)(1) and (e)(2) mirror the same requirements under paragraph (b)(1) and (b)(2). For an explanation of the flexibility of these requirements, see supra Part III.B.1.a). 107 This example was previously discussed above in reference to paragraph (b)(6). See supra Part III.B.1.a). VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 designed to require that securityspecific information is provided to market participants so that a securityspecific utilization rate would be able to be calculated. All persons would be required to provide the total amount of each security that is available to lend under either paragraph (e)(1)(iii) or (e)(2)(iii). Per paragraph (e)(1)(iii), a security that is not subject to legal restrictions that would prevent it from being lent would be ‘‘available to lend.’’ 108 For example, a lending agent that provides information on behalf of a beneficial owner should exclude any securities that the beneficial owner has specifically restricted from the lending program. Some programs may be subject to overall portfolio restrictions 109 (e.g., no more than 20% of the portfolio may be lent at any time),110 and/or specific counterparty restrictions (e.g., counterparty rating). However, because those restrictions apply to the overall portfolio but not the specific securities held in those portfolios, those securities would be available to lend unless the securities are themselves subject to restrictions that prevent them from being lent. The Commission preliminarily believes that this approach would provide market participants with useful information because all securities that generally 108 This definition is consistent with the approach of the OFR’s General Instructions for Preparation of the Securities Lending Pilot Data Collection. See Securities Lending Pilot Data Collection, supra note 93, at 2. 109 For example, Commission staff guidance forms the basis for investment companies’ securities lending practices. See Investment Company Derivatives Rule, 85 FR 83228, n. 742. As a result, investment companies typically do not have more than one-third of the value of their portfolio on loan at any given point in time. See, e.g., SEC Staff NoAction Letter, RE: The Brinson Funds, et al., available at https://www.sec.gov/divisions/ investment/noaction/1997/ brinsonfunds112597.pdf) (Nov. 25, 1997) (‘‘One of the guidelines is that a fund may not have on loan at any given time securities representing more than one-third of its total assets.’’). This staff statement represents the views of the staff of the Division of Investment Management. It is not a rule, regulation, or statement of the Commission. The Commission has neither approved nor disapproved its content. The staff statement, like all staff statements, has no legal force or effect: It does not alter or amend applicable law, and it creates no new or additional obligations for any person. 110 For example, a beneficial owner that has program limits permitting the loan of any portfolio security, up to 20% of the portfolio would include 100% of the portfolio as lendable. A beneficial owner that will only lend specified securities, which represent 25% of the portfolio, would list only those specified securities as lendable. Similarly, a beneficial owner that will lend any security in its portfolio but has program limits in place to avoid loaning more than one-third of the value of their portfolio at any time would report 100% of its securities as available to lend. PO 00000 Frm 00017 Fmt 4701 Sfmt 4702 69817 would be available to lend would be included. Next, all persons would be required to provide the total amount of each security that is on loan under either paragraph (e)(1)(iv) or (e)(2)(iv). Per paragraph (e)(1)(iv), a security would be ‘‘on loan’’ if the loan has been contractually booked and settled.111 Because a loan should be considered effected when it is agreed to by the parties,112 effected loans that have not been booked and settled would not be included in the total amount of each security on loan that is provided to the RNSA. The Commission preliminarily believes this information will provide information that is more relevant for this purpose of allowing market participants to plan their borrowing activity, since loans that have been booked and settled are truly no longer able to be lent by the Lender providing the information to the RNSA.113 To illustrate when Lenders would be required to provide information under paragraph (e) and the securities that would be considered ‘‘available to loan’’ and ‘‘on loan’’ with an example: Consider a Lender that owns five shares of Issuer A, five shares of Issuer B, and five shares of Issuer C, none of which are subject to legal restrictions that prevent them from being lent. If on a business day this Lender does not have any outstanding securities loans and does not loan any securities, it would not be required to provide information about any of its securities under paragraph (e). In contrast, if on a business day this Lender loans three of its shares of issuer A, the Lender would be required to provide information to an RNSA under paragraph (e) because it would have been required to provide information about this loan to an RNSA under paragraph (a). This Lender would consider two shares of issuer A, five shares of Issuer B, and five shares of Issuer C as ‘‘available to loan’’ because none of these shares would be subject to legal or other restrictions that prevent them from being lent. Further, if the loan of three shares of Issuer A clears 111 Like the interpretation of ‘‘available to loan’’ discussed in note 108, the interpretation of ‘‘on loan’’ is consistent with the approach of the OFR’s General Instructions for Preparation of the Securities Lending Pilot Data Collection. See Securities Lending Pilot Data Collection, supra note 93, at 2. 112 See Part III.B. 113 Further, while it may be possible to infer a rough estimate of the amount of securities on loan from the information provided under paragraphs (b) and (c) without using any information provided under paragraph (e), the Commission preliminarily believes that the information provided under paragraph (e) should allow market participants to calculate a utilization rate that is likely to be reliable. E:\FR\FM\08DEP2.SGM 08DEP2 jspears on DSK121TN23PROD with PROPOSALS2 69818 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules and settles on that business day, this Lender would consider the three shares of Issuer A as ‘‘on loan.’’ As noted above, to provide clarity about what would be required to be provided to an RNSA under paragraph (e) and to ensure that all relevant securities available to loan or on loan are included, the data elements of paragraph (e) are separated between lending agents, who would provide the data elements in paragraph (e)(1), and persons who do not employ a lending agent, who would provide the data elements in paragraph (e)(2).114 With respect to lending agents, paragraph (e)(1) contains different requirements for lending agents that are broker-dealers and lending agents that are not broker dealers. In particular, under paragraph (e)(1)(iii), if a lending agent is a broker or dealer, the lending agent would provide to the RNSA the total amount of each security available to lend by the broker or dealer, including the securities owned by the broker or dealer, the securities owned by its customers who have agreed to participate in a fully paid lending program, and the securities in its margin customers’ accounts. If the lending agent is not a broker-dealer, the lending agent would provide to the RNSA the total amount of each security available to the lending agent to lend, including any securities owned by the lending agent in the total amount of each security available to lend provided. Similarly, under paragraph (e)(1)(iv), if a lending agent is a broker-dealer, the lending agent would provide to the RNSA the amount of each security on loan by the broker or dealer, including the securities owned by the broker or dealer, the securities owned by its customers who have agreed to participate in a fully paid lending program, and the securities that are in its margin customers’ accounts in the total amount of each security on loan. If the lending agent is not a broker-dealer, the lending agent would provide to the RNSA the total amount of each security on loan where the lending agent acted as an intermediary on behalf of a beneficial owner and securities owned by the lending agent in the total amount of each security on loan provided to the RNSA. The Commission preliminarily believes that the requirements for 114 Paragraph (a)(1)(i)(A) defines lending agent as a ‘‘bank, clearing agency, broker, or dealer that acts as an intermediary to a loan of securities . . . on behalf of a [beneficial owner].’’ Under this definition, a lending agent that is not acting as a lending agent with respect to a particular securities loan would still be a lending agent, and, therefore be subject to paragraph (e)(1) and not (e)(2). VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 lending agents will provide them with specificity around which positions to include in the information that is provided to an RNSA under paragraph (e). In addition, because some lending agents are broker-dealers, the Commission preliminarily believes that the applicable requirements should ensure that all relevant positions are included. With respect to all other persons, paragraphs (e)(2)(iii) and (e)(2)(iv) contain the requirements for the positions that should be included in the total amount of each security available to lend and on loan. Unlike paragraph (e)(1), paragraph (e)(2) does not distinguish among different types of persons in paragraph (e)(2) because, due to the definition of lending agent in paragraph (a)(1)(i)(A), persons subject to paragraph (e)(2) would not be loaning securities on behalf of other persons. It is not necessary, therefore, to distinguish between different types of market participants because these entities would, by definition, only be loaning securities that they own. Accordingly, persons subject to paragraph (e)(2)(iii) would provide to the RNSA the total amount of each security that is owned by the person and available to lend.115 In addition, under paragraph (e)(2)(iv), these persons would provide to the RNSA the total amount of each security on loan owned by the person. While the Commission welcomes any public input on this topic, the Commission asks commenters to consider the following questions: 43. Should the RNSA make the information reported under proposed Rule 10c–1(e) public at the level it is provided (e.g., not aggregating the information by security)? Why or why not? 44. Should Rule 10c–1 require the RNSA to make the information required by paragraph (e) publicly available in a manner that identifies the Lender if that Lender volunteers to make such information public? Why or why not? If so, should only beneficial owners be permitted to volunteer to make such information public and not lending agents? Why or why not? 45. Should paragraph (e) be limited to only require information about certain types of securities, such as only equity securities? If so, please explain which securities should be included and why the excluded securities should not be included. 46. Are the data elements required by paragraphs (e)(1)(i)/(e)(2)(i) (the legal name of the security issuer, and the LEI 115 Proposed PO 00000 Frm 00018 Rule 10c–1(e)(2)(iii). Fmt 4701 Sfmt 4702 of the issuer, if the issuer has an active LEI) and (e)(1)(ii)/(e)(2)(ii) (the ticker symbol, ISIN, CUSIP, or FIGI of the security, if assigned, or other identifier) both necessary? Would only requiring one of these be sufficient to allow identification of the security about which the information is being provided? Would only requiring one of these reduce the utility of the data in other ways, for example, by making it more challenging to identify entities and/or securities across multiple data sets? 47. As noted above, the language ‘‘total amount of each security’’ is intended to provide the RNSA with flexibility to accommodate market conventions of different types of securities. For example, this language is intended to give an RNSA the discretion to make rules, if it chooses to do so, that require the number of shares be provided for equity securities and par value of debt securities. Instead of this approach, should the Commission specify the specific reporting obligations applicable to specific types of securities under paragraph (e) rather than leaving it to the discretion of an RNSA? If yes, please explain why and provide a methodology for determining the total amount of each security available for loan and on loan for various types of securities. 48. The Commission recognizes that the definition of ‘‘available to lend’’ may overstate the quantity of securities that could actually be lent because the data would include securities that may become restricted if a limit is reached. Should a different definition be used? Is there another definition that would provide a better or more accurate estimate of securities available for loan than the proposed definition? In particular, please also explain how the alternative approach would operationally work and give market Lenders certainty around the securities it would classify as available to lend. 49. If the number of shares available to lend was not made publicly available, are there alternative data that market participants could use to evaluate whether the security will be difficult or costly to borrow? For example, could a market participant look to the public float of a security instead? Why or why not? Would there be other impacts on the utility of the data? 50. To avoid the provision of information about individual market participants’ proprietary portfolios, should the Commission limit the requirement to provide information under paragraph (e) to lending programs that pool the securities of multiple beneficial owners? In addition or as an E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 alternative, should the Commission remove the requirement that a reporting agent would be required to provide the identity of the person on whose behalf it is providing the information? Would this be consistent with the purpose of the proposed rule, which is to increase transparency in the securities lending market? Why or why not? 51. Do the definitions of ‘‘available to lend’’ or ‘‘on loan’’ conflict with market practice or other regulatory requirements? If yes, please explain. 52. Do you believe that any of the information in paragraph (e) of the proposed Rule should not be required to be provided or that any of the requirements of paragraph (e) should be modified? Do you believe that any information in addition to the information required to be provided in paragraph (e) of the proposed Rule should be provided? Please explain why. 53. Do you believe that the information provided pursuant to paragraph (e) of the proposed Rule should be provided more frequently or less frequently than each business day? Why or why not? C. RNSA Rules To Administer the Collection of Information The Commission is proposing Rule 10c–1(f), which would require the RNSA to implement rules regarding the format and manner to administer the collection of information in proposed paragraphs (b) through (e) of this section and the distribution of such information pursuant to Section 19(b) of the Exchange Act. The Commission preliminarily believes that permitting an RNSA to implement rules regarding the administration of the collection of securities lending transactions would enable the RNSA to maintain and adapt potential technological specifications and any changes that might occur in the future. Under the proposal, and consistent with Exchange Act Section 19(b), the Commission would retain oversight of the RNSA’s adoption of rules to administer the collection of information under proposed Rule 10c– 1.116 While the Commission welcomes any public input on this topic, the Commission asks commenters to consider the following questions: 54. Should proposed Rule 10c–1 specify the format and manner that information should be provided to the RNSA rather than require the RNSA to adopt rules regarding such format and manner? Please discuss. Are there disadvantages to having an RNSA adopt 116 15 U.S.C. 78s(b). VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 a rule regarding the format and manner that information should be provided to the RNSA pursuant to proposed Rule 10c–1? What advantages would there be if Rule 10c–1 specified the format and manner that information should be submitted to the RNSA? D. Data Retention and Availability The Commission is proposing Rule 10c–1(g)(1) to require that an RNSA retain the information collected pursuant to paragraphs (b) through (e) of proposed Rule 10c–1 in a convenient and usable standard electronic data format that is machine readable and text searchable without any manual intervention for a period of five years. The Commission preliminarily believes that requiring the RNSA to retain records for five years is consistent with other retention obligations of records that Exchange Act rules impose on an RNSA. For example, 17 CFR 240.17a–1, Exchange Act Rule 17a–1 requires RNSAs to keep documents for a period of not less than five years. Similarly, 17 CFR 242.613(e)(8), Rule 613(e)(8) of Regulation NMS, on which the retention period for proposed Rule 10c–1 is modeled, requires the central repository to retain information in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of not less than five years. Rule 10c–1(g)(1) is using a standard for storage that is similar to Rule 613(e)(8). The standard sets forth the criteria for how information must be stored but does not specify any particular technological means of storing such information, which should provide flexibility to the RNSA to adapt to technological changes that develop in the future. As with Exchange Act Rule 17a–1, the retention period is intended to facilitate implementation of the broad inspection authority given the Commission in Section 17(a) of the Exchange Act.117 The Commission preliminarily believes that including a retention period that is consistent with other rules applicable to RNSAs reduce the burden for an RNSA to comply with the retention requirements in proposed Rule 10c–1 because the RNSA will have developed experience and controls around administering record retention programs that are similar to the requirements of proposed Rule 10c–1(g)(1). 117 See, e.g., Recordkeeping and Destruction of Records, Exchange Act Release 10809 (May 17, 1974), 39 FR 18764 (May 30, 1974); see also Recordkeeping and Destruction of Records, Exchange Act Release 10140 (May 10, 1974), 38 FR 12937 (May 17, 1973). PO 00000 Frm 00019 Fmt 4701 Sfmt 4702 69819 Furthermore, the Commission is proposing Rule 10c–1(g)(2), which would require the RNSA to make the information collected pursuant to paragraph (a)(2)(iii) and paragraphs (b) through (e) of this section available to the Commission or other persons, such as SROs or other regulators, as the Commission may designate by order upon a demonstrated regulatory need. The Commission preliminarily believes that stating explicitly that it would have access to the information that is being provided to the RNSA is appropriate because in times of market stress or extreme trading conditions, including spikes in volatility, the Commission will be able to quickly access and analyze activity in the market place. In addition to the Commission and the RNSA, other regulators may require access to the confidential information for regulatory purposes, for example to ensure enforcement of the regulatory requirements imposed on the entities that they oversee. The Commission is also proposing Rule 10c–1(g)(3), which would require the RNSA to provide the information collected under paragraphs (b) and (c) of this section and the aggregate of the information provided pursuant to paragraph (e) of this section available to the public without charge and without use restrictions, for at least a five-year period. The Commission preliminarily believes that requiring the RNSA to provide certain information to the public will further the direction by Congress in Section 984(b) of the DFA for the Commission to promulgate rules that are designed to increase the transparency of information to brokersdealers and investors, with respect to the loan or borrowing of securities because the information required to be disclosed by the RNSA will include the specified material terms of securities lending transactions. The Commission preliminarily believes that access to the publicly available 10c–1 information as required by paragraph (g)(3) should be available on the RNSA’s website or similar means of electronic distribution in the same manner such information is required to be maintained pursuant to paragraph (g)(1) of this section (specifically, ‘‘a convenient and usable standard electronic data format that is machine readable and text searchable without any manual intervention’’), and be free and without use restrictions. The Commission acknowledges that establishing and maintaining a system to provide public access to certain 10c– 1 information is not without cost. The Commission, however, preliminarily believes that such costs should be borne E:\FR\FM\08DEP2.SGM 08DEP2 69820 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules by the RNSA in the first instance and permitted to be recouped by the RNSA from market participants who report securities lending transactions to the RNSA.118 Furthermore, proposed Rule 10c–1 would require that the publicly available 10c–1 information be made available without use restrictions. The Commission preliminarily believes that any restrictions on how the publicly available 10c–1 information is used will impede the utility of such information because such restrictions may limit the ability of investors, commercial vendors, and other third parties, such as academics, from developing uses and analyses of the information.119 The Commission preliminarily believes that five years is the appropriate length of time for the RNSA to make information available to the public, because such a time period will provide broker-dealers and investors with an opportunity to identify trends occurring in the market and in individual securities based on changes to the material terms of securities lending transactions. The Commission is also proposing Rule 10c–1(g)(4), which would require the RNSA to establish, maintain, and enforce reasonably designed written policies and procedures to maintain the security and confidentiality of the confidential information required by paragraphs (d) and (e)(3). As discussed above in Parts III.B.1.c) and d), Rule 10c–1 would require Lenders to provide sensitive and confidential information to the RNSA. Furthermore, paragraphs (d) and (e)(3) would require that the RNSA keep such information confidential. The Commission preliminarily believes that the RNSA needs to protect this information from intentional or inadvertent disclosure to protect investors that provide such information by establishing reasonably designed written policies and procedures because the distribution of such information would identify market participants or could reveal information about the internal operations of market participants, which could be adverse to those providing information to the RNSA. For example, the disclosure of such information could reveal the portfolio holdings, trading strategies, jspears on DSK121TN23PROD with PROPOSALS2 118 See infra Part III.E. 119 The requirement to provide the 10c–1 information in the same manner such information is maintained pursuant to paragraph (g)(1) of this section on the RNSA’s website without charge and without use restrictions is not intended to preclude the RNSA from creating alternative means to provide information to the public or subscribers. For example, an RNSA might choose to file with the Commission proposed rules to establish data feeds of the Rule 10c–1 information that vendors might subscribe to and repackage for onward distribution. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 and activity of a Lender, which other market participants might use to disadvantage the Lender. While the Commission welcomes any public input on this topic, the Commission asks commenters to consider the following questions: 55. Is the retention of information collected by the RNSA for a period of five years in proposed paragraph 10c– 1(g)(1) appropriate? If not, should the period under proposed paragraph 10c– 1(g)(1) to preserve records under proposed paragraph 10c–1(b) through (e) be different—20 years, 10 years, 3 years, or some other period of time and why? Should the proposed Rule require an RNSA to maintain the information indefinitely? What would be the benefits or costs if the proposed Rule required an RNSA to retain information for the life of the RNSA? Would investors, RNSAs, the Commission, or the public benefit from retention period that is longer than five years? Is a recordkeeping requirement in proposed Rule 10c–1(g)(1) necessary, or will an RNSA maintain the records of its own accord or pursuant to other regulatory recordkeeping obligations, such as Rule 17a–1? 56. Is the retention requirement in proposed paragraph 10c–1(g)(1) unduly burdensome on the RNSA or overly costly? If so, in what ways could modifications to the Rule as proposed reduce these burdens and costs? 57. What, if any, impact would the recordkeeping requirements in paragraph (g) have on liquidity in securities that are subject to the requirement to provide 10c–1 information? 58. Is five years the appropriate length of time for the RNSA to make information available to the public? If not, should the period of time be for 20 years, 10 years, 3 years, or some other period of time? Please explain why. 59. Are there other methods of distributing 10c–1 information that Rule 10c–1 should require besides the RNSA’s website or similar means of electronic distribution? Please explain. Should Rule 10c–1 not explicitly name any type of technology currently in existence, such as a website? Should Rule 10c–1 require only that information has to be publicly available and let the RNSA determine how to best accomplish providing information to the public? 60. Should the Commission include additional requirements designed to help ensure the confidentiality of information provided to the RNSA? Please explain. Do commenters believe the confidential information is as PO 00000 Frm 00020 Fmt 4701 Sfmt 4702 sensitive as discussed in this release? Please explain. E. Report and Dissemination Fees To fund the reporting and dissemination of data provided pursuant to this Rule, the Commission is proposing paragraph 10c–1(h), which would reflect that the RNSA has authority under Exchange Act Section 15A(b)(5) to establish and collect reasonable fees from each person who provides any data in proposed paragraphs (b) through (e) of proposed Rule 10c–1 directly to the RNSA. The Exchange Act allows RNSAs to adopt rules that ‘‘provide for the equitable allocation of reasonable dues, fees, and other charges among members and issuers and other persons using any facility or system which the association operates or controls.’’ 120 The Commission preliminarily believes that it is appropriate to establish and collect reasonable fees from each person who directly provides the information 121 set forth in the Rule to the RNSA. The Commission acknowledges that this might result in persons that are not members of an RNSA being required to pay fees to the RNSA for the use of the facility or system operated by FINRA, but in the absence of such a fee the RNSA and its members could be subsidizing the free riding of nonmember Lenders that would be required to provide 10c–1 information to the RNSA under the proposed Rule. Such an outcome might not result in an equitable allocation of reasonable dues, fees, and other charges among ‘‘members and issuers and other persons’’ providing 10c–1 information to a facility or system operated or controlled by the RNSA. The Commission has previously approved a rule that permits an RNSA to charge fees to non-members that use the RNSA’s systems to comply with rules adopted by the Commission. FINRA Rule 6490, which implements notice requirements of issuers for certain corporate actions pursuant to Rule 10b–17, establishes a fee schedule that issuers pay to FINRA for processing these corporate actions. The Commission exercised oversight of the 120 See 15 U.S.C. 78o–3(b)(5) (‘‘The rules of the association provide for the equitable allocation of reasonable dues, fees, and other charges among members and issuers and other persons using any facility or system which the association operates or controls’’). 121 For example, lending agents and reporting agents would be providing proposed Rule 10c–1 information to an RNSA on behalf of beneficial owners and using the facility or system of the RNSA. However, the beneficial owners relying on such lending agent or reporting agent would not be using the facility or system of the RNSA. E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules fees imposed by FINRA on nonmembers by noticing FINRA’s Rule 6490 for comment, reviewing and considering comments, and approving Rule 6490. Similarly, the Commission would oversee fees that the RNSA proposed to charge by members and non-members to administer proposed Rule 10c–1. Specifically, any such fees would have to be filed with the Commission under Section 19(b) of the Exchange Act. The proposed fees would be published for notice and public comment. Since FINRA is currently the only RNSA, the Commission understands the potential for monopolistic pricing by FINRA on Lenders that are required to provide 10c–1 information to FINRA. To the extent FINRA files a rule to charge fees for Lenders to provide 10c–1 information, the Commission would be analyzing costs to FINRA to establish the system required by proposed Rule 10c–1 consistent with the requirements under Section 15A(b).122 For example, Section 15A(b)(5) requires an equitable allocation of reasonable fees and other charges among members and issuers and other persons using any facility or system which the association operates or controls. Accordingly, to the extent FINRA fails to meet its burden in a rule filing with the Commission that the fees meet the requirements of the Exchange Act, the fees would not be permissible. While the Commission welcomes any public input on this topic, the Commission asks commenters to consider the following questions: 61. Should proposed Rule 10c–1 explicitly state that an RNSA may collect a fee from persons that provide 10c–1 information to the RNSA? If so, why ? 62. Are there alternative means to fund a system for providing 10c–1 information to the RNSA? If so, please explain. jspears on DSK121TN23PROD with PROPOSALS2 IV. General Request for Comment The Commission solicits comment on all aspects of proposed Rule 10c–1 and any other matter that might have an impact on the proposal discussed above. In particular, the Commission asks commenters to consider the following questions: 63. What, if any, impact would proposed Rule 10c–1 have on liquidity in securities that are subject to the requirement to provide 10c–1 information? Please explain. 64. Are there additional or different ways to structure the proposed Rule that would help provide additional 122 See NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010). VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 transparency in the securities lending market? Please explain. 65. Should the Rule be limited to certain securities? Why or why not? Please explain. 66. How might the proposal positively or negatively affect investor protection, the maintenance of a fair, orderly, and efficient securities lending market, and capital formation? 67. As currently drafted the proposed Rule would require that persons whose loans are processed through any of the lending programs such as those operated by the OCC comply with the requirement to provide 10c–1 information. Please discuss whether loans cleared through OCC, or similar processes, should be exempt from the proposed Rule’s requirement to provide 10c–1 information or whether such exemptions should be considered on a case-by-case basis pursuant to paragraph (i) of the proposed Rule. 68. As currently drafted paragraphs (b), (c), and (d) of the proposed Rule require that information be provided to the RNSA within 15 minutes after the loan is effected or modified. Please comment on whether the time period for providing the information in paragraphs (b), (c), and (d) should be shorter, for example within 90 seconds, or longer, for example within 30 minutes, and explain why. 69. As currently drafted paragraphs (b) and (c) of the proposed Rule require that the RNSA make the information provided to it pursuant to those paragraphs available to the public as soon as practicable. Please comment on whether making the information provided pursuant to paragraphs (b) and (c) publicly available as soon as practicable provides sufficient transparency in the securities lending market or whether such information should be published in a shorter or longer time frame and please explain why. 70. As currently drafted the information required to be provided in paragraphs (b) and (c) of the proposed Rule would be made public by the RNSA. Please comment on whether the information provided pursuant to any of those paragraphs should not be made public and explain why. If there are any additional data elements that you believe the Commission should require to be provided, please include a description of such elements that explains why they should be added to the requirement to provide 10c–1 information and whether or not they should be made public. If there are any data elements in paragraphs (b) or (c) of the proposed Rule that should not be PO 00000 Frm 00021 Fmt 4701 Sfmt 4702 69821 required to be provided, or that should be modified, please explain why. 71. Please comment on whether the proposed Rule should include a definition of ownership of securities, which would specify who owns and can lend securities. For example, should the proposed Rule define ownership as meaning that a person, or the person’s agent, has title to such security, has not pledged such security, and has custody or control of such security? Please comment. Comments are of great assistance to the Commission’s rulemaking initiative when they are accompanied by supporting data and analysis of the issues addressed in those comments and if they are accompanied by alternative suggestions to the proposal where appropriate. V. Paperwork Reduction Act Analysis A. Background Certain provisions of proposed Rule 10c–1 impose ‘‘collection of information’’ requirements within the meaning of the Paperwork Reduction Act of 1995 (‘‘PRA’’).123 The Commission is submitting proposed Rule 10c–1 to the Office of Management and Budget (‘‘OMB’’) for review in accordance with the PRA.124 The title for the new information collection is ‘‘Material Terms of Securities Lending Transactions.’’ An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a current valid control number. As detailed above, to supplement the information available to the public involving securities lending and close the data gaps in this market, proposed Rule 10c–1 is designed to provide, in a timely manner, investors and other market participants with unrestricted and free access to material information regarding securities lending transactions. The data elements provided to an RNSA under proposed Rule 10c–1 are also designed to provide the RNSA with data that might be used for in-depth monitoring and surveillance. Further, the data elements are designed to provide regulators with information to understand: Whether market participants are building up risk; the strategies that broker-dealers use to source securities that are lent to their customers; and the loans that brokerdealers provide to their customers with fail to deliver positions. Because the Commission has not directly addressed the provision of the 123 44 U.S.C. 3501, et seq. 44 U.S.C. 3507; 5 CFR 1320.11. 124 See E:\FR\FM\08DEP2.SGM 08DEP2 69822 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules material terms of securities lending transactions for purposes of the Federal securities laws, proposed Rule 10c–1 would create new information collections burdens on certain Lenders and RNSAs, as detailed below. B. Proposed Use of Information The information collections in Proposed Rule 10c–1 are designed to increase the transparency and efficiency of the securities lending market by requiring any person that loans a security on behalf of itself or another person to provide the material terms of those securities lending transactions to an RNSA. As discussed above, the information available on securities lending transactions is spotty and incomplete.125 The information collections are necessary to remediate these issues by giving market participants and regulators unrestricted and free access to material information regarding securities lending transactions. C. Information Collections As described in detail below, the information collections burdens in proposed Rule 10c–1 are directly related to either (1) Lenders 126 capturing data elements and providing information to an RNSA and (2) an RNSA collecting the information and subsequently making certain data elements publicly available. Given the differences in the information collections applicable to these parties, the burdens applicable to Lenders are separated from those applicable to an RNSA in the analysis below for the sake of organization. jspears on DSK121TN23PROD with PROPOSALS2 D. Information Collections Applicable to Lenders Proposed Rule 10c–1 would apply to all Lenders. As defined above,127 Lenders include any person who loans a security on behalf of itself or another person.128 Proposed Rule 10c–1 would require that the data elements in paragraphs (b) through (e) within a specified time period be provided to an RNSA. In particular, paragraphs (b) 125 See supra Part I.A, (quoting 2020 FSOC Annual Report, supra note 14). 126 The Commission is proposing to limit the obligation to provide 10c–1 information to an RNSA only to the lender to avoid the potential double counting of transactions that could arise if the Rule required both sides of the securities lending transaction to provide the 10c–1 information to an RNSA. 127 See supra note 9. 128 Because Rule 10c–1 is designed to increase the transparency of information available to brokers, dealers, and investors, with respect to the loan or borrowing of securities all persons engaged in the lending of securities are Lenders, including persons that are not registered with or directly regulated by the Commission. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 through (d) contain loan-level data elements. These data elements would be required to be provided to an RNSA within 15 minutes after a loan is effected or modified, as applicable. Paragraph (e) contains data elements requiring the enumeration of total amount of each specific security available to loan and on loan. These data elements would be required to be provided to an RNSA at the end of each business day. To reduce the potential for double counting of securities lending transactions and reduce the burden on Lenders, proposed Rule 10c–1 would provide a hierarchy of who is responsible for providing information to an RNSA. First, although the proposed Rule places an obligation on each person that loans a security on behalf of itself or another person to provide information to an RNSA, if such Lender is using a lending agent, such lending agent shall have the obligation to provide the 10c–1 information to an RNSA on behalf of the lender. Second, persons with a reporting obligation, including a lending agent, may enter into a written agreement 129 with a reporting agent. Finally, Lenders are directly required to provide the RNSA with the 10c–1 information if the Lender is loaning its securities without a lending agent or reporting agent. In addition, paragraph (a)(2) would require that reporting agents also enter into a written agreement with the RNSA. Such written agreement must include terms that permit the reporting agent to provide 10c–1 information on behalf of another person. Reporting agents would also be required to provide the RNSA with a list of each person and lending agent on whose behalf the reporting agent is providing 10c–1 information to the RNSA. For the purpose of organizing the below analysis, the Commission has separated Lenders into three categories based on who would actually provide the required data elements to the RNSA.130 These categories are (1) 129 The Commission preliminarily believes it is appropriate to permit a Lender, including a lending agent, to enter into a written agreement with a reporting agent to permit the reporting agent to provide the 10c–1 information to an RNSA because such an arrangement will ease burdens on Lenders that do not have and do not want to establish connectivity to FINRA. Additionally, the written agreements will memorialize and provide proof of the contractual obligations for the reporting agent to provide the 10c–1 information to an RNSA. See supra Part III.A.2.b). 130 While, as more fully discussed below, there would be some variation between Lenders that are in the same category, the Commission is organizing the analysis so that the discussion of Lenders who share commonalities allows for a logical presentation and discussion of burdens. PO 00000 Frm 00022 Fmt 4701 Sfmt 4702 lending agents; (2) reporting agents, and (3) Lenders that would not employ a lending agent.131 The Commission preliminarily believes that Lenders that employ a lending agent would not be subject to any burdens because they would not be responsible for providing information to an RNSA. As a preliminary matter, the opacity of the securities lending market makes estimating the number of respondents difficult. Indeed, the objective of proposed Rule 10c–1 is to close the data gaps in this market.132 Despite these data gaps the Commission has made estimates of the number of Lenders in each category. First, the Commission estimates that there would be 37 lending agents. This estimate is based on a review of N–CEN reports filed with the Commission that identify the lending agents used by investment companies. Of these 37 lending agents, the Commission estimates that 3 would provide information directly to an RNSA and 34 would provide information to a reporting agent.133 Next, the Commission estimates that there would be 94 reporting agents. This estimate is based on the number of broker-dealers that lent securities in 2020. The Commission estimates that these persons would be reporting agents because they would likely have experience providing RNSAs with information through other tradereporting requirements and have experience with securities lending.134 Finally, the Commission estimates that there would be 278 Lenders that would not employ a lending agent. This estimate is based on the number of investment companies that do not employ a lending agent based on a review of N–CEN reports filed with the 131 As an example of variability between Lenders in the same category, the parties within the (1) lending agent category and the (3) lenders that would not employ a lending agent category may choose to employ a reporting agent. As discussed below, this choice will result in information collection burdens being different for Lenders within the same category. 132 See supra Part I.A.2. 133 Of the 37 lending agents identified, three are broker-dealers. Broker-dealers have experience providing information directly to RNSAs, so the Commission estimates that they would provide information directly to an RNSA. The other 34 lending agents are not broker-dealers, so the Commission estimates that they would provide information to a reporting agent rather than establishing connectivity directly to an RNSA. 134 It is possible that some of these broker-dealers may choose not to be a reporting agent and that other persons may choose to be a reporting agent. Given uncertainty regarding future reactions to proposed Rule 10c–1 and a lack of granular data about the current market, however, the Commission preliminarily believes that the broker-dealers that lent securities in 2020 is a reasonable estimate of the number of reporting agents. E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules Commission. Of these 278 Lenders, the Commission estimates that 139 will provide information to an RNSA and 139 will provide information to a reporting agent. 1. Lending Agents Under proposed Rule 10c–1(a)(1), lending agents would be required to provide 10c–1 information to an RNSA (a ‘‘providing lending agent’’) or enter into a written agreement with a reporting agent to provide information to an RNSA (a ‘‘non-providing lending agent’’). In both cases, lending agents would face information collection burdens to comply with the rule. (a) Providing Lending Agents (i) Initial Burden jspears on DSK121TN23PROD with PROPOSALS2 Providing lending agents would incur initial burden to develop and reconfigure their current systems to capture the required data elements.135 Providing lending agents would also be subject to initial burden to establish connections that would allow it to provide the information to a RNSA.136 The Commission preliminarily believes that burden for this requirement is similar to that of establishing the appropriate systems and processes required for collection and transmission of the required information under the under 17 CFR 242.613, Exchange Act Rule 613 (commonly referred to as the ‘‘Consolidated Audit Trail’’ or the ‘‘CAT’’) 137 because of the general similarity between the systems established under that rule and the systems that would be required to be established under proposed Rule 10c– 1.138 While similar enough to use as the basis for the estimate, the Commission preliminarily believes that systems that comply with proposed Rule 10c–1 will be significantly less complex than those required by the CAT because they will need to capture less information 135 While providing lending agents are likely already tracking the data elements as a part of the regular course of business, capturing this information would be a new regulatory requirement. 136 In particular, they would be required to establish connections with the RNSA and the persons on whose behalf they are lending securities. 137 See Joint Industry Plan, Order Approving the National Market System Plan Governing the Consolidated Audit Trail, Exchange Act Release No. 79318 (Nov. 15, 2016), 81 FR 84696, 84921 (Nov. 23, 2016) (‘‘CAT Approval Order’’). 138 Both the CAT and proposed Rule 10c–1 would require the provision of trade information to a thirdparty information repository. The burden estimates in the CAT Approval Order are based on a study of cost estimate calculations. See id. at 84857 (describing overview and methodology of the study). VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 overall.139 Despite this difference, for the purposes of this analysis, out of an abundance of caution, the Commission is using certain specific estimates of internal burden from the CAT Approval Order, as detailed below. Unlike the burden in the CAT Approval Order, however, the Commission preliminarily believes that each party that would face PRA burdens under proposed Rule 10c– 1 will have internal staff 140 that can handle this task.141 More specifically, the Commission is basing its estimates for systems development and monitoring on the burdens applicable to non-OATS 142 reporters under the CAT.143 The Commission chose this estimate because of the factors that were considered by the Commission in the CAT Approval Order when it categorized firms and estimated burdens. In particular, nonOATS reporters were estimated to be subject to the smallest burdens under the CAT NMS because of the limited scope of their reportable activity.144 Based on the overall size of the securities lending market and the number that would be providing information to an RNSA, the Commission preliminarily believes that 139 Exchange Act Rule 613(c)(1) requires the CAT NMS Plan to provide for an accurate, timesequenced record of certain orders beginning with the receipt or origination of an order by a brokerdealer, and further documenting the life of the order through the process of routing, modification, cancellation and execution (in whole or in part) of the order. Proposed Rule 10c–1, on the other hand, does not require order information be provided to an RNSA. Further, more trades that are reportable to CAT are executed than securities lending transactions. The Commission preliminarily estimates that these two differences will result in fewer data items under proposed Rule 10c–1 than the CAT. Accordingly, the systems required to comply with proposed Rule 10c–1 would be substantially less complex than the systems required to comply with the CAT. 140 In the CAT NMS Plan Release, the Commission estimated that external costs may consist of, for example, the use of service bureaus, technology consulting, and legal services. See, e.g., CAT Approval Order, supra note 137, at 84935. 141 The Commission preliminarily believes that, because of the sophisticated services associated with third-party providers’ business, third-party providers would employ internal staff with the expertise required to comply with proposed Rule 10c–1. 142 The FINRA website states: ‘‘FINRA has established the Order Audit Trail System (OATS), as an integrated audit trail of order, quote, and trade information for all NMS stocks and OTC equity securities. FINRA uses this audit trail system to recreate events in the life cycle of orders and more completely monitor the trading practices of member firms.’’ FINRA, Order Audit Trail System (OATS), available at https://www.finra.org/industry/oats (listing further information on OATS). 143 CAT NMS Plan Release at 756 (discussing the burdens applicable to these broker-dealers). 144 The CAT NMS Plan Release estimated that non-OATS reporters would have fewer than 350,000 reportable events each month. CAT Approval Order, supra note 137, at 84928. PO 00000 Frm 00023 Fmt 4701 Sfmt 4702 69823 the volume of securities lending transactions for providing lending agents will be, on average, of a similar scope to the volume of reports estimated by non-OATS reporters under the CAT NMS Plan Release. The Commission, therefore, estimates that each providing lending agent would incur 3,600 hours of initial burden to develop and reconfigure their current systems to capture the required data elements.145 Accordingly, the total industry-wide burden for this requirement would be 10,800 hours.146 (ii) Ongoing Annual Burden Once a providing lending agent has established the appropriate systems and processes required for collection and provision of the required information to the RNSA,147 the Commission preliminarily estimates that proposed Rule 10c–1 would impose ongoing annual burdens associated with, among other things, providing the data to the RNSA, monitoring systems, implementing changes, and troubleshooting errors. The Commission estimates that the ongoing burden will be equivalent to the ongoing burden estimated for non-OATS reporters in the CAT Approval Order for the same reasons discussed with respect to initial burden. The Commission, therefore, estimates that it would take 1,350 burden hours per year to comply with the rule per providing lending agent,148 leading to a total industry-wide ongoing annual burden of 4,050 hours.149 (b) Non-Providing Lending Agents Instead of providing information to an RNSA, paragraph (a)(1)(ii) would permit 145 In the CAT Approval Order, the Commission estimated that, on average, the initial burden for non-OATS reporters would be two full-timeequivalent (‘‘FTE’’) employees working for one year (2 FTEs × 1800 working hours per year = 3600 burden hours). See CAT Approval Order, supra note 137, at 84938. The Commission is using this estimate because of the similarities between the requirements applicable to providing lending agents under proposed Rule 10c–1 and the requirements applicable to non-OATS reporters under the CAT. 146 3,600 hours × 3 providing lending agents = 10,800 hours. 147 The Commission expects that the process of providing information to an RNSA will be highly automated so it is including the burden for doing so in this category. 148 In the CAT NMS Plan Release, the Commission estimated that, on average, the ongoing annual burden non-OATS reporters would be .75 FTE employees (.75 FTEs × 1800 working hours per year = 1350 burden hours). See CAT Approval Order, supra note 137, at 84938. The Commission is using this estimate because of the similarities between the requirements applicable to providing lending agents under proposed Rule 10c–1 and the requirements applicable to non-OATS reporters under the CAT NMS Plan. 149 1,350 hours × 3 providing lending agents = 4,050 hours. E:\FR\FM\08DEP2.SGM 08DEP2 69824 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules non-providing lending agents to enter into a written agreement with a reporting agent that would provide the required information to the RNSA. These non-providing lending agents would be subject to distinct information collection burdens from those applicable to providing lending agents. First, because they would not have to establish connectivity to an RNSA and may have flexibility in the format of the information that it provides the reporting agent, non-providing lending agents would be subject to less initial and ongoing burden for systems development and monitoring. Second, non-providing lending agents would be subject to initial burden to negotiate and execute a written agreement with the reporting agent. (i) Systems Development and Monitoring jspears on DSK121TN23PROD with PROPOSALS2 (a) Initial Burden Like providing lending agents, nonproviding lending agents would incur initial burden to develop and reconfigure their current systems to capture the required data elements. The Commission preliminarily believes that non-providing lending agents would be subject to less burden than providing lending agents, however, because they would likely have the flexibility to collaborate with a reporting agent to determine the most efficient means of establishing systems that comply with the proposed Rule. For example, if agreed to by both parties, the nonproviding lending agent could have the flexibility to provide information that does not meet the specific format requirements of an RNSA to the reporting agent if the reporting agent is able to reformat the information once received. Given potential efficiencies, the Commission preliminarily estimates that a non-providing lending agent would be subject to half the initial burden of a providing lending agent to develop and reconfigure their current systems to capture the required data elements as a providing lending agent. The Commission, therefore, estimates that each non-providing lending agent would be subject to an initial burden of 1,800 hours, leading to a total industrywide initial burden for this requirement of 61,200 hours.150 (b) Ongoing Annual Burden Once a non-providing lending agent has established the appropriate systems and processes required for collection and provision of the required 150 1,800 hours × 34 non-providing lending agents = 61,200 hours. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 to modify the written agreement or take additional action after it is executed. The Commission preliminarily believes that these agreements would likely be standardized across the industry since the data elements would be consistent for all persons. The Commission preliminarily estimates that the only terms that may require negotiation are price and the format of the information that would be required to be provided. To account for negotiation and any administrative tasks that would go into processing and executing agreements, the Commission is estimating non-providing lending agents would spend 30 hours on this task.153 Accordingly, the Commission estimates that the total industry-wide initial burden attributed to this proposed requirement would be 1,020 hours.154 information to the reporting agent, the Commission preliminarily estimates that the proposed Rule would impose ongoing annual burdens associated with, among other things, providing the data to the reporting agent, monitoring systems, implementing changes, and troubleshooting errors. As with initial burden for this requirement, the Commission preliminarily believes that non-providing lending agents would be subject to less burden than providing lending agents because they would likely have the flexibility to collaborate with a reporting agent to determine the most efficient means of establishing systems that comply with the proposed Rule. For example, the reporting agent could design programs that create direct links to a non-providing lending agent’s systems to facilitate the gathering of information such that ongoing intervention would not be required by the non-providing lending agent. In addition, non-providing lending agents and reporting agents could negotiate terms that may allow it to avoid providing certain 10c–1 information that can be gleaned from another data element, such as not requiring the provision of a securities issuer’s name if a security has a valid CUSIP. Given the potential efficiencies, the Commission estimates that a nonproviding lending agent would be subject to roughly half of the ongoing annual burden of a providing lending agent to develop and reconfigure their current systems to capture the required data elements as a providing lending agent. The Commission, therefore, estimates that each non-providing lending agent would be subject to an annual burden of 675 hours,151 leading to a total industry-wide annual burden for this requirement of 22,950 hours.152 2. Reporting Agents Three requirements of proposed Rule 10c–1 would subject reporting agents to initial and ongoing annual PRA burdens. The first requirement would be related to the development and monitoring of systems that would facilitate the provision of information to an RNSA. Because reporting agents would provide the same information as a providing lending agent, the Commission preliminarily estimates that the initial and ongoing annual burden for this task would be equivalent to the initial burden attributable to the same task for providing lending agents, as fully described below. The second would be related to the written agreements with the persons who would be providing the reporting agent information. Finally, the third would be related to entering into an agreement with a RNSA to provide 10c–1 information. (ii) Entering Into Written Agreement With Reporting Agent (a) Systems Development and Monitoring Paragraph (a)(1)(ii) of proposed Rule 10c–1 would require a non-providing lending agent to enter into a written agreement with a reporting agent. This requirement would subject nonproviding lending agents to initial burden to draft, negotiate, and execute the agreements required by this paragraph. The Commission preliminarily believes that this requirement would not subject nonproviding lending agents to ongoing annual burden once the agreement is signed because there would be no need (i) Initial Burden Under paragraph (a), reporting agents would provide 10c–1 information to an RNSA on behalf of another person. The Commission preliminarily believes that a reporting agent would be subject to initial burden to develop and reconfigure their current systems to capture the required data elements because the Commission preliminarily 151 1,350 hours (ongoing burden applicable to providing agents) × 50% = 675 hours. 152 675 hours × 34 non-providing lending agents == 22,950 hours. PO 00000 Frm 00024 Fmt 4701 Sfmt 4702 153 The Commission preliminarily believes that each lending agent would execute one such agreement because of the efficiencies gained from only having one reporting agent and the commoditized information that would be provided. Accordingly, the estimate of 30 hours would be the initial burden required for one agreement. 154 30 hours × 34 non-providing lending agents = 1,020 hours. E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules believes that they would need to change internal systems to collect the required information. Additionally, the reporting agent would need to establish, maintain, and enforce reasonably designed written policies and procedures to provide 10c– 1 information to an RNSA on behalf of another person in the manner, format, and time consistent with Rule 10c–1.155 Reporting agents would provide the same information to the RNSA as a providing lending agent,156 so the Commission preliminarily believes that the burden estimates should be consistent. The Commission, therefore, estimates that each reporting agent would incur 3,600 hours of initial burden to develop and reconfigure their current systems to capture the required data elements.157 Accordingly, the industry-wide initial burden would be 338,400 hours.158 (ii) Ongoing Annual Burden Once a reporting agent has established the appropriate systems and processes required for collection and provision of the required information to the RNSA, the proposed Rule 10c–1 would impose ongoing annual burdens associated with providing the data to the RNSA (including an updated list of persons on whose behalf they are providing information, as needed), monitoring systems, implementing changes, and troubleshooting errors. As with the initial burden for this requirement, reporting agents would provide the same information to the RNSA as a providing lending agent, so the Commission preliminarily believes that the burden estimates should be consistent. The Commission, therefore, 155 Proposed Rule 10c–1(a)(2)(i). the information provided to the RNSA would be the same, certain aspects of the requirements applicable to reporting agents would be slightly different than those applicable to providing lending agents. For example, unlike providing lending agents, reporting agents would need to design systems to establish connectivity with the persons on whose behalf they are providing information to an RNSA. In addition, unlike providing lending agents, reporting agents would be required to provide to the RNSA the identity of the person on whose behalf it is providing the information under paragraph (e). Further, unlike any type of lending agent, reporting agents would be required to establish, maintain, and enforce reasonably designed written policies and procedures to provide information to an RNSA. Despite these differences, the Commission preliminarily believes that the estimates used in the CAT approval order are an appropriate basis from which to estimate the burdens for reporting agents in addition to providing lending agents because both provide the same information to the RNSA. Accordingly, this burden estimates for reporting agents is not being adjusted incrementally from the estimate for providing lending agents. 157 See supra Part V.D.1.(a)(i). 158 3,600 hours × 94 reporting agents = 338,400 hours. jspears on DSK121TN23PROD with PROPOSALS2 156 While VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 estimates that each reporting agent would incur 1,350 hours of ongoing annual burden on this requirement.159 Accordingly, the industry-wide ongoing annual burden would be 126,900 hours.160 (b) Entering Into Written Agreements With Persons on Whose Behalf the Reporting Agent Would Be Providing Information Paragraph (a)(1)(ii) of proposed Rule 10c–1 would require reporting agents to enter into written agreements with the persons on whose behalf they are providing information to an RNSA. This requirement would subject reporting agents to initial burden to draft, negotiate, and execute these agreements. The Commission preliminarily believes that this requirement would not subject reporting agents to ongoing annual burden once the agreement is signed because there would be no need to modify the written agreement or take additional action after it is executed. As discussed above, the Commission preliminarily believes that these agreements would likely be standardized across the industry since the data elements would be consistent for all persons.161 The Commission preliminarily estimates that the only terms that may require negotiation are price and the format of the information that would be required to be provided. As discussed above, however, the Commission preliminarily believes that this process would be highly automated. The Commission, therefore, preliminarily believes that it would take reporting agents the same amount of time to comply with this requirement of time as non-providing lending agents. Accordingly, the Commission estimates that each reporting agent would spend 30 hours on this task. As a result, the total industry-wide initial burden attributed to this proposed requirement would be 2,820 hours.162 (c) Entering Into Written Agreement With RNSA In addition to written agreements with persons on whose behalf they would be providing information, paragraph (a)(2)(ii) of proposed Rule 10c–1 would require reporting agents to enter into written agreements the RNSA. Since all reporting agents would be providing the same information to the RNSA, the Commission preliminarily believes that no terms of these 159 See supra Part V.D.1.(a)(ii). hours × 94 reporting agents = 126,900 total hours. 161 See supra Part V.D.1.(b)(ii). 162 30 hours × 94 reporting agents = 2,820 hours. 160 1,350 PO 00000 Frm 00025 Fmt 4701 Sfmt 4702 69825 agreements would not be negotiated. Instead, the RNSA would create a form agreement that would be consistent for all reporting agents. While it is possible that the burden may be very small since these agreements would likely be standardized, the Commission is conservatively estimating one hour of initial burden for each reporting agent to account for any administrative tasks that would go into processing and executing agreements.163 The Commission preliminarily believes that reporting agents that enter into written agreements with RNSAs would not incur any ongoing annual burden to comply with this requirement once the agreement is signed because there will be no need to modify the written agreement or take additional action because the information will not vary.164 Accordingly, the Commission estimates that the industry-wide initial burden for this requirement would be 94 hours.165 (d) Recordkeeping Requirement Paragraph (a)(2)(iv) of proposed Rule 10c–1 would require reporting agents to preserve for a period of not less than three years, the first two years in an easily accessible place, the 10c–1 information that it obtained from any person pursuant to paragraph (a)(1)(ii), including the time of receipt, and the corresponding 10c–1 information provided by the reporting agent to the RNSA, including the time of transmission to the RNSA, and the written agreements that the reporting agent entered into with the persons on whose behalf it was providing information and the RNSA. The Commission preliminarily believes that the initial burden associated with retaining the collected information is associated with reporting agent’s burden to develop and reconfigure their current systems to capture the required data elements. Accordingly, the Commission is not assessing an initial burden associated with the recordkeeping of information required by proposed Rule 10c–1(a)(2)(iv). The Commission preliminarily believes that this recordkeeping requirement will be highly automated. The Commission, therefore, estimates 163 For example, a reporting agent may need to enter the written agreement into a contract management system or scan an executed paper agreement into an electronic format. 164 The data elements that will need to be reported will not change and will be consistent across the industry. Therefore, there will be no need to modify or update agreements in any way. 165 1 hour × 94 reporting agents = 94 hours. E:\FR\FM\08DEP2.SGM 08DEP2 69826 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules that reporting agents will spend one hour per week on upkeep and testing of records to ensure accuracy to comply with this requirement, for a total of 52 hours per year of annual burden per reporting agent. Accordingly, the estimates that the total ongoing annual burden for this requirement would be 4,888 hours.166 3. Lenders That Would Not Employ a Lending Agent As discussed in Part II.A, some Lenders run their own securities lending program rather than employing a lending agent. Under proposed Rule 10c–1, these persons would be required to either (1) provide 10c–1 information directly to an RNSA (a ‘‘self-providing lender’’) or (2) use a reporting agent to provide 10c–1 information to an RNSA (a ‘‘lender that directly employs a reporting agent’’). The Commission preliminarily believes that the initial and ongoing annual burden would vary between these two types of lenders. (a) Self-Providing Lenders Self-providing lenders would be subject to initial and ongoing annual burden to develop and reconfigure their current systems to capture the required data elements. Because the information that would be provided to an RNSA would be the same information as the information provided by a providing lending agent and a reporting agent, the Commission preliminarily believes that the initial and ongoing annual burden for this task would be equivalent to the initial burden attributable to the same task for providing lending agents and reporting agents, as more fully discussed below. jspears on DSK121TN23PROD with PROPOSALS2 (i) Initial Burden Self-providing lenders would be subject to initial burden to develop and reconfigure their current systems to capture the required data elements because the Commission preliminarily believes that they would need to change internal order routing and execution management systems to collect the required information. Self-providing lenders would provide the same information to the RNSA as a providing lending agent and reporting agent, so the Commission preliminarily believes that the burden estimates should be consistent. The Commission, therefore, estimates that each selfproviding lender would incur 3,600 hours of initial burden to develop and reconfigure their current systems to 166 52 hours × 94 reporting agents = 4,888 hours. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 capture the required data elements.167 Accordingly, the industry-wide initial burden would be 500,400 hours.168 (ii) Ongoing Annual Burden Once a self-providing lender has established the appropriate systems and processes required for collection and provision of the required information to the RNSA, the Commission preliminarily estimates that the proposed Rule 10c–1 would impose ongoing annual burdens associated with, among other things, providing the data to the RNSA, monitoring systems, implementing changes, and troubleshooting errors. As with the initial burden for this requirement, the Commission estimates that the ongoing annual burden for this task would be the same as providing lending agents and reporting agents because each would be providing the same information to the RNSA so the Commission preliminarily believes that the burden estimates should be consistent. The Commission, therefore, estimates that each reporting agent would incur 1,350 hours of ongoing annual burden on this requirement.169 Accordingly, the industry-wide ongoing annual burden would be 187,650 hours.170 (b) Lenders That Would Directly Employ a Reporting Agent Lenders that directly employ a reporting agent would be subject to distinct information collection burdens from those applicable to self-providing lenders. First, because they would not have to establish connectivity to an RNSA and may have flexibility in the format of the information that it provides the reporting agent, lenders that directly employ a reporting agent would be subject to less initial and ongoing burden for systems development and monitoring. Second, unlike self-providing lenders, lenders that would directly employ a reporting agent would be subject to initial burden to negotiate and execute a written agreement with the reporting agent as required by paragraph (a)(1)(ii). (i) Systems Development and Monitoring (a) Initial Burden The Commission preliminarily believes that lenders that would directly 167 See supra Part V.D.1.(a)(i); see also supra Part V.D.2.(a)(i). 168 3600 hours × 139 self-providing lenders = 500,400 hours. 169 See supra Part V.D.1.(a)(ii); see also supra Part V.D.2.(a)(ii). 170 1350 hours × 139 self-providing lenders = 187,650 total hours. PO 00000 Frm 00026 Fmt 4701 Sfmt 4702 employ a reporting agent would incur initial burden to develop and reconfigure their current systems to capture the required data elements and provide them to a reporting agent. Lenders that would directly employ a reporting agent would provide the same information to a reporting agent as a non-providing lending agent, so the Commission preliminarily believes that the burden estimates should be consistent.171 The Commission, therefore, preliminarily estimates that a lender that directly employs a reporting agent would be subject to an initial burden of 1,800 hours, leading to a total industry-wide initial burden for this requirement of 250,200 hours.172 (b) Ongoing Annual Burden Once a lender that directly employs a reporting agent has established the appropriate systems and processes required for collection and provision of the required information to the reporting agent, the proposed Rule would impose ongoing annual burden associated with, among other things, providing the data to the reporting agent, monitoring systems, implementing changes, and troubleshooting errors. As with the initial burden for this requirement, the Commission estimates that the ongoing annual burden for this task would be the same as a nonproviding lending agent, so the Commission preliminarily believes that the burden estimates should be consistent.173 The Commission, therefore, estimates that each lender that directly employs a reporting agent would be subject to an ongoing annual burden of 675 hours, leading to a total industry-wide burden for this requirement of 93,825 hours.174 (ii) Entering Into a Written Agreement With a Reporting Agent Paragraph (a)(1)(ii) of proposed Rule 10c–1 would require lenders that directly employ a reporting agent to enter into a written agreement with the reporting agent. This requirement would subject lenders that directly employ a reporting agent to initial burden to draft, negotiate, and execute these agreements. The Commission preliminarily believes that lenders that directly employ a reporting agent would not incur any ongoing burden to comply with this requirement once the agreement is signed because there will be no need to 171 See supra Part V.D.1.(b)(i)(a). hours × 139 lenders that directly employ a reporting agent = 250,200 hours. 173 See supra Part V.D.1.(b)(i)(b). 174 675 hours × 139 lenders that directly employ a reporting agent = 93,825 hours. 172 1,800 E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules agent as a non-providing lending agent,176 so the Commission preliminarily believes that the burden estimates for entering into the agreements should be consistent.177 The Commission, therefore, estimates that modify the written agreement or take additional action because the information will not vary.175 Lenders that directly employ a reporting agent would largely provide the same information to the reporting 69827 each lender that directly employs a reporting agent would spend 30 hours of initial burden on this task. As a result, the total industry-wide initial burden attributed to this proposed requirement would be 4,170 hours.178 PRA TABLE 1—SUMMARY OF ESTIMATED BURDENS FOR LENDERS Total initial industry burden Total annual industry burden Type of burden Providing Lending Agents: Systems Development and Monitoring. Non-Providing Lending Agents: Systems Development and Monitoring. Non-Providing Lending Agents: Entering into Agreement with Reporting Agent. Reporting Agents: Systems Development and Monitoring ..... Reporting Agents: Entering into Agreement with Person who Provides 10c–1 Information. Reporting Agents: Entering into Agreement with RNSA ........ Reporting Agents: Recordkeeping Requirement .................... Self-Providing Lenders: Systems Development and Monitoring. Lenders that Would Directly Employ a Reporting Agent: Systems Development and Monitoring. Lenders that Would Directly Employ a Reporting Agent: Entering Into a Written Agreement with a Reporting Agent. Third-Party Disclosure ........... 3 10,800 4,050 Third-Party Disclosure ........... 34 61,200 22,950 Third-Party Disclosure ........... 34 1,020 0 Third-Party Disclosure ........... Third-Party Disclosure ........... 94 94 338,400 2,820 126,900 0 Third-Party Disclosure ........... Recordkeeping ....................... Third-Party Disclosure ........... 94 94 139 94 0 500,400 0 4,888 187,650 Third-Party Disclosure ........... 139 250,200 93,825 Third-Party Disclosure ........... 139 4,170 0 E. Information Collection Applicable to RNSAs jspears on DSK121TN23PROD with PROPOSALS2 Number of entities impacted Requirement Proposed Rule 10c–1 places new burdens on RNSAs. Proposed Rule 10c– 1(b)–10c–1(e) would require RNSAs to collect the 10c–1 information provided to the RNSA by Lenders and make this information publicly available as soon as practicable. The collection of 10c–1 information might cause an RNSA to exercise authority under proposed Rule 10c–1(f) and implement rules regarding the format and manner to administer the collection of information required by proposed Rule 10c–1.179 Rule 10c–1(b) also requires the RNSA to create a unique transaction identifier and assign it to each loan reported to the RNSA under 10c–1. Furthermore, for each security about which the RNSA receives information pursuant to 10c–1(e)(1) and (e)(2), the RNSA would be required by Rule 10c–1(e)(3) to make available to the public only aggregated information for that security, including information required by (e)(1)(i) and (ii) and (e)(2)(i) and (ii), as soon as practicable, but not later than the next business day. Additionally, proposed Rule 10c–1(g)(1) would also require RNSAs to retain the 175 The data elements that will need to be reported will not change and will be consistent across the industry. Therefore, there will be no need to modify or update agreements in any way. 176 See supra Part V.D.1.(b)(ii). 177 Further, as with non-providing lending agents, because of the efficiencies gained from only having one reporting agent and the commoditized VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 information collected pursuant to paragraphs (b) through (e) of proposed Rule 10c–1 in a convenient and usable standard electronic data format that is machine readable and text searchable without any manual intervention for a period of five years; and proposed Rule 10c–1(g)(3) would require the RNSA to provide information collected under paragraphs (b) and (c) and the aggregate of the information provided pursuant to paragraph (e) available to the public, for a least a five-year period. Proposed Rule 10c–1(g)(2) would require the RNSA to make 10c–1 information available to the Commission or other persons as the Commission may designate by order upon a demonstrated regulatory need. 1. RNSA Collection of Information From Lenders and Providing Information to the Public and the Commission As discussed above, Lenders would be required to provide information to an RNSA pursuant to Rule 10c–1(a) and the RNSA would be required to make certain information publicly available on its website or similar means of electronic distribution, without charge and without use restrictions as soon as practicable. Accordingly, an RNSA information that would be provided, each lender that directly employs a reporting agent would enter into an agreement with only one reporting agent. 178 30 hours × 139 lenders that directly employ a reporting agent = 4,170 hours. 179 The burden of filing any proposed rule changes by the RNSA is already included under the collection of information requirements contained in PO 00000 Frm 00027 Fmt 4701 Sfmt 4702 would be required to create, implement and maintain the infrastructure to enable Lenders to provide the RNSA with the 10c–1 information, which would include establishing technical requirements and specifications for such infrastructure, creating a system that would generate unique identifiers, meeting with industry participants to gather feedback on the proposed infrastructure, drafting written policies and procedures to protect the confidentiality of certain information, and entering into written agreements with Lenders—including lending agents and reporting agents—for such information to be provided to the RNSA. Additionally, the infrastructure would need to comply with proposed Rule 10c–1(g)(2), which would require the RNSA to make the information collected pursuant to paragraphs (b) through (e) available to the Commission or other persons as the Commission may designate by order upon a demonstrated regulatory need. The Commission preliminarily believes that the initial burden for the RNSA to create and implement the infrastructure for Lenders to provide the required information to the RNSA and Rule 19b–4 under the Exchange Act. See Securities Exchange Act Release No. 50486 (Oct. 5, 2004), 69 FR 60287, 60293 (Oct. 8, 2004) (File No. S7–18–04) (describing the collection of information requirements contained in Rule 19b–4 under the Exchange Act). E:\FR\FM\08DEP2.SGM 08DEP2 69828 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules for the RNSA to provide such information to the public is similar to the requirement for National Securities Exchanges and RNSAs to establish the appropriate systems and processes required for collection and transmission of the required information under the CAT NMS Plan 180 submitted by SROs under Exchange Act Rule 613. While similar enough to use as the basis for the estimate, the Commission preliminarily believes that systems that comply with proposed Rule 10c–1 will be significantly less complex than those that comply with the CAT because they will need to capture less information overall.181 Additionally, there is currently only one RNSA, rather than the multiple National Securities Exchanges, that will have the burden to create and implement the infrastructure for Lenders to provide information to the RNSA. Accordingly, the burden hour estimates for this collection of information will be substantially reduced from the CAT estimates, as detailed below. Further, the Commission preliminarily believes that the RNSA will have internal staff that can handle this task, so unlike the tasks under the CAT NMS Plan, the tasks under proposed Rule 10c–1 would not require any outsourcing. (a) Initial Burden The Commission estimates that it would take an RNSA approximately 10,924 hours of internal legal, compliance, information technology, and business operations time to develop the infrastructure to enable Lenders to provide the information required by Rule 10c–1 to the RNSA and for the RNSA to provide such information to the public.182 The Commission 180 See CAT Approval Order, supra note 137. supra note 139. 182 This estimate is based on the Commission’s initial burden estimate for national securities exchanges and RNSAs regarding the data collection and reporting for the consolidated audit trail which was approximately 43,696.8 burden hours in total. See CAT Approval Order, supra note 137, at 84921. Given the size of the overall equity market vs. the size of the securities lending market the Commission preliminarily believes the CAT burden hours would overestimate the burden hours to develop the infrastructure to provide information required by Rule 10c–1 to the RNSA and for the RNSA to provide such information to the public. Accordingly, the Commission preliminarily believes that the initial burden should be calculated jspears on DSK121TN23PROD with PROPOSALS2 181 See VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 preliminarily believes that the RNSA would not incur external costs for the implementation of the infrastructure to enable Lenders to provide the information required by the Rule to the RNSA and make such information publicly available because the sole RNSA, FINRA, has experience implementing systems to collect information from its members.183 Therefore, the Commission preliminarily estimates that the average one-time initial burden of developing the infrastructure to enable Lenders to provide the information required by proposed Rule 10c–1 would be 10,924 burden hours for the RNSA. (b) Ongoing Annual Burden Once the RNSA has developed the infrastructure to enable Lenders to provide the 10c–1 information to the RNSA and for the RNSA to provide such information to the public, the Commission preliminarily estimates that Rule 10c–1 would impose on the RNSA ongoing annual burdens of 7,739.5 hours to ensure that the infrastructure is up to date and remains in compliance with the proposed Rule,184 for an estimated annual burden of 7,739.5 hours. based on the size of the securities lending market in comparison to the size of the equities market. The Commission estimates that the average daily dollar value of securities lending transactions is approximately $120 billion dollars compared to the average daily equity trading volume of $475 billion. Accordingly, the size of the securities lending market is approximately 25% of the U.S. equity market. Therefore the Commission estimates that the initial burden to develop and implement the needed systems changes to capture and publish the 10c–1 information is 25% of the burden hours for CAT, which would be 10,924 burden hours. 183 See supra note 73. 184 This estimate is similar to the Commission’s ongoing annual burden estimate for national securities exchanges and RNSAs regarding the data collection and reporting for the consolidated audit trail which was approximately 30,958.20burden hours in total. See CAT Approval Order, supra note 137, at 84922. Given the size of the overall equity market vs. the size of the securities lending market the Commission preliminarily believes the CAT burden hours would overestimate the burden hours to develop the infrastructure to provide information required by Rule 10c–1 to the RNSA and for the RNSA to provide such information to the public. Accordingly, the Commission preliminarily believes that the initial burden should be calculated based on the size of the securities lending market in comparison to the size of the equities market. The Commission estimates that the average daily dollar value of securities lending transactions is PO 00000 Frm 00028 Fmt 4701 Sfmt 4702 2. RNSA Retention of Collected Information Proposed Rule 10c–1(g)(1) requires that the RNSA retain the information collected pursuant to paragraphs (b) through (e) of this section in a convenient and usable standard electronic data format that is machine readable and text searchable without any manual intervention for a period of five years. The Commission preliminarily believes that the initial burden associated with retaining the collected information is associated with RNSA’s burden to implement and maintain the infrastructure for Lenders to report information to the RNSA. Accordingly, the Commission is not assessing an initial burden associated with the retention of information required to be reported under the proposed Rule. The Commission, however, preliminarily estimates that Rule 10c–1 would impose on the RNSA ongoing annual burdens of 52 hours to retain the collected information required by the proposed Rule,185 for an estimated annual burden of 52 hours. The Commission preliminarily believes it is appropriate to add burden hours that already exist for 17a–1 because the RNSA will have to retain records involving 10c–1 information for Lenders that are not FINRA members. approximately $120 billion dollars compared to the average daily equity trading volume of $475 billion. Accordingly, the size of the securities lending market is approximately 25% of the U.S. equity market. Therefore the Commission estimates that the initial burden to develop and implement the needed systems changes to capture and publish the 10c–1 information is 25% of the burden hours for CAT, which would be 7,739.5 burden hours. 185 This estimate is similar to the Commission’s ongoing annual burden estimate for national securities exchanges and RNSAs regarding the data collection and reporting for Rule 17a–1, which requires that every national securities exchange, national securities association, registered clearing agency, and the Municipal Securities Rulemaking Board keep on file for a period of not less than five years, the first two years in an easily accessible place, at least one copy of all documents, including all correspondence, memoranda, papers, books, notices, accounts, and other such records made or received by it in the course of its business as such and in the conduct of its self-regulatory activity. See Paperwork Reduction Act Extension Notice for Exchange Act Rule 17a–1, 84 FR 57920 (Oct. 29, 2019). E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules 69829 PRA TABLE 2—SUMMARY OF ESTIMATED BURDENS FOR RNSA Requirement Type of burden Implement and maintain the infrastructure for Lenders to report information to the RNSA including written policies and procedures. RNSA retain the information collected pursuant to paragraphs (b) through (f) of proposed Rule 10c–1. F. Collection of Information Is Mandatory Each collection of information discussed above would be a mandatory collection of information. G. Confidentiality The Commission could receive confidential information as a result of this collection of information, such as the identity of Lenders. The proposed Rule does not permit the RNSA to make such information public. Aside from this information, the collection of information is expected to be, for the most part, publicly available information. To the extent that the Commission does receive confidential information pursuant to this collection of information, such information will be kept confidential, subject to the provisions of applicable law. H. Retention Period of Recordkeeping Requirement Pursuant to proposed Rule 10c– 1(g)(1), an RNSA would be required to retain the information collected pursuant to paragraphs (b) through (e) of proposed Rule 10c–1 in a convenient and usable standard electronic data format that is directly available and searchable electronically without any manual intervention for a period of five years. Pursuant to proposed Rule 10c– 1(a)(2)(iv) a reporting agent would be required to retain information for a period of not less than three years, the first two years in an easily accessible place. jspears on DSK121TN23PROD with PROPOSALS2 I. Request for Comment The Commission requests comment on whether the estimates for burden hours and costs are reasonable. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to (1) evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the Commission, including whether the information would have practical utility; (2) evaluate the accuracy of the Commission’s estimate of the burden of the proposed collections of information; (3) determine VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 Frm 00029 Total initial industry burden Total annual industry burden Reporting and Third Party Disclosure. 1 10,924 7,739.5 Recordkeeping ....................... 1 0 52 whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (4) determine whether there are ways to minimize the burden of the collections of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology. The Commission also requests that commenters provide data to support their discussion of the burden estimates. While the Commission welcomes any public input on this topic, the Commission asks commenters to consider the following questions: 72. Is the Commission adequately capturing the respondents that would be subject to the burdens under the proposed Rule? Specifically, would more or fewer than 37 lending agents, 94 reporting agents, and 278 Lenders that would not employ a lending agent be required by proposed Rule 10c–1 to provide information to an RNSA? 73. Are there any additional factors that the Commission should consider when estimating whether a Lender would employ a reporting agent? 74. Are there any other hourly burdens associated with complying with the proposed Rule 10c–1? If so, what are the other hourly burdens associated with complying with the proposed Rule? 75. Would any aspects of the proposed Rule that are not discussed in this PRA Analysis impact the burden associated with the collection of information? Any member of the public may direct to us any comments concerning the accuracy of these burden estimates and any suggestions for reducing the burdens. Persons submitting comments on the collection of information requirements should direct the comments to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, MBX.OMB.OIRA.SEC_desk_officer@ omb.eop.gov, and send a copy to Vanessa Countryman, Secretary, Securities and Exchange Commission, PO 00000 Number of entities impacted Fmt 4701 Sfmt 4702 100 F Street NE, Washington, DC 20549–1090, with reference to File No. S7–18–21. OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication of this release. Consequently, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days of publication. Requests for materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7–18–21, and be submitted to the Securities and Exchange Commission, Office of FOIA Services, 100 F Street NE, Washington, DC 20549–2736. VI. Economic Analysis A. Introduction and Market Failure 1. Introduction The Commission has considered the economic effects of the proposed Rule and wherever possible, the Commission has quantified the likely economic effects of the proposed Rule.186 The Commission is providing both a qualitative assessment and quantified estimates of the potential economic effects of the proposed Rule where feasible. The Commission has incorporated data and other information to assist it in the analysis of the economic effects of the proposed Rule. However, as explained in more detail below, because the Commission does not have, and in certain cases does not believe it can reasonably obtain, data that may inform the Commission on certain economic effects, the Commission is unable to quantify 186 Section 3(f) of the Exchange Act requires the Commission, whenever it engages in rulemaking and is required to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action would promote efficiency, competition, and capital formation. Additionally, Section 23(a)(2) of the Exchange Act requires the Commission, when making rules under the Exchange Act, to consider the impact such rules would have on competition. Exchange Act Section 23(a)(2) prohibits the Commission from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. E:\FR\FM\08DEP2.SGM 08DEP2 jspears on DSK121TN23PROD with PROPOSALS2 69830 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules certain economic effects. Further, even in cases where the Commission has some data, it is not practicable due to the number and type of assumptions necessary to quantify certain economic effects, which render any such quantification unreliable. Our inability to quantify certain costs, benefits, and effects does not imply that such costs, benefits, or effects are less significant. The Commission requests that commenters provide relevant data and information to assist the Commission in quantifying the economic consequences of the proposed Rule. The Commission preliminarily believes that the proposed Rule would result in increased transparency in the securities lending market by making available the public portion of new 10c– 1 information, which is more comprehensive than existing data, and by making such data available to a wider range of market participants and other interested persons than currently access existing data. This effect could be similar to what was observed with the implementation of TRACE in corporate bonds.187 The subsequent benefits include a reduction of the information disadvantage faced by end borrowers and beneficial owners in the securities lending market, improved price discovery in the securities lending market, increased competition among providers of securities lending analytics services, reduced administrative costs for broker-dealers and lending programs, and improved balance sheet management for financial institutions. The Commission preliminarily believes the proposed Rule would also likely reduce the cost of short selling, leading to improved price discovery and liquidity in the underlying security markets. The Commission also preliminarily believes the proposed Rule would also benefit investors by increasing the ability of regulators to surveil, study, and provide oversight of both the securities lending market and also individual market participants. The Commission preliminarily believes that there will be costs that would result from the proposed Rule. The proposed Rule would lead to direct compliance costs as entities providing the 10c–1 information to an RNSA would have to build or adjust systems to meet the requirements of the proposed Rule. Further, the RNSA managing the collection of data may impose fees on entities that provide 10c–1 information to an RNSA. These costs may be absorbed by the entities 187 See infra Section IV.C.1.(a) for a discussion of TRACE. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 that provide 10c–1 information to an RNSA in the form of lower profits, or they may be passed on to the end customer in the form of increased fees for broker-dealer services or lending program services. The proposal would also impose direct costs on the RNSA responsible for collecting, maintaining, and distributing the data. Additionally, the Commission preliminarily believes that the proposed Rule would render existing securities lending data less valuable, leading to less revenue for the firms currently compiling and distributing this data. Also, brokerdealers and lending programs would have costs in the form of lost information advantage when dealing with beneficial owners and end borrowers in the securities lending market. Lastly, making public securities lending data that is currently either not reported, or where access to the data is limited, may affect the profitability of certain trading strategies as investors use the data in the proposal to learn about market sentiment and adjust their trading strategies accordingly. that they could provide; and (2), provide their data to the commercial vendor in order to access the full dataset provided by the vendor.190 Data vendors may see restricting access to the data as necessary to persuade current contributors to participate, and thus may be unable to change their current practice. If the data vendors expand who has access to their data then some of the entities that contribute data may choose to no longer contribute their data because they no longer have an incentive to do so, making the data less comprehensive than it currently is. By keeping access to the data somewhat restrictive data vendors enhance the comprehensiveness of the data, but they limit who has access. Secondly, those market participants who choose not to contribute data to existing private data products likely do so because they believe it is in their interest to keep their own data out of public view, making it unlikely that an entity will be able to produce a comprehensive lending data product. 2. Market Failures The securities lending market is characterized by asymmetric information between market participants and a general lack of information on current market conditions,188 which can lead to inefficient prices for securities loans (including equity lending and fixed income lending).189 These information frictions stem from the fact that access to timely lending market data is very limited for some market participants. The current ‘‘give-to-get’’ model of commercial data for securities lending means that only those market entities with data to report for themselves are able to get access to the data. Furthermore, participation in the giveto-get data product is purely voluntary, meaning that the data could be missing observations in a systematic fashion, thus biasing the impression it creates of the lending market. The Commission preliminarily believes that opacity in the lending market is unlikely to be solved by market forces. Firstly, the primary source for data about the securities lending market comes from commercial data vendors who operate under a giveto-get model where entities who wish to obtain securities lending are typically required to: (1), Be participants in the lending market themselves with data 1. Securities Lending A securities loan is typically a fully collateralized transaction whereby the lender, also known as the beneficial owner, temporarily transfers legal right to a security to the borrower, the counterparty, in exchange for compensation. The form of compensation depends on the type of collateral used to secure the transaction. There are two general types of collateral: Cash and non-cash. In the United States, the most common form of collateral for equity security loans is cash. The borrower of the security deposits typically 102% or 105% of the current value of the asset being loaned as collateral. The lender then reinvests this collateral, usually in low-risk interest-bearing securities, then rebates a portion of the interest earned back to the borrower. The difference between the interest earned and what is rebated to the borrower is the lending fee earned by the lender. The portion of the interest earned on the reinvested collateral that is returned to the borrower is called the rebate rate, and is a guaranteed amount set forth in the terms of the loan. It is possible for the lender to lose money on the loan if the interest earned on the reinvestment of the collateral does not exceed the rebate 188 See infra Part VI.B.2. 189 The Commission preliminarily believes that the issues discussed in this part apply to all securities. The Commission requests comment on this belief. PO 00000 Frm 00030 Fmt 4701 Sfmt 4702 B. Baseline 190 As discussed in Part VI.B.5, while the primary sources for lending market data come from the main commercial data vendors operating on a give-to-get system, some firms obtain and distribute securities lending data by surveying some fund managers about their lending experience. E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules rate. If the security is in high demand in the borrowing market, the rebate rate may be negative, indicating that the borrower does not receive any rebate and must also provide additional compensation to the lender. Lending fees are influenced by factors including: The current demand for the given security, the potential difficulty a particular broker dealer may face finding an alternative source of loans, the length of the loan, the collateral used, the credit worthiness of the counterparty, and the relative bargaining power of the parties involved, among others. Consequently there is usually a significant range of fees charged for loans of the same security on the same day to different entities.191 Securities loans are most commonly obtained through bilateral negotiations between lending programs and brokerdealers, often with a phone call.192 Generally, when an end investor wishes to borrow a share, and its broker-dealer does not have the share available in their own inventory or through customer margin accounts to loan, its broker-dealer will borrow a share from a lending agent with whom it has a relationship. The broker-dealer will then re-lend the share to its customer. As previously noted, loans from lending programs to broker-dealers occur in the Wholesale Market and loans from a broker-dealer to the end borrower occur in what is referred to as the Retail Market. Obtaining a securities loan often involves extensive search for counterparties by broker-dealers.193 Investors borrow securities for a variety of reasons. A primary reason for borrowing equity shares is to facilitate a short sale. Investors use short sales to take a directional position in a security, or to hedge existing positions.194 When investors execute a short sale, they do not borrow the shares on the day of the short sale. Rather, because the stock market settles at T+2 and the lending market has same day settlement, the loan actually occurs on the settlement 191 See Part VI.B.3 for statistics on the range of jspears on DSK121TN23PROD with PROPOSALS2 fees. 192 Most broker dealers are regulated by FINRA and are subject to securities lending rules such as FINRA rules 4314, 4320, and 4330. 193 See e.g., Adam C. Kolasinski, Adam V. Reed & Matthew C. Ringgenberg, A Multiple Lender Approach to Understanding Supply and Search in the Equity Lending Market, 68 J. Fin. 559–95 (2013). 194 Market makers in the equity market also use short selling to facilitate liquidity provision in the absence of sufficient inventory. However, these short sales are not considered here because they are almost always reversed intraday and thus do not result in a securities loan. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 day, two trading days after the stock market transaction took place. Option market activity can also be a source of demand for security loans as short selling is a critical component of delta hedging. Delta hedging occurs when options market participants, particularly options market makers, holding directional positions hedge their inventory exposure by taking offsetting positions in the underlying stock.195 Equity options markets are often significantly less liquid than the markets for their underlying securities. Delta hedging a long call or short put position requires short selling, which in turn requires borrowing the underlying asset. Equity security loans can also occur to close out a failure to deliver (FTD). FTDs occur when one party of a transaction is unable to deliver at settlement the security that they previously sold. FTDs can occur for multiple reasons.196 Regulation SHO Rule 204 states that a party needing to close out an FTD can borrow shares in the lending market and deliver the borrowed share to settle the transaction. Doing so allows more time for the individual to source the shares or purchase them in the open market. The financial management activity of banks also drives securities loans, particularly in fixed income securities. It is the Commission’s understanding that a significant fraction of debt security loans occur as banks manage liquidity on their balance sheet. Securities loans help banks manage liquidity on their balance sheets because when a security is on loan, legal claim to the security transfers to the borrower.197 Thus banks lacking sufficient high-quality liquid assets on their balance sheet may borrow such assets to bolster their liquidity ratios.198 Consequently, the most common securities to be lent are US Treasury/ Agency bonds.199 195 For a given option contract, a quantity known as the ‘‘delta’’ captures the sensitivity of the option’s price to a $1 increase in the price of the underlying security. When hedging inventory, the market maker determines the appropriate position size in the underlying stock according to the delta. 196 See e.g., Amendments to Regulation SHO at note 8, 61691, available at https://www.sec.gov/ rules/final/2008/34-58775fr.pdf. 197 See e.g., Concept Release on the U.S. Proxy System, Exchange Act Release No. 62495 (July 13, 2010), 75 FR 42982, 42994 (July 22, 2010) (‘‘When an institution lends out its portfolio securities, all incidents of ownership relating to the loaned securities, including voting rights, generally transfer to the borrower for the duration of the loan.’’). 198 To ensure that the balance sheet is actually improved by the transaction, such loans are collateralized with securities instead of cash. 199 See OFR Pilot Survey, supra note 24. PO 00000 Frm 00031 Fmt 4701 Sfmt 4702 69831 Also, the Commission understands that some financial entities may use securities loans to obtain the type of collateral required by other agreements they are trying to enter into. For example, if a contract requires a certain kind of fixed income security as collateral, a firm may borrow that security to collateralize the contract. Additionally, because dividends and substitute dividends are sometimes taxed differently, an investor for whom a substitute dividend is taxed lower than a dividend may loan its shares to an investor for whom dividends are taxed less than substitute dividends.200 While a security is on loan, the borrower is the legal owner of the security and receives any dividends, interest payments, and, in the case of equity security loans, holds the voting rights associated with the shares.201 Usually the terms of the loan stipulate that dividends and interest payments must be passed back to the beneficial owner in the form of substitute payments. Voting rights cannot be transferred and remain with the borrower until the loan is returned. 2. Current State of Transparency in Securities Lending As described above,202 data on securities lending are incomplete, and, may be unavailable to certain market participants. The available data are produced by commercial vendors. Data from commercial vendors are based on voluntary data contributions, largely from lending programs. Consequently, these data by and large only cover the Wholesale Market. Because the primary data providers to the commercial vendors are lending programs, which primarily lend to broker dealers in the Wholesale Market, the data have limited coverage of the Retail Market. Moreover, even in the Wholesale Market the data are incomplete as it is unlikely that the full universe of lending programs contribute all data to any given data provider. The voluntary nature of the submissions may mean that some data will be withheld. Market participants that choose not to disclose their data to the commercial providers likely do so because it is in their strategic interest 200 This is known as dividend arbitrage. While the IRS has passed regulations to try to combat this type of dividend arbitrage, there is evidence that it still occurs. See Peter N. Dixon, Corbin A. Fox & Eric K. Kelley, To Own or Not to Own: Stock Loans around Dividend Payments, 140 J. Fin. Econ. 539– 59 (2021). 201 See e.g., OFR Reference Guide, supra note 14, at 36. See also Viktoria Baklanova, Adam M. Copeland, and Rebecca McCaughrin, ‘‘Reference Guide to US Repo and Securities Lending Markets,’’ 740 FRB of New York Staff Report (2015). 202 See supra Part VI.A.2. E:\FR\FM\08DEP2.SGM 08DEP2 jspears on DSK121TN23PROD with PROPOSALS2 69832 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules not to do so, resulting in nonrandom omissions. These omissions likely insert bias into the commercial databases. Because the data are missing, the extent of the biases cannot be determined. As mentioned above, these data lack significant coverage of the Retail Market. This omission has been noted by industry participants who have stated that even with the commercial data they still feel unable to benchmark the performance of their lending programs because they have very little insight in to the retail portion of the lending market.203 Access to data provided by the commercial vendors is also restricted, as only certain entities can purchase the data. The Commission understands that these entities access the data using various means such as an application programming interface (API), spreadsheet add-in applications, file downloads, or directly from the distributor’s website. However, it is the Commission’s understanding that some large institutional investors who would like the data, such as hedge funds, cannot access it, even for a fee, because they do not provide lending data to the commercial vendors and distributing the data to them may discourage other market participants from contributing their data to the data vendors. Expanding access to the commercial data may discourage some participants from contributing data because securities loans are often entered into to facilitate various trading and hedging strategies. Consequently, if sophisticated traders such as hedge funds can access the data, then some market participants may be leery of contributing data to the commercial data vendors for fear of hedge funds learning about their trading or hedging strategies. Additionally, while some data vendors do allow non-lending market participants, such as academics and regulators, to access the data for a fee, they sometimes place usage restrictions on the data that make it unusable for regulatory and some academic functions. The Commission preliminary believes, based on conversations with industry participants and our staff’s use of some of the data, that the coverage and timeliness of the three biggest commercial data vendors are roughly comparable. Other firms provide a different approach to securities lending data by surveying fund managers about their borrowing experience, such as the 203 See, e.g., Bob Currie, The Power of Reinvention, Sec. Fin. Times, Aug. 31, 2021, at 20, available at https:// www.securitiesfinancetimes.com/sltimes/SFT_ issue_285.pdf (interviewing Matthew Chessum). VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 fees they paid to borrow, from which they provide estimates of lending fees.204 The current state of data availability, combined with the need for extensive search to facilitate security loans in the bilateral market,205 means that the largest and most centrally connected broker-dealers and lending programs likely have access to better information about the current state of the lending market than other participants, including their customers, the beneficial owners and end borrowers. This asymmetric information between those in the center of the lending market and those on the periphery may lead to inferior terms for those on the periphery, in the form of lower performance and less favorable prices for beneficial owners and end borrowers.206 Furthermore, because of the limited insight of existing commercial data into the retail market and the limits on access under the give-to-get model used by these data vendors, the commercially available data products for the securities lending market do not alleviate this information asymmetry. In addition to the specific problem of information asymmetry, the lack of comprehensive and widely available data on securities lending activity likely means that the prices at which securities loans take place are not efficient, relative to the hypothetical case where complete information about securities lending activity were widely available. Asymmetric information deters outsiders from entering the market, as they anticipate not being able to transact on the same terms. This limits both liquidity (because fewer participants enter to transact) and price discovery (because not all information enters prices). Moreover, even connected participants lack a complete picture of the lending market, implying that the prices that they quote may not 204 See Garango Antonio, Short Selling Activity and Future Returns: Evidence from FinTech Data (2020), at 1 and 3, available at https:// papers.ssrn.com/sol3/papers.cfm?abstract_ id=3775338. 205 See e.g., Adam C. Kolasinski, Adam C., Adam V. Reed, and Matthew C. Ringgenberg. ‘‘A multiple lender approach to understanding supply and search in the equity lending market. ‘‘The Journal of Finance 68, no. 2 (2013): 559–595. For a discussion of search costs in the securities lending market. 206 For example, broker-dealers acting on behalf of customers have an incentive to lend from their own inventory, even if lower cost borrowing options exists, because they keep the whole lending fee in this case. The lack of data available to the end borrower about the state of the lending market makes it difficult for the end borrower to monitor the performance of its broker-dealer for situations like this. PO 00000 Frm 00032 Fmt 4701 Sfmt 4702 be as efficient as they otherwise would be. 3. Characteristics of the Securities Lending Market The value of securities available to be loaned generally far exceeds the total value on loan. The OFR Pilot Survey documented that in 2015 only about 10% of the value of securities available for lending were on loan.207 However, for a specific security it is not always true that shares available to loan far exceeds shares on loan. For some securities, particularly highly shorted securities, it can be extremely difficult and expensive to find securities to borrow. Securities that are difficult to borrow are said to be ‘‘on special’’ and can have average lending fees many times higher than a security that is not on special. In addition to significant variation in fees across different securities, there can also be a wide range of fees charged to borrow the same security on the same day. Table [1] provides descriptive statistics illustrating these characteristics of the securities lending market. The data come from FIS (a/k/a Fidelity National Information Services, Inc.) and so reflect conditions in the wholesale lending market for the sample of lenders for which FIS obtains data. The data cover US equities on the same days as the OFR Pilot Study.208 Panel A of Table[1] provides the distribution of utilization rates (defined as the percent of shares currently on loan relative to the total number of shares available for lending).209 This panel highlights that utilization rates are highly positively 207 See Viktoria Baklanova, Cecilia Caglio, Frank M. Keane & R. Burt Porter, A Pilot Survey of Agent Securities Lending Activity (Off. of Fin. Research, Working Paper No. 16–08, 2016). Also, the number of shares available for loan must be interpreted carefully. It is the Commission’s preliminary understanding that some beneficial owners may report a supply of shares available that, if borrowed, would exceed the total amount of securities lending they are willing to engage in, so that not all shares reported as available could in fact be borrowed at once. Investment companies that engage in securities lending consistent with SEC staff’s current guidance generally limit securities lending to no more than one third of the value of their portfolio on loan at a given point in time. Some investment companies may set individual portfolio limits lower. See supra note 109. 208 We limited our sample to these dates for comparison to the OFR study. Additionally, while the data presented here is limited to equities, the proposal applies to all securities and the Commission preliminarily believes that given that there exists the same lack of transparency for fixed income loans and equity loans, the same economic structure likely applies to both fixed income and equities. 209 The statistics in Table 1 derive from data obtained from FIS for U.S. common stocks. The table includes data from the same period of time as the OFR Pilot Survey (October 9, 2015, November 10, 2015, and December 31, 2015). E:\FR\FM\08DEP2.SGM 08DEP2 skewed. For most stocks supply significantly outstrips demand with median utilization rates of approximately 12%. For stocks at the 90th percentile, utilization rates are near 70%, implying that an investor seeking to find shares of such a stock to borrow may have a difficult time doing so. Panel B of Table [1] shows that the lending fees paid for securities loans exhibit a wide range.210 Some stocks, i.e., those on special, can have fees many times higher than the median stock. Specifically, stocks at the 90th percentile of lending fees have an average lending fee of 7% per year while the median stock has a lending fee of about 0.6% per year. Even when loans involve the same stock, and on the same day, there can be a significant range in fees paid to borrow securities. Panel C of Table [1] highlights the range of fees charged for the same stock on the same day. The range in fees is defined as the difference in the maximum and minimum fees reported to FIS for loans of the same stock on that day. This range can be quite substantial. For the median stock the range is about 3 percentage points, or approximately five time the median fee charged for securities lending transactions. The level of average fees is affected by the overall demand for the security 210 This result is consistent with the academic literature See e.g., Peter N. Dixon, Corbin A. Fox, and Eric K. Kelley. ‘‘To Own or Not to Own: Stock Loans Around Dividend Payments,’’ Journal of Financial Economics, 140, 2 (2021), 539–559. Also consistent with the academic literature, average fees for each stock each day are computed by FIS as the share weighted average fee across all loans VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 PO 00000 Frm 00033 Fmt 4701 Sfmt 4725 69833 while the range of fees for the same security can be influenced by a number of characteristics: The Credit worthiness of the borrower, the type of collateral used, and the term of the loan. The range in fees may also represent asymmetric information between the parties to the loan negotiation, such that one party is able to charge a higher fee than would be possible if the other party were more aware of the current rates for the security to be loaned. It may also represent a general lack of price efficiency, as market participants operate without a clear view of the market as a whole. BILLING CODE 8011–01–P outstanding reported to FIS for a given stock on a given day. Stocks are sorted by average fee and percentiles are determined. E:\FR\FM\08DEP2.SGM 08DEP2 EP08DE21.006</GPH> jspears on DSK121TN23PROD with PROPOSALS2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules BILLING CODE 8011–01–C 4. Structure of the Securities Lending Market jspears on DSK121TN23PROD with PROPOSALS2 The securities lending market is made up of a market for borrowing and borrowing services, and a market for lending services. End borrowers can borrow securities either through their broker-dealer, or by themselves if they maintain their own relationships with lending programs. If they borrow through their broker-dealer, then they transact in the Retail Market. If they maintain their own relationships and borrow directly from lending programs, then they transact in the Wholesale Market. Beneficial owners can either supply shares to the lending market by contracting with a lending program, or they can run their own lending program and lend directly to entities such as large hedge funds with which they maintain relationships. In either case, such a transaction occurs in the Wholesale Market. Lenders can also be broker-dealers who lend to end borrowers either from their own account There is currently no common source that those seeking security loans can use to determine where to find shares available to lend, which is why brokerdealers rely on relationships with lending programs to secure loans. This situation has contributed to high search costs in this market.211 High search 211 Kolasinski, Reed & Ringgenberg, supra note 193. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 or from customer margin accounts. These lenders transact in the Retail Market. The following sections discuss the structure of the market for borrowing and borrowing services and the market for lending services. (a) Market for Borrowing and Borrowing Services A market participant wishing to borrow shares usually does so through its broker-dealer, who offers to find shares to borrow as part of its suite of services offered to customers. A brokerdealer may start by providing a security loan to its customer with shares from its own inventory or out of another customer’s margin account. The Commission understands that in order to facilitate the amount of borrowing customers wish to do, a broker-dealer will typically have to find external sources of shares. To that end, brokerdealers maintain relationships with various lending programs. Additionally, some large institutions, such as banks, credit unions, pension funds, and hedge funds, choose to costs imply that transactions cannot take place without a costly effort to find a favorable counterparty. The need for such costly effort can inhibit market efficiency. Broker-dealers possess some market power over their customers. Generally, broker-dealers assist investors in finding shares to borrow as part of a suite of services and switching costs to selecting a new broker dealer can be high. This PO 00000 Frm 00034 Fmt 4701 Sfmt 4702 maintain their own relationships with lending programs. These entities bypass broker-dealers to search for borrowable shares themselves. This option is not feasible for smaller institutions, who lack both the scale to make it cost effective, and the creditworthiness to be an acceptable counterparty for the lending programs in the absence of an intermediary, e.g., a broker-dealer. The OFR Pilot Survey estimated that there were approximately $1 trillion of shares on loan. The OFR primarily focuses on the Wholesale Market, consequently the overwhelming majority of borrowers were brokerdealers, who are generally arranging the loan on behalf of a customer (such as a hedge fund) that wishes to borrow shares, typically to deliver shares to settle a short transaction. Consequently the OFR Pilot Survey does not provide much insight into who the end borrowers are for the trades facilitated by broker-dealers. Figure [1] provides the fraction of total securities on loan by type of borrower based on the OFR Pilot Survey. relationship can make it difficult for investors to change broker-dealers if they underperform in one area because it is not just a securities lending relationship that would be changed, but the whole suite of broker-dealer services would be affected.212 Additionally, the 212 Some entities, such as some hedge funds, have multiple prime-brokers. For such institutions it would be less difficult to switch between brokerdealers if one is performing poorly as they could E:\FR\FM\08DEP2.SGM 08DEP2 EP08DE21.007</GPH> 69834 (b) Market for Lending Services The primary sources of shares to loan are long term investors such as investment firms, pension and endowment funds, governmental entities, and insurance companies. These entities generally make their shares available to lend either through a lending program run by a lending agent or by running their own lending program. Additionally, broker-dealers may lend shares from their own inventory, from fully paid shares, and from customer margin accounts. As described above, a beneficial owner seeking to lend shares will generally provide those shares to a lending agent, which runs a lending program. There are two broad categories of lending programs: Custodian banks and third-party lending programs. In the case of custodian banks, the lending program is generally offered as part of their general custodian services. Both types of lending programs will generally pool shares across accounts with which they have lending agreements to create a common pool of shares available to lend. As shares are lent out the revenue earned from the pool of shares is generally distributed across all accounts contributing shares to the pool of shares on loan on a prorata basis. In pooled lending programs the lending program generally splits the fees generated from lending with the beneficial owners. Based on the staff’s experience, the Commission preliminarily believes that the lending program will usually take about a third of the fees earned. In the case of custodian banks, the custodian bank may, rather than return the lending revenue directly to the beneficial owner, instead apply the beneficial owner’s portion of the lending revenue to other fees charged by the custodian bank for other services. Lending programs typically indemnify the beneficial owner from default by the borrower. This indemnity gives the lending program an incentive to ensure the creditworthiness of the borrower, and a lending program may assess higher fees to borrowers it deems as less creditworthy. Lastly, over the past two decades, auction-based security lending has become an alternative for lender- borrower interactions. In this setting, unlike the directed lending programs, positions of different beneficial owners are not pooled to cater to securityspecific demand from borrowers. Instead, after determining the desired income streams, the lender’s entire portfolio, or its segments, are offered via blind single-bid auctions. In some cases, a beneficial owner may choose to set up its own lending program. This course is more common among very large funds that have the resources to build up the expertise necessary to operate a lending program. The Commission preliminarily believes that the current relationship and network structure of lending programs and broker-dealers favors larger lending programs that have the resources to maintain relationships with more and larger lending broker-dealers. Thus, the Commission preliminarily believes that the market for lending services is likely dominated by a few large lending programs, including those run by the large custodian banks. The OFR Pilot Survey estimated that as of the latter part of 2015 there were approximately $9.5 trillion worth of shares available for lending.213 Figure [2] provides a breakout of the percent of shares available for lending provided by the various entities. redirect securities lending business to their top performing prime-broker. 213 Commercial vendors typically report a value for securities available to loan that is larger than what is reported in the OFR study. This difference is likely due to sample construction. The commercial vendors likely have a larger sample of lending programs to draw from, particularly the lending programs based outside of the United States. relationship nature of the lending market favors larger broker-dealers who can maintain high-volume relationships with more lending programs. Finally, the lack of data make it difficult for customers to evaluate the performance of broker-dealers. Customers as well as lenders thus rely on relationships and reputation, a situation that also leads to market power. jspears on DSK121TN23PROD with PROPOSALS2 69835 VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 PO 00000 Frm 00035 Fmt 4701 Sfmt 4725 E:\FR\FM\08DEP2.SGM 08DEP2 EP08DE21.008</GPH> Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 69836 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules 5. Market for Securities Lending Data and Analytics C. Economic Effects of the Proposed Rule The market to collect and disseminate securities lending data is an outgrowth of the market for securities lending market analytics.214 This market consists of a few established vendors that specialize in geographic areas (U.S. and non-U.S.) but seek to compete in all geographic areas. Most vendors collect the data to support the analysis business in which they provide data-based service to institutions and other lending programs. Others collect data through their facilitation of security loans. As such, the data vendor business is often an outgrowth of another business. The Commission preliminarily believes that the data provided by the various data vendors are largely comparable.215 However the entities providing data to the vendors are also their customers. This relationship limits the market power of the vendors with respect to their clients who provide data but results in the clients’ incentives limiting the competitiveness of the market.216 This results in the market being largely inaccessible for many entities that could use the data for their own benefit or the benefit of the market as a whole.217 The give-to-get model for securities lending data is a significant barrier to entry to any firm seeking to provide analytics services. Firms cannot provide analytics services without data, and the biggest three data vendors have established relationships with data contributors to collect data. Such data contributors have an incentive to also control who can access that data. Consequently, the Commission understands that the market for securities lending data and securities lending analytics is largely concentrated among the three biggest data vendors. 1. Effects of Increased Transparency in the Lending Market The Commission preliminarily believes that the primary impact of the proposed Rule would be to increase transparency in the securities lending market. The proposed Rule would improve transparency through increased completeness, accuracy, accessibility, and timeliness of securities lending data. Due to uncertainties about existing data discussed in IV.B.2, the Commission has some uncertainty in describing how much more complete, accurate, and timely the data provided by the proposal will be. However, the Commission preliminarily believes that the data provided by the proposal will improve upon existing data in each of these areas. While commercial data vendors collect data only from a segment of the market, the proposed Rule would seek to collect all security loan transactions. In addition, unlike the often voluntary data reporting of subscribers to commercial data vendors, the proposed Rule mandates reporting. As such, the data provided by the proposed Rule would be more comprehensive than the data offered by any individual data vendor. The data provided by the proposed Rule would encompass more data fields than those offered by individual existing commercial data vendors, improving the breadth of the available securities lending data. While both commercial data and the data provided by the proposal will provide information on fees (rebate rates) and the dollar value of the loan, the proposed rule requires reporting of additional information relevant to the loan including: The name of the platform or venue where the security loan transaction was executed, the security loan’s termination date, type of collateral, and borrower type. In addition, as described in Part III.B.1.b), the proposed Rule would collect detailed security loan modification data while existing commercially available data often fails to cover such information. Commercial data vendors restrict data access via usage restrictions. In contrast, the proposed Rule expands accessibility of the data by allowing all market participants to access data.218 While the Commission preliminarily believes that the lack of such usage restrictions would expand access, the Commission is uncertain as to whether the RNSA would develop systems to facilitate access with a degree of convenience 214 See the business model descriptions in IHS Markit’s comment letter responding to FINRA’s Regulatory Notice 21–19, available at https:// www.finra.org/sites/default/files/NoticeComment/ IHS%20Markit_Paul%20Wilson_21-19_ 9.30.2021%20-%20I HSM%20Cmt%20Ltr%20re%20FI NRA%20RFC%20Short%20Interest%20Position %20Reporting.pdf. 215 See Truong X. Duong, Zsuzsa R. Husza ´ r, Ruth SK Tan, and Weina Zhang. ‘‘The Information Value of Stock Lending Fees: Are Lenders Price Takers?’’ Review of Finance 21, no. 6 (2017): 2353–2377 (who provide a comparative analysis of the datasets of two of the main commercial data vendors and find very high correlations between the values presented in the different datasets). 216 See supra Part VI.A.2. 217 See supra Part VI.B.4.(b). VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 218 See PO 00000 Part VI.C.3 for estimated compliance costs. Frm 00036 Fmt 4701 Sfmt 4702 comparable to current data vendors. Nevertheless, the Commission preliminarily believes that the commercial vendors may process the data available through the RNSA to provide conveniently accessible comprehensive securities lending data, along with the other relevant products, to clients.219 Lastly, the proposed Rule would likely improve the timeliness of data available to the public. While the Commission understands that most of the major data vendors provide some data on transactions intraday, it is unclear if all do. These vendors make intraday data available in 15 minute increments. However it is not clear whether these data vendors require their data contributors to report transactions within 15 minutes thus the Commission is uncertain about the comprehensiveness of existing intraday data offerings.220 Consequently, the proposed Rule’s 15 minute reporting window will in the extreme case likely result in data that is at least as timely as some existing data and will likely be more timely. While the Proposal provides improvements in many areas as discussed above, and the Commission preliminarily believes that the Proposal will lead to an overall increase in transparency, the Commission preliminarily believes that in some areas, the Proposal will produce data that that may be less timely than existing commercial data. For example the Proposal requires the RNSA to report end of day quantities of securities available for lending and loans outstanding. These data will be made available to the public as soon as practicable, but not later than the next business day. The Commission preliminarily understands that the 219 The Commission understands that there are different ways that market participants currently access data as discussed in Part VI.B.1, and that these ways may be different from how market participants access the data created by the Proposal. However, the Commission preliminarily believes that how market participants access the data will likely have a significantly smaller impact on the economic effects of the rule relative to the effects of the content of the data, its accessibility, and its timeliness. The Commission preliminarily believes that market participants will relatively easily adapt to optimally use the data generated by the proposal. These adaptations will likely be relatively small given the similarity of the structure of the current data with the data generated by the Proposal. Thus the Commission’s discussion of economic effects in this section focus on the content of the data. 220 Fifteen-minute reporting frequency is currently implemented in corporate bond markets, where reporting is often handled manually. Hence, in any market with a degree of automation, e.g., security lending markets, a 15-minute reporting frequency would be unlikely to present technological challenges. E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 current practice by market participants is to provide preliminary statistics on the same day based on the intraday data collected by the vendors—potentially one day sooner than the Proposal— while the main data are disseminated one day later. Thus while the Commission preliminarily expects that the data for shares on loan and shares available to loan could be more comprehensive than existing commercial data, it may also be disseminated one day later than the preliminary statistics produced by the commercial vendors. Despite this potential reduction in the timeliness of one data element, increased transparency from the proposed Rule would have several notable economic effects. First, it reduces information asymmetries, which would be beneficial to some and costly to others. The improvements in the information available to various participants could affect revenues from borrowing securities, lending securities, intermediating loans and selling data. Third, the improvements in efficiency in the securities lending market would reduce the costs of short selling, potentially affecting markets more broadly. Finally, improvements in transparency in the securities lending market can assist financial institutions in managing collateral and their balance sheets more broadly. As discussed below, the Commission preliminarily believes that the data provided by the proposal may decrease the cost of lending. Consequently, some investors may see returns decrease due to more competitive fee pricing which may lower securities lending revenue for some lenders. On the other hand, other investors may see returns increase if the cost of borrowing securities decreases as it will facilitate investment, hedging, and potentially market making strategies. Many investors may experience both effects. In general, the Commission believes that reductions in transaction costs ultimately benefit investors. (a) Reduction in Information Asymmetry The Commission preliminarily believes that the transparency created by the proposed Rule would reduce information asymmetries between various market participants. Specifically, it would reduce the information asymmetries between dealers and end borrowers and between beneficial owners and lending programs, resulting in lower costs for end borrowers but reduced revenues for some broker-dealers and lending programs. In addition, beneficial owners VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 could benefit from better terms but could also experience reduced revenues from their lending activities. The Commission preliminarily believes that the transparency created by the proposed Rule would benefit end borrowers by reducing the information disadvantage they have with a broker when borrowing shares, leading to lower prices for end borrowers. Because most security loans are facilitated through broker-dealers, the data would allow end borrowers to determine the extent to which their broker-dealer is obtaining terms that are better, worse, or consistent with current market conditions for loans with similar characteristics. If a particular brokerdealer is consistently underperforming relative to the rest of the market, an investor would have the tools to identify such underperformance and address it with his or her broker dealer, or to find a new broker dealer.221 Such improvements are consistent with the experience in other markets. For example, the implementation of TRACE in the corporate bond markets improved transparency in that market and has been studied extensively. Research has shown that TRACE lowered both the average cost of transacting as well as the dispersion of transaction costs—largely by reducing the information asymmetries between customers and their broker-dealers.222 Additionally, recent research from Brazil has shown that improving securities lending transparency led to lower fees, increased liquidity, and increased price efficiency.223 221 The costs associated with switching broker dealers may be high, particularly for smaller borrowers. Switching broker-dealers may not be cost effective for these borrowers, however, the data would provide benchmark statistics that may enable smaller borrowers to select higher performing broker-dealers initially. 222 See e.g., Amy K. Edwards, Lawrence E. Harris, and Michael S. Piwowar. ‘‘Corporate Bond Market Transaction Costs and Transparency.’’ The Journal of Finance 62.3 (2007): 1421–1451, Michael Goldstein, Edith S. Hotchkiss, and Erik R. Sirri. ‘‘Transparency and Liquidity: A Controlled Experiment on Corporate Bonds.’’ The Review of Financial Studies 20.2 (2007): 235–273, Hendrik Bessembinder, William Maxwell, and Kumar Venkataraman. ‘‘Market Transparency, Liquidity Externalities, and Institutional Trading Costs in Corporate Bonds.’’ Journal of Financial Economics 82.2 (2006): 251–288, Michael A. Goldstein, and Edith S. Hotchkiss. ‘‘Dealer Behavior and the Trading of Newly issued Corporate Bonds.’’ AFA 2009 San Francisco meetings paper. 2007, and Hendrik Bessembinder and William Maxwell. ‘‘Markets: Transparency and the Corporate Bond Market.’’ Journal of economic perspectives 22.2 (2008): 217–234. 223 See Fa ´ bio Cereda, Fernando Chague, Rodrigo De-Losso, Alan Genaro, and Bruno Giovannetti. ‘‘Price transparency in OTC equity lending markets: Evidence from a loan fee benchmark.’’ Journal of Financial Economics (Forthcoming). PO 00000 Frm 00037 Fmt 4701 Sfmt 4702 69837 The Commission preliminarily believes that the proposed Rule would benefit beneficial owners by reducing their information disadvantage with respect to their lending programs. By allowing beneficial owners to more easily benchmark their lending programs through access to data on lending fees and other characteristics of recently transacted security loans, the proposed Rule would provide these lenders with an improved ability to determine the quality of the loans that their lending program executes on their behalf relative to other loans with similar characteristics and to discuss performance with their lending program, find a different lending program, or find a new route to market. Reduction in information asymmetry could result in reduced revenue for some broker-dealers and lending programs. Because end borrowers and beneficial owners would have more information about the state of the lending market, broker dealers and lending programs who consistently underperform the market may lose customers to better performing brokerdealers and lending programs, or begin offering better terms to their customers. Both possibilities represent a reduction in revenue for broker-dealers and lending programs. It is possible some broker-dealers and lending programs may choose to exit some or all of the market for lending services as a result of this loss of revenue.224 The loss of revenue will in part be a transfer to end borrowers, beneficial owners, better performing lending programs, and better performing broker-dealers. Lending programs may also experience reduced revenues through the change in terms offered by brokerdealers to their customers. If a given lending program has become skilled in cultivating relationships with brokerdealers willing currently to pay higher fees, then the increased competition that broker-dealers face as a result of the rule may lead to lower overall fees being charged for security loans—lowering the total lending revenue produced by securities lending.225 Lower overall lending fees may reduce the revenue earned by beneficial owners and would represent a partial transfer to the end borrowers who may receive better terms on average as a result of decreased information asymmetries.226 224 See infra Part VI.D. a discussion of the potential for brokerdealers to face increased competition, see supra Part VI.D.2. 226 See supra Part VI.B. 225 For E:\FR\FM\08DEP2.SGM 08DEP2 69838 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 (b) Improved Information for Participants in the Securities Lending Market The Commission preliminarily believes that the increased transparency that would result from the proposed Rule would increase the information about the state of and activity in the securities lending markets that is available to market participants generally. This would result in benefits in the form of increased trading profits for investors and beneficial owners, reduced costs of business for brokerdealers, improved performance and reduced costs for lending programs, improved price discovery in the securities lending market, and new business opportunities for data vendors. The increase in securities lending information would also result in costs in the form of lost revenue for current providers of commercial securities lending data. The Commission preliminarily believes the improved information that would result from the proposed Rule would lead to increased profits for certain investors by increasing their certainty regarding investment strategies that require borrowing securities. Prior to a short sale transaction, the end borrower will be able to get a better sense of the likely costs associated with such an investment strategy, using the information that would be provided under the proposed Rule. This increase in certainty regarding the costs of borrowing a security may decrease risk, and thereby increase risk-adjusted profits, of pursuing investment strategies that require short sales. The improved information access would lead to the benefit of improved price discovery in the security lending market itself. As all participants in the securities lending market obtain better data on that market, utilize the insights contained in the data, and then improve their decisions based on it, the price discovery process would improve. This would lead to more efficient prices for securities loans. Access to the information that would be made available by this proposal would benefit investors by potentially enabling them to make more informed decisions about whether to buy, hold, or sell a given security. Extant research has demonstrated that securities lending data has information relevant to the prices of the underlying security.227 227 See Truong X. Duong, Zsuzsa R. Husza ´ r, Ruth S. K. Tan & Weina Zhang, The Information Value of Stock Lending Fees: Are Lenders Price Takers? 21 Rev. Fin. 2353–77 (2017). This study shows that after controlling for the level of short selling, securities lending fees are predictive of future stock VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 This information may therefore enable more informed investment decisions by those investors who utilize the insights into the underlying market available from the lending market. More informed investment decisions facilitated by the proposal may also improve market stability by allowing investors to better manage risk. Furthermore, this improved information access may also improve price discovery in the market for the securities underlying the security loans. Because these data currently are not widely observed, 228 it is possible that the information about the underlying securities contained in security lending market data are not incorporated in those underlying securities’ prices. For example, existing research shows that lending fees themselves contain information that is relevant to prices.229 Additionally, a more accurate estimation of shares on loan can provide a clearer view into daily changes in short interest which can provide market participants with improved information about bearish sentiment. Consequently, by publicly disseminating securities lending data, the proposal may increase price efficiency by allowing a broader section of investors to learn from and trade based on signals obtained from the securities lending market. Additionally, an improved view of current lending market conditions for various securities could help inform beneficial owners in making decisions concerning which shares to make available for lending, potentially leading to more profitable lending. For instance, to the extent that beneficial owners do not currently have a way of determining which securities are in high demand, the new information may be able to alert them about securities with high lending fees, which would enable them to better optimize which shares in their portfolio they make available for lending.230 A clearer understanding of lending market conditions facilitated by the dissemination of new 10c–1 information returns with higher fees associated with lower future returns. These result imply that, all things equal, lenders charge higher fees to lend their shares when they have negative information about a company. And See Kaitlin Hendrix & Gavin Crabb, Borrowing Fees and Expected Stock Returns (2020), available at https://papers.ssrn.com/sol3/ papers.cfm?abstract_id=3726227. 228 See supra Part VI.B.2. 229 See, e.g., Duong, Husza ´ r, Tan, and Zhang supra note 215. 230 This decision can be important because beneficial owners that engage in securities lending activities consistent with the SEC staff’s current guidance limit the portion of their portfolios that can be on loan at any point in time. See supra note 109. This additional information may help a beneficial owner that is close to its program limit to optimally choose which shares to make available. PO 00000 Frm 00038 Fmt 4701 Sfmt 4702 may benefit broker-dealers by decreasing the cost incurred to obtain a locate in order to facilitate a short sale on behalf of a customer. The increased information that would be created by the proposed Rule would allow a broker-dealer to better ascertain current market conditions for security loans with certain characteristics prior to calling lending programs to get competing quotes. As described in Part VI.B.4., broker-dealers tend to find loans for their customers through their network of lending programs with which they have relationships, after they have exhausted their own inventory and customer margin accounts.231 The data from the proposed Rule would enable them to determine whether or not a quote from a lending program is competitive with greater ease. It is possible new broker-dealers may choose to enter this market as a result of this reduction in cost.232 The proposed Rule would benefit lending programs by providing a means by which they may improve the performance of their lending. New 10c– 1 data will provide lending programs with a source of more comprehensive data on the securities lending market than existing commercial data. With this data the lending programs would have an improved ability to determine prevailing market conditions as they compete to lend shares, which may improve their lending performance. The Commission preliminarily believes that the proposed Rule may cause a loss in revenue for the commercial vendors of securities lending data. The proposed Rule would create data that are similar to, but more comprehensive than the data currently available from private data vendors. Consequently, for many users the data provided by the proposal may supplant the data currently provided by the commercial vendors, and these users would then drop their subscriptions to the data vendors. The Commission preliminarily believes that a potential mitigating factor that could reduce the severity of this loss in revenue would be that commercial data vendors could offset some of the impact of lowered demand for their data by enhancing their related businesses 233 using the data in the proposed Rule. As discussed in Part VI.B.5, commercial data vendors also 231 See also supra Part VI.B.1 (discussing the role of broker-dealers in facilitating borrowing by customers). 232 See infra Part VI.D. 233 The proposal would also lower barriers to entry for new entrants desiring to offer analytics solutions for the equity lending market. This outcome is discussed in Part VI.D.2. E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 provide analytics to their customers, and would be able to support these analytics data with the data provided by the proposed Rule. Further, because the commercial vendors would not need to protect their relationship with their current data vendors, they could provide analytics to more market participants. However, as discussed below in Part VI.D.2, the data vendors may see increased competition for data analytics services as the barriers to entry for providing analytics services decline and new entrants compete to provide analytics services. This effect would lower what the data vendors can charge for analytics services. Additionally, to the extent that the commercial data vendors offer their customers other securities lending services, such as execution services, the proposal may enhance their other business lines by providing more comprehensive data to support other securities lending market services. The Commission recognizes that these benefits are somewhat limited because the data will not contain all information necessary to perfectly compare the fees on different loans, though the Commission preliminarily believes that the proposed Rule improves the ability to compare loans. For example, as discussed in Part IV.B.1, loan fees are determined by a variety of factors including counterparty creditworthiness—which is not captured in the proposal’s data. As such, two loans could appear to be similar in the information the proposed Rule would provide, but the counterparty risk differences could result in different fees. While recognizing this limitation, the Commission does not believe this limitation could be solved by adding information on counterparty risk. In particular, the Commission is unaware of reliable measures for counterparty risk that would be informative when attached to transaction information. However, the Commission requests comment on whether commenters believe any such measures exist. (c) Improved Market Function Through Effects on Short Selling As described in Parts VI.C.1.a) and VI.C.1.b), the Commission preliminarily believes that the proposed Rule would likely reduce the cost to borrow securities. This would have a number of effects through the impact on short selling. Because maintaining a short position requires borrowing the security, reducing the cost to borrow securities would reduce the cost to short sell. Reduced costs for short selling would result in benefits in the form of VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 enabling investors to profitably engage in more fundamental research, improving price discovery in securities markets, providing more discipline for corporate managers, and increasing liquidity in the stock and options markets. The reduced costs to short selling would benefit investors by enabling them to profitably engage in more fundamental research. Indeed, academic research indicates that when short selling costs diminish, investors will do more fundamental research because it is easier to trade on their information if they uncover negative information.234 This new fundamental research may in turn lead to better investment decisions for these investors. Additionally, by facilitating more short selling and more research, the proposed Rule would benefit market participants by improving price discovery. Academic research shows that short sellers, through their research, contribute to price efficiency by gathering and trading on relevant private information.235 Short sellers also serve as valuable monitors of management. Extant research has demonstrated that when management knows that short sellers may be studying their firms, they are less likely to engage in inappropriate and/or value-destroying behavior.236 Research also indicates that when short selling becomes easier the effectiveness of short sellers as monitors increases.237 Reducing the costs of short selling may also have the benefit of increasing the liquidity in the underlying securities. Short sellers are key contributors to liquidity in both equity 234 See Dixon, Fox & Kelly, supra note 200. It is not necessary that the information uncovered by this research be negative in nature for this to be true. The possibility of easier securities borrowing ensures that if the information happens to be negative, it will still be profitable. Thus, the risk of engaging in costly research decreases and more information, both positive and negative, is uncovered as a result. 235 See e.g. Jesse Blocher, Adam V. Reed, and Edward D. Van Wesep. ‘‘Connecting Two Markets: An Equilibrium Framework for Shorts, Longs, and Stock Loans.’’ Journal of Financial Economics 108, no. 2 (2013): 302–322 and Peter Dixon, Why Do Short Selling Bans Increase Adverse Selection and Decrease Price Efficiency? Review of Asset Pricing Studies 1(1), 122–168. 236 See e.g. Eric C. Chang, Tse-Chun Lin, and Xiaorong Ma. ‘‘Does Short-Selling Threat Discipline Managers in Mergers and Acquisitions Decisions?’’ Journal of Accounting and Economics 68, no. 1 (2019): 101223. See also Massimo Massa, Bohui Zhang, and Hong Zhang. ‘‘The Invisible Hand of Short Selling: Does Short Selling Discipline Earnings Management?’’ The Review of Financial Studies 28, no. 6 (2015): 1701–1736. 237 See e.g. Vivian W. Fang, Allen H. Huang, and Jonathan M. Karpoff. ‘‘Short Selling and Earnings Management: A Controlled Experiment.’’ The Journal of Finance 71, no. 3 (2016): 1251–1294. PO 00000 Frm 00039 Fmt 4701 Sfmt 4702 69839 and options markets and existing research shows that when short selling is constrained by tightness in the securities lending market, the stock market is less liquid.238Also, lower costs to short selling would have potential benefits in the options markets in the form of increased liquidity. As discussed in Part VI.B.1, securities lending affects liquidity in the options market through its impact on how easily options market makers can delta hedge. Less costly delta hedging may therefore increase liquidity in the options market. Also, since some price discovery occurs in the options market, to the extent that the rule increases the ease with which investors can trade in options, the proposal may further enhance price efficiency in the spot market.239 However, the proposal may somewhat diminish the value of collecting and trading on negative information. Specifically, the proposal would provide information that may provide a more timely view into short selling activity than currently exists. Increasing short selling transparency may make it more costly for short sellers to implement their positions as other market participants would more quickly learn about and react to short sellers’ activities. These dynamics decrease the profitability of short selling and may mitigate some of the benefits discussed in the preceding paragraphs. 240 238 See Dixon, Fox & Kelley, supra note 200. 18.6 (2014):, 18, 6, 2153–2195. 239 See, e.g., David Easley, Maureen O’Hara & Pulle Subrahmanya Srinivas, Option Volume and Stock Prices: Evidence on Where Informed Traders Trade, 53 J. Fin. 431–65 (1998); Jun Pan & Allen M. Poteshman, The Information in Option Volume for Future Stock Prices, 19 Rev. Fin. Stud. 871–908 (2006); Sophie Ni, Neil D. Pearson & Allen M. Poteshman, Stock Price Clustering on Option Expiration Dates, 78 J. Fin. Econ. 49–87 (2005). 240 While the literature examining the effects of short selling on financial markets is overwhelming positive, it is not uniformly so. Two theoretical studies posit that in certain circumstances short selling can lead to stock price manipulation with adverse effects for the firms whose stock prices are manipulated. See Markus K. Brunnermeier and Martin Oehmke, Predatory Short Selling Review of Finance, 18, 6 (2014), 2153–2195. See also Itay Goldstein and Alexander Guembel, Manipulation and the Allocational Role of Prices, The Review of Economic Studies,75, 1 (2008), 133–164. However, there has yet to be strong empirical evidence supporting these studies. One study shows using international empirical data that the markets that allow short selling tend to exhibit more negative skewness, implying an increase in risk for extremely negative return events. It is unclear whether this pattern indicates that short sellers exacerbate crash risk, or whether this pattern simply reflects short sellers quickly incorporate negative information into stock prices (a behavior that enhances price efficiency). See Arturo Bris, William N. Goetzmann, and Ning Zhu, Efficiency and the Bear: Short Sales and Markets around the E:\FR\FM\08DEP2.SGM Continued 08DEP2 69840 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules (d) Improved Financial Management for Financial Institutions As discussed in Part VI.B.1, financial institutions such as banks and brokerdealers use the securities lending market in order to manage collateral needed for other transactions. These entities can face the same opacity concerns as do end borrowers and beneficial owners, and thus an increase in market transparency may lead to improved ability to manage collateral. Also, as discussed in Part VI.B.1, banks borrow securities to manage their balance sheets, and the Commission expects that this too may become easier to do as a result of the proposed Rule, leading to the benefit of improved balance sheet management by banks. jspears on DSK121TN23PROD with PROPOSALS2 2. Regulatory Benefits The proposed Rule would improve upon current data sources by providing an RNSA (FINRA is the only RNSA) and the Commission access to securities lending information that identifies the parties to the loans, indicates when a broker-dealer loans its own securities to its customers, and indicates whether the purpose of such a loan was to close out a failure to deliver. Further, the improved access and comprehensiveness and reduced bias of the publicly available data would also accrue to FINRA and the Commission, as well as any other regulators using this data. This access would benefit investors by enhancing regulatory tools employed to promote fair and orderly securities transactions. In particular, benefits to investors could result from improved surveillance and enforcement uses, market reconstruction uses, and market research uses. (a) Surveillance and Enforcement Uses The party identities and purpose information could facilitate better surveillance by FINRA for regulatory compliance by its members, and could improve its ability to enforce such regulations. Additionally, FINRA would be able to notify another regulator as appropriate. For example, for FINRA, the information on whether the security is loaned from a broker-dealer’s securities inventory to its customer could assist FINRA in determining whether the broker-dealer was charging lending fees or paying rebates commensurate with the market. Thus, beneficial owners and end borrowers, who engage in securities lending transactions, would be protected against potential unfair World, The Journal of Finance, 62, 3 (2007), 1029– 1079. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 pricing of securities by broker-dealers. In addition, FINRA can use the data more generally to assist in its surveillance of FINRA Rules 4314, 4320, and 4330 regarding securities lending and short selling that primarily intend to reduce information asymmetry in the securities lending markets. For instance, the proposed Rule could help FINRA identify broker-dealers who tend to lend to or borrow from non-FINRA members to examine compliance with provisions of FINRA rules 4314 and 4330 that entail agreement, disclosure, and other requirements for this activity. In addition, the information on how much borrowing particular FINRA members engage in can assist FINRA in identifying which broker-dealers to examine for compliance with FINRA rule 4320—which contains short sale delivery requirements. These types of activities would better protect investors by helping to ensure that entities engaging in certain securities lending transactions are authorized to do so and are in compliance with applicable regulations. FINRA can also use the information to monitor when brokerdealers are building up risk, thereby protecting broker-dealers’ customers against potential instabilities. FINRA could use data on the identity and activity of its members to provide an early warning with regard to the behavior of its members during a short squeeze. Additionally, the securities lending data would facilitate the Commission’s oversight of compliance with Regulation SHO, such as the locate requirement and the close out requirement. In particular, the information on shares available and shares on loan would provide the Commission with a way to identify securities for which obtaining a locate would be more difficult because securities with little difference between shares available and shares on loan would be harder to locate and borrow. Coupled with other data, the Commission could identify short sale orders, short sellers, and their brokerdealers who are active in such securities, which would allow the Commission to more efficiently target broker-dealers for locate examinations. In addition, the information on whether the loan is being used to close out a fail to deliver could assist in examinations for Rule 204 compliance. Importantly, being able to estimate the securities lending revenues and costs of particular participants could help to fine tune disgorgement estimations. The 241 See Commission could also use the data to oversee broker-dealer compliance with Exchange Act rule 15c3–3.241 (b) Market Reconstruction Uses The data provided by the Proposal may help regulators reconstruct market events. For example, in January 2021 trading in so called ‘meme’ stocks led to many questions about securities lending being asked by law makers, investors, and the media as well as calls by some for increased regulation in some areas.242 The data provided by the proposal would allow for more detailed evaluations of such events in the future than was possible with existing data during January 2021. For example, January 2021 information on market participants’ securities lending activity would have provided FINRA and Commission staff a more timely and fulsome view of who was entering into new loans and who was no longer borrowing securities. This would have facilitated a deeper understanding of how the events were or were not impacting market participants. Such analysis can help determine if further regulatory intervention in markets is warranted, and can inform the nature of any intervention. (c) Market Research Uses Greater access and more comprehensive data on the securities lending market would improve the quality and expand the scope of research by both academics and regulators, which would better inform the regulators. In particular, improving the information available for their policy decisions would promote fair, orderly, and efficient markets and the protection of investors. For example, the data could facilitate research on the effectiveness of regulations such as Regulation SHO or FINRA Rules 4320 and 4330. Additionally, research conducted by academic researchers and market participants could also improve the value of public comment letters on Commission and FINRA proposals, which would also better inform policy decisions. 3. Direct Compliance Costs The Proposal will require various entities to enter into contracts and develop recording and reporting systems to comply with the proposal. This section provides estimates of those costs. 17 CFR 240.15c3–3. e.g., supra note 11. 242 See, PO 00000 Frm 00040 Fmt 4701 Sfmt 4702 E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 infrastructure to enable Lenders to provide the RNSA with the 10c–1 information and entering into written agreements with Lenders, as well as smaller costs associated with providing such information to the public. Table [2] also shows that Lenders and reporting agents would, in aggregate, incur roughly $375 million in initial costs and $140 million annually in ongoing costs to comply with the PO 00000 Frm 00041 Fmt 4701 Sfmt 4702 proposal. These costs come from costs to develop and maintain systems and from costs to enter into agreements. Tables [3] and [4] break these costs down by those incurred by Lenders and reporting agents based on the decision by Lenders to self-report or use a reporting agent. BILLING CODE 8011–01–P E:\FR\FM\08DEP2.SGM 08DEP2 EP08DE21.009</GPH> jspears on DSK121TN23PROD with PROPOSALS2 Table [2] shows that the Commission preliminary believes that the proposed requirements would impose a one-time cost of $3.50 million and ongoing expenses of $2.48 million on FINRA, the only RNSA. As discussed in Part V, the RNSA would incur these costs to develop systems to take and disseminate data required by the proposal. These include larger costs associated with creating and maintaining the 69841 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 BILLING CODE 8011–01–C Table [3] shows that Lenders and reporting agents would incur an aggregate of roughly $371 million in initial costs and $140 million annually in ongoing costs to develop and VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 maintain systems for reporting securities lending information. These include larger costs associated with developing and reconfiguring their current systems to capture the required PO 00000 Frm 00042 Fmt 4701 Sfmt 4702 data elements, as well as smaller costs associated with implementing changes and monitoring systems, most of which would be incurred by Self-Providing Lenders. E:\FR\FM\08DEP2.SGM 08DEP2 EP08DE21.010</GPH> 69842 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules 243 SRO rule filings are subject to notice, comment and Commission review pursuant to Section 19 of the Exchange Act. The SRO must demonstrate that proposed fees satisfy Exchange Act requirements, including that such proposed fees equitably allocate reasonable dues, fees and other charges among members and issuers and other persons using the SRO’s facilities. Further, such proposed fees cannot not impose any burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. When competitive forces do not constrain costs, such as with data products such as TRACE or the data provided by this Proposal, SROs can satisfy Exchange Act requirements by demonstrating that fees are reasonably related to costs. See infra Part V.E. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 shown in Table [2], the Commission expects the RNSA to incur ongoing costs of $2.48 million per year. Consequently, dividing the cost incurred by the RNSA by the 409 reporting entities to estimate the fees for the reporting entities results in an annual fee per reporting entity of approximately $6,000, or approximately $500 per month. This estimate represents a lower bound on the estimated fees levied by the RNSA as the RNSA likely would need to recoup some of the initial fixed costs associated with administering the data.244 4. Indirect Costs Given the fixed costs associated with establishing and maintaining systems to report data, or the costs associated with having another entity report data, the Commission preliminarily believes that the proposed Rule may cause some smaller lending programs and brokerdealers to exit the market for lending services, potentially leading to slightly more consolidation in the lending program and broker-dealer space.245 244 The numbers provided in this section are estimates. To the extent the Commission has overor underestimated burden hours or hourly costs, or the number of entities subject to each reporting requirement, the actual compliance costs may be higher or lower. However, the Commission views the estimates provided herein as best guess estimates based on the information currently available to the Commission. 245 See infra Part VI.D.2 (discussing possible entry and exit from the market for broker-dealer and lending program services). PO 00000 Frm 00043 Fmt 4701 Sfmt 4702 This may pose indirect costs on these broker-dealers’ and lending programs’ customers. Such costs would include the cost of switching to a new brokerdealer or lending program, the loss of potentially more suitable options for such services if the exiting entity was highly specialized, and potentially higher prices associated with reduced competitive pressures. In the discussion of competition in Part VI.D.2, the Commission further discusses the possibility of exit by broker-dealers and lending programs from the securities lending market, along with a mitigating factor which the Commission preliminarily believes would reduce the chance of such exits. 5. Risk of Circumvention Through Repurchase Agreements The Commission recognizes a risk that the comprehensiveness of the data, and hence the benefits that accrue due to the comprehensive nature of the data, would be diminished if the proposal induces market participants to substitute repurchase agreements (‘‘repo’’) for securities lending agreements.246 This substitution may 246 In a repurchase agreement, one party sells an asset, usually a Treasury security or other fixed income security, to another party with an agreement to repurchase the asset at a later date at a slightly higher price. Repo contracts are a common form of short-term corporate financing. In a repo, the party selling the security is similar to the lender in a securities lending agreement; the party purchasing the security is similar to a borrower in cash E:\FR\FM\08DEP2.SGM Continued 08DEP2 EP08DE21.011</GPH> jspears on DSK121TN23PROD with PROPOSALS2 Table [4] shows that Lenders and reporting agents would incur an aggregate of $3.56 million in initial costs and $0 annually in ongoing costs to enter into agreements for reporting securities lending information. These include costs associated with drafting, negotiating, and executing agreements with counterparties, most of which would be incurred by Lenders that would directly employ a reporting agent, but there would not be ongoing costs because once an agreement is signed, there would be no need to modify the written agreement or take additional action after it is executed. In addition to the above enumerated costs, the estimated 409 reporting entities would also be required to pay reporting fees to the RNSA. The Commission estimates these costs would be reasonably related to the cost that the RNSA would incur to administer and distribute the data.243 As 69843 69844 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 occur because a cash collateralized securities loan is economically very similar to a repo. While the Commission is unaware of short sales of equities currently being facilitated by repo contracts, the Commission understands that in fixed income it is fairly common for entities wishing to short sell a bond to facilitate that transaction with a repo instead of a securities loan. The Commission preliminarily believes that this risk varies across asset classes. In equities, the Commission preliminarily believes that the current risk of such migration may be minimal because of the lack of a well-developed repo market for equities. However, this risk may increase if the market for equity repos becomes more developed in the future.247 Among fixed income securities the risk is substantially greater due to a well-developed repo market for fixed income securities and the established practice of using both securities loans and repo transactions to facilitate short sales of fixed income securities. In all asset classes, if the Proposal leads to improvements in the functioning of the securities lending market, then the risk of migration may diminish as improved efficiency in the securities lending market may diminish the incentive to transfer activity to the relatively less developed equity repo market. Should this substitution affect a significant volume of securities lending, certain benefits and costs discussed above would decline. The less comprehensive data could reduce the extent to which the proposal reduces any bias in the data. For instance, collateralized securities lending. In both cases, the transaction is facilitated by cash transferring from the purchaser (borrower) to the seller (lender). In a securities loan, the cash is in the form of collateral while in a repo transaction the cash is payment for the security. In both cases, the purchaser or borrower becomes the legal owner of the security. To unwind the repurchase agreement or securities loan, cash transfers back to the purchaser in terms of the repurchase cost for a repo or in the form of returned collateral in a securities loan. Repos and securities loans differ in that repos typically are primarily used for short-term financing while securities loans typically are used to gain access to the security itself. Also loans generally allow the lender to recall the security on demand while repos do not. Additionally, the cash received by the seller of a repo is often not re-invested but is used to finance the operations of a company whereas the cash received in a securities loan is generally reinvested in low risk fixed income securities for the life of the loan. See e.g. Gary Gorton & Andrew Metrick, ‘‘Securitized Banking and the Run on Repo,’’ 104 J. Fin. Econ. 425 (2012). 247 The Commission preliminarily views it as unlikely that the equity repo market will develop to a similar extent as the fixed income repo market in the near future. Repos are primarily used for short term finance and due to the volatility of equities relative to fixed income securities, equities are a significantly riskier collateral type, limiting their appeal as ‘‘collateral’’ for short term finance. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 market participants who use the data to price securities loans would have a less accurate and potentially biased view of the market, which would limit the improvements to efficiency. Additionally, regulators using the data to determine lending market conditions at the time of, for example, a Reg SHO violation would be using less precise data—limiting the benefits of Reg SHO enforcement. On the other hand, such substitution could reduce compliance costs for some. Obviously, those substituting into repo would incur lower compliance costs from the proposed Rule, including one-time implementation costs if they replaced all securities lending with repo. Further, a significant substitution would reduce the ongoing costs of the RNSA because the RNSA would not have to collect and process as many transaction reports. D. Impact on Efficiency, Competition, and Capital Formation 1. Efficiency In the securities lending market, the availability of new 10c–1 information for market participants would lead to more efficient prices for securities loans.248 The reduction in asymmetric information in the market for lending programs and broker-dealers may also make those markets more efficient.249 Additionally, the Commission preliminary believes that the proposal may have secondary effects that could increase price efficiency in the stock and options market.250 Also, the increased ease with which banks and other financial institutions would be able to manage collateral and balance sheets as a result of the proposed Rule could lead to increased efficiency in their functioning and in those markets in which they play a role. 2. Competition The Commission preliminarily believes that the net impact of the proposal on competition is difficult to predict, in that some aspects would likely increase competition and some aspects would likely reduce competition. The markets in which competition would likely be impacted are the markets for broker-dealer services, lending programs and securities lending data vendors. The Commission preliminarily believes that the increased access to securities lending information would increase competition between lending programs, and between broker-dealers. The new 10c–1 information would 248 See supra Part VI.C.1.(b). supra Part VI.C.1.(a). 250 See supra Part VI.C.1.(c). 249 See PO 00000 Frm 00044 Fmt 4701 Sfmt 4702 allow all participants in the securities lending markets to observe data that could serve as benchmarks for performance of both lending programs and broker-dealers when they act on behalf of their respective customers in the market.251 This would permit better monitoring of the performance of these entities by their respective customers, and would likely force these entities to do more to match the performance of their competitors, to the extent that they do not already do so. Also, the increased ability for brokerdealers to monitor conditions in the lending market may encourage new broker-dealers to enter the market, further increasing competition for broker-dealer services. This same argument may be true for platforms that engage in securities lending. Improved data may allow for better evaluation of the performance of such platforms and may also lower barriers to entry for new platforms—enhancing competition among securities lending platforms. At the same time, the reduction in asymmetric information in the securities lending market that would result from the proposed Rule would diminish broker-dealer and lending program profits to the extent that it reduces their current information advantage over their customers.252 To this end, some brokerdealers and lending programs whose profitability primarily depends on economic inefficiencies associated with asymmetric information may exit the market for facilitating securities loans. The Commission also preliminarily believes that given the significant fixed costs of implementing the systems required by the proposed Rule for lending programs to report to an RNSA, smaller 253 lending programs and broker-dealers may be forced to consolidate or exit the lending market. The Commission preliminarily believes that a mitigating factor leading to less consolidation is that the current relationship and network structure of lending programs and broker dealers already favors larger lending programs and broker-dealers who have the resources to maintain relationships with more and larger securities lending counterparties. Consequently, the Commission preliminarily believes that the market for lending programs and broker-dealer security borrowing 251 See supra Part VI.C.1.(b). supra Part VI.C.1.(a). 253 The term ‘‘smaller’’ in the Economic Analysis does not mean that these are ‘‘small businesses’’ or ‘‘small entities’’ for purposes of the Regulatory Flexibility Act. See infra Part VII. Rather, smaller is meant to convey the size of these entities in relation to larger market participants engaged in securities lending transactions. 252 See E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules services is already likely dominated by larger lending programs and brokerdealers that the Commission does not believe would cease operating as a result of these fixed costs.254 The Commission preliminarily believes that the new information provided in the Rule would change the competitive landscape for analytics services by increasing opportunities for enhancing products and services that depend on securities lending data and lowering barriers to entry concerning who can provide those services. Increased competition in this space will likely lead to more options for consumers of analytics services, lower prices, and improved analytics services. The new information available through the RNSA as a result of this proposal would produce an alternative to the existing data vendor products. The Commission preliminarily believes that it would be hard for a vendor to offer value with data not derived from the proposed new information, since data not based on proposed new information would be unlikely to be as comprehensive.255 3. Capital Formation The Commission preliminarily believes that the impact of the proposal on capital formation would be small, but positive. In particular, improved price discovery in securities markets 256 and improved balance sheet management by financial institutions 257 could facilitate improvements in the provision of capital. In addition, the proposed Rule would reduce the costs of short selling. To the extent that this effect would enhance short selling activity, it may facilitate more effective discovery of negative information that in turn could lead to more efficient allocation of capital. E. Alternatives jspears on DSK121TN23PROD with PROPOSALS2 1. Broker-Dealer Reporting The Commission could require only broker-dealers, rather than all participants, to report securities lending transactions to the RNSA. The Commission preliminarily believes that this alternative would be less costly overall than the proposal. Specifically, 254 An additional mitigating factor in the case of broker-dealers is that the Commission views it as likely that smaller broker-dealers currently contract with larger broker-dealers to help facilitate securities loans for their customers, and thus, may be able to easily contract with these larger brokerdealers to also act as a reporting agent on their behalf. This dynamic may limit the potential for new entrants the broker-dealer space to compete with established broker dealers. 255 See supra Part VI.B.2 256 See supra Parts VI.C.1.(b), VI.C.1.(c). 257 See supra Part VI.C.1.(d). VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 non-broker-dealer Lenders would not incur any of the costs of reporting. As a result, fewer entities would incur costs. Further, most broker-dealers already have connections to FINRA so the overall implementation costs associated with connecting to FINRA would be lower. In addition, because most broker dealers currently have relationships with FINRA, the Commission preliminarily believes that this alternative could be implemented sooner, allowing the market and market participants to internalize the benefits of securities lending transparency sooner. However, the reported transaction data would not provide a comprehensive view into the securities lending market. Even though brokerdealer activity makes up a significant majority of securities lending transactions, the alternative would exclude other significant players such as lending programs. Thus, the alternative would obscure a large swath of the Wholesale Market, making it more difficult for lending institutions, for example, to benefit from securities lending transparency because the included data would provide a less relevant benchmark. Requiring only broker dealers to report data could also create a competitive advantage for non-broker dealer entities that engage in securities lending. Such entities would not be required to report their transactions and thus would have lower costs. They would also be in a position to attract business from entities seeking to keep their transactions out of the public view, further tilting the economic landscape in their favor. This effect both could create an uneven playing field for entities engaged in the securities lending market and could also further dilute the value of the data provided by the proposed Rule, diminishing the benefits of the rule. 2. Publicly Releasing the Information in 10c–1(d) As an alternative to the proposal, the Commission could consider publicly disclosing the information in 10c–1(d), namely available identifiers for each party to the transaction, whether the security is loaned from a broker’s or dealer’s securities inventory to a customer of such broker or dealer, and if known whether the loan is being used to close out a fail to deliver. Information on who the parties to the transaction are and whether a broker or dealer is lending to its own customer could refine the context around the data elements in 10c–1(b) and (c), which are proposed to be public. Such refinement PO 00000 Frm 00045 Fmt 4701 Sfmt 4702 69845 would be likely to alter trading strategies, which could have both positive and negative effects on market quality. For example, this information could allow the market to identify the positions of large short sellers. Empirical studies support the idea that short sellers are informed, suggesting that additional information about short selling could help investors better value securities.258 Professional traders, might seek to profit by developing trading strategies based on signals from the identities of those borrowing securities, particularly those borrowing a high volume. In addition, the information could be used to reduce the search costs in the securities lending market. However, the information on whether the security loan is being used to close out a fail to deliver may be of little use to anyone other than regulators. At this time, the Commission is unaware of potential non-regulatory uses of such information that would be beneficial to the market. The alternative would result in higher costs to the RNSA, to those who access the data, and to participants in the securities lending market. The RNSA would incur higher costs to release the greater volume of data and those who access the data would incur higher costs to import and process the data. Trading strategies incorporating the identities of borrowers and lenders could negatively impact those borrowers and lenders in ways that could ultimately degrade price efficiency. In particular, identifying large short sellers could facilitate ‘‘copycat strategies’’ that seek to profit by copying the activity of others believed to have better information or by trading ahead of them.259 If it facilitates such trading strategies, releasing the identities of short sellers could act as a constraint on fundamental short selling, reducing the incentives to conduct fundamental research.260 Less fundamental research 258 See, e.g., Joseph E. Engleberg, Adam V. Reed & Matthew C. Ringgenberg, How are Shorts Informed?: Short Sellers, News, and Information Processing, 105 J. Fin. Econ. 260–78 (2012); David E. Rapach, Matthew C. Ringgenberg & Guofu Zhou, Short Interest and Aggregate Stock Returns, 121 J. Fin. Econ. 46–65 (2016). However, one academic study finds that prices react to short sales even when short sales are not transparent to the market. See Michael J. Aitken, Alex Frino, Michael S. McCorry & Peter L. Swan, Short Sales Are Almost Instantaneously Bad News: Evidence from the Australian Stock Exchange, 53(6) J. Fin. 2205–2223 (Dec. 1998). 259 See Congressional Study, ‘‘Short Sale Position and Transaction Reporting,’’ at available at https:// www.sec.gov/files/short-sale-position-andtransaction-reporting%2C0.pdf at 52 and 53. 260 See Sanford J. Grossman & Joseph E. Stiglitz, On the Impossibility of Informationally Efficient Markets, 70(2) Am. Econ. Rev. 393–408 (1980). E:\FR\FM\08DEP2.SGM 08DEP2 69846 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 could potentially result in over- or under-pricing, because prices would not incorporate information short sellers would have otherwise collected and traded on. Revealing the identities of participants and when they are borrowing to close failures to deliver in the securities lending market could also result in pressure on lenders to recall loans or negative campaigns against short sellers. 3. Additional Information in the Reported or Disseminated Information The Commission could consider alternatives that would add additional fields to the reported information or to require the RNSA to compute derived fields for public dissemination. For example, the Commission could require the RNSA to calculate and disseminate the utilization rate calculated from the shares on loan and the shares available to loan. The utilization rate is a commonly used measure for determining the availability of shares to borrow, which could be useful for market participants in complying with the locate requirement of regulation SHO and for broker-dealer back offices in planning their borrowing activity. However, because shares on loan and shares available are an end-of-day measure, to the alternative would not provide benefits from real time utilization rates. Further, individual users may prefer to calculate utilization rates themselves with bespoke adjustments. The calculation would require additional processing resources of the RNSA. While the alternative would require the RNSA to calculate and disseminate utilization rate, the proposal does not preclude the RNSA from doing so if users demand the measure. The Commission could add required data elements to 10c–1(e) to indicate the extent to which volume of shares available to lend that comes from sources that are less accessible to acquire or that could be restricted. Securities, such as securities owned by broker-dealer customers who have agreed to participate in a fully paid lending program, and the securities in broker-dealers’ margin customers’ accounts, may be readily available to the broker-dealer managing the accounts, but may not be available for others. Further, because beneficial owners that engage in securities lending consistent with the SEC staff’s current guidance may restrict the portion of their portfolios that can be on loan at any point in time,261 they, or their lending agents, may report more shares available 261 See supra note 109. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 to lend than they could lend out all at once, particularly when they are far from their limit. Therefore, these two additional fields can facilitate estimating refined measures of the utilization rate that exclude shares that market participants might not be able to reach. As such, these alternative measures could improve the accuracy of the data provided by 10c–1(e). On the other hand, these additional fields would increase the complexity and the costs of reporting, processing and disseminating the securities lending information. The Commission could also include in 10c–1(d) information on whether, if the lender is a broker or dealer, the securities are borrowed from customers who have agreed to participate in fully paid lending programs or from securities owned in its margin customers’ accounts. Such information would improve the efficiency of surveillance of, for example, compliance with Rule 15c3–3(b)(3) related to providing the lender collateral to secure the loans of securities when brokerdealers lend shares from fully paid or excess margin securities from customers. As such, this information would help protect investors. Including this data would likely increase initial costs associated with the rule for brokerdealers as it would require expanding systems beyond the current proposal to capture the data. However, the Commission preliminarily believes that broker-dealers likely already have ready access to this data, thus the Commission does not expect that including such data would significantly affect broker-dealer operations after the initial set-up costs. The Commission could also require entities to report in their lending transactions whether a given loan was transacted on their own behalf, or on behalf of a customer. That is, is the loan transacted on a principal or agent basis? This alternative would allow FINRA and the Commission to oversee compliance with various regulations. This data could allow examiners at the Commission and FINRA to review transactions that occur by an entity on a principal and agent basis to look for systematically different terms between the two different types of transactions by the same broker dealer. Such differences may flag to regulators that broker-dealers are not fulfilling their obligations and may be in violation of existing rules. Requiring such data would add complexity and additional cost to the rule. However, these costs may be minimal for broker-dealers, who are FINRA members, as the Commission understands that FINRA members already collect much of this PO 00000 Frm 00046 Fmt 4701 Sfmt 4702 information.262 However, the Commission is unaware of any regulation or rule requiring non-FINRA members to collect this information, consequently this alternative may significantly increase costs for nonFINRA members who would be required to build out systems to collect and report such information. 4. Alternative Timeframes for Reporting or Dissemination The Commission could consider alternative delays for reporting or disseminating the securities lending transaction information. For example, the Commission could require reporting timeframes of less than fifteen minutes as well as more than fifteen minutes. The Commission also could require reporting transactions at the end of the day only. Further, the Commission could require the RNSA to delay the dissemination of transaction reports instead of disseminating as soon as practicable. Because trades cannot be disseminated until after they are reported, alternative reporting timeframes reflect different tradeoffs between the value of disseminating security loan terms close to the time of a trade and the cost of reporting trades at shorter time horizons. Alternatives requiring reporting timeframes of less than 15 minutes may be more costly to implement. Currently, 15 minute reporting is used in various settings. For instance, TRACE requires reporting trades at the 15 minute time horizon, and some of the data vendors release data at 15 minute intervals. These facts suggest that the industry has experience with reporting information to regulators and data vendors at 15 minute horizons. Consequently, the Commission preliminarily expects that deviating from this time horizon to require a shorter timeframe may significantly increase costs associated with complying with the rule. In contrast, alternatives allowing a longer time to report would also delay the dissemination, which could reduce the price discovery and price efficiency benefits associated with an increase in transparency if securities lending transactions occur frequently enough. Additionally, the Commission preliminarily believes that longer reporting horizons would likely not decrease the cost substantially due to the automated nature of the securities lending transactions and the need to build out systems regardless. Alternative dissemination timeframes reflect different tradeoffs between price 262 See, E:\FR\FM\08DEP2.SGM e.g., FINRA Rule 4314. 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 discovery and price efficiency benefits on one hand and harmful information leakage on the other, as well as the cost of reporting at a faster or slower horizon. An alternative dissemination timeline could require a later dissemination time for large trades. However, intermediaries in the securities lending market do not generally take on risk the way dealers do in other markets where dealers have argued for delays, such as the corporate bond market.263 For instance, intermediaries in the corporate bond market frequently hold large inventories and buy, sell, and facilitate trades out of their own inventory—assuming significant inventory risk in the process. This is not true in the securities lending market where broker-dealers are more likely to facilitate transactions between lending programs and end borrowers. The current Proposal requires the RNSA to disseminate transaction-level information as soon as practicable. Alternatively, the Commission could limit the proposal by requiring the RNSA to aggregate the transaction–level information prior to disseminating. Specifically, the RNSA could aggregate the data in items identified in 10c–1(b) and (c) and make it public at the end of the day it is reported. Given the need to build out systems regardless and the automated nature of securities lending transactions, the Commission preliminarily believes that this alternative would likely be nearly as costly to implement as the current proposal for entities reporting data to the RNSA. It would, however, likely lower costs to the RNSA as they would not be required to build out systems capable of intraday dissemination. Additionally, daily aggregate data would not provide the same price discovery benefits as the current proposal. Specifically, market participants could not use intraday trends in the securities lending market to make investment decisions. Also, without a comprehensive transaction tape, it would be more difficult for market participants to study and understand pricing dynamics in the securities lending market. The 263 In the corporate fixed income market, some participants argued for the delay in the dissemination of information on large trades. Specifically, they argue that immediate dissemination coupled with 15-minute reporting times harms institutional investors because dealers are either less willing to trade with them or dealers charge them higher markups to offset the costs of offsetting large transactions See, e.g., comments from JPMorgan & Co. on the Fixed Income Market Structure Advisory Committee (FIMSAC), available at https://www.sec.gov/comments/265-30/265303974442-167144.pdf. The Commission notes that we are unaware of any empirical data in support of these arguments. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 alternative would also make it more difficult for end investors to determine if the terms that their broker-dealer offers are consistent with current market prices—rendering it more difficult for investors to evaluate the performance of their broker-dealer. Similarly, without transaction data beneficial owners would be hampered in their ability to determine whether the terms for loans secured by their lending agents were consistent with market conditions for loans with similar characteristics— rendering it more difficult for beneficial owners to evaluate the performance of their lending agents—reducing the benefits of improved competition. The lack of a lending tape may also hinder broker-dealers from determining if the terms being offered by a lending agent for a loan are consistent with market conditions for similar loans. The diminished transparency of this alternative relative to the Proposal may also lead to less improvement in the efficiency of the securities lending market leading to fewer short selling benefits described above in Part IV.C.1.(c) This alternative would also hamper research into the securities lending market by academics, regulators, and other market participants as they would be prevented from performing intraday and event study analysis on the securities lending market. The Commission could also require alternative time frames for reporting the data required in paragraph (e) of the proposed rule regarding shares on loan and shares available to the RNSA. The Commission preliminarily believes that time horizons longer than what is required in the current proposal would diminish the usefulness of the data by making it less timely. Additionally, due to the automated nature of the industry, the Commission preliminarily does not believe that longer reporting horizons would significantly decrease the cost of compliance. Moreover the Commission could require reporting at time horizons that are shorter than what is currently required in the proposal. Such data may be somewhat more timely, but the Commission preliminarily believes that shorter requirements would be a deviation from current industry standard and thus may significantly increase the cost of implementation. Finally, the Commission could require the RNSA to distribute the collected data required in paragraph (c) at different horizons, such as by the following morning instead of by the end of the following day. This alternative would allow market participants to benefit from the data a business day earlier than currently proposed. Given PO 00000 Frm 00047 Fmt 4701 Sfmt 4702 69847 the automated nature of the data, this alternative may not be significantly costlier than the current proposal, although it would not allow the RNSA to process the data during regular business hours potentially limiting the amount of data validation the RNSA could perform prior to distributing the data. 5. Allow an RNSA To Charge Fees To Distribute the Data The Commission could consider allowing the RNSA to charge fees to access the securities lending data, similar to the model currently employed with TRACE data. The effect on costs of this alternative would follow from allowing the RNSA an additional way to obtain revenue from providing new 10c–1 information. This additional revenue could help pay for costs to collect and disseminate the data. It may also allow the RNSA to reduce the reporting fees it would charge under the proposed Rule. As discussed in Part VI.C.3, the Commission preliminarily believes that fees levied by the RNSA would be reasonably related to cost.264 Thus, the estimates provided in that section could be either entirely applied to entities purchasing data, or they could be split between providers and purchasers of data. In the case that fees were applied primarily to subscribers of data, and if all 409 entities providing data were the only entities to subscribe to the data, then as discussed in Part VI.C.3, estimated annual fees to subscribe to the data would be approximately $6,000 per year. This estimate would go down if the RNSA chose to split the fees between data subscribers and data providers. It would also go down if more than the 409 estimated entities providing data chose to subscribe the data. This estimate is similar to the fees currently charged for a TRACE enterprise license. As discussed in part VI.C.1, TRACE has been successful in mitigating inefficiencies in the corporate bond market. Consequently, given the experience with TRACE and the expectation that most of the entities likely in a position to effect the securities lending market or to use information from the securities lending market to affect other markets would subscribe to the data even if there was a cost to subscribing, the Commission preliminarily believes that allowing the RNSA to charge for data would likely still result in significant benefits to the securities lending market. This alternative would also reduce benefits relative to the proposed Rule, in 264 See E:\FR\FM\08DEP2.SGM infra note 243. 08DEP2 69848 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules that charging for access to the new 10c– 1 information may reduce the number of market participants who access it, to the extent that any market participant would find such fees cost-prohibitive. A reduction in access to the data may reduce many of the benefits that would otherwise accrue to the proposed Rule, such as increased price discovery and security market efficiency. The Commission preliminarily believes that many of the market participants providing data to the RNSA under the proposed Rule would also be consumers of the data; for these market participants it is unclear how much difference this shift in fees would make. jspears on DSK121TN23PROD with PROPOSALS2 6. Longer Holding Period Requirement The Commission could also require the RNSA to retain and make publicly available the data for a period longer than the 5 years specified—e.g., 10 or 20 years. This alternative would ensure that the data are available to regulators and market participants at longer horizons. For instance, if regulators or market participants wanted to evaluate how the lending market reacts to different market events, such as across the business cycle, then five years of data may not be sufficient. The average business cycle is 3–5 years, and so to study the dynamics of the lending market across the business cycle would require at least 10 years, if not more, of data. Additionally, because there is likely persistence in conditions in the securities lending market a five year time horizon may not be sufficient for certain statistical analyses.265 Improved understanding of the dynamics of the securities lending market across various market conditions may benefit both regulators and investors by providing more precise information with which to make regulatory and investment decisions—enhancing many of the benefits described in Parts VI.C.1 and VI.C.2. For example, longer term data may enable superior statistical analysis by market participants of the dynamics of the securities lending market in various environments, which in turn may lead to better investment decisions and thus improved market performance. Additionally, the Commission could use longer term data to provide more precise estimates of damages in, for example Reg SHO violations or violations of Exchange Act rule 15c3–3 (Customer 265 Persistence in conditions implies that observations are not independent. When this is the case even relatively large datasets may lack statistical power for some modeling applications, such as factor models. The solution in such cases is to significantly increase the sample size. VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 Protection Rule), to calculate disgorgement. The Commission preliminarily believes that the alternative would impose additional costs on the RNSA not required by the current proposal in terms of storing and maintaining historical data. However, since the current proposal already requires the RNSA to build systems to collect and disseminate 5-years of data, these costs would likely be relatively small because the Commission understands that the cost of storing data is relatively small compared to the cost of producing and maintaining the systems needed to collect, process, and disseminate the data. While the current proposal allows FINRA to destroy the data after 5-years, the Commission preliminarily believes that it is unlikely that FINRA would do so. This is because the cost of retaining the data is likely relatively small and may have commercial value. For instance, while the proposal requires the most recent 5-years of data to be made publicly available free of charge, there is no requirement to make data beyond 5-years available to the public free of charge. Consequently an RNSA could determine to offset some of the cost of implementing the proposal through fees levied on historical data. If this is the case, and the RNSA chooses to keep the historical data under the current proposal, then the cost difference to an RNSA between the current proposal and this alternative would likely be minimal given that this alternative would require the RNSA to comply with a requirement that they may already choose to do on their own. 7. Report to the Commission Rather Than to an RNSA The Commission could propose to have Lenders disclose the 10c–1 information directly to the Commission—for example, through EDGAR, rather than to an RNSA. Such an alternative could alter who incurs costs and would likely increase overall costs relative to the proposal because, for example, many entities who possess reporting capabilities to an RNSA, e.g., members of FINRA, would need to establish comparable reporting relationships with the Commission. In particular, many broker-dealers already have connectivity to FINRA systems that support the kind of intraday submission process required for providing new 10c–1 information.266 Establishing similar connectivity with EDGAR may require additional effort for Lenders compared to the proposal. 266 For PO 00000 example, FINRA’s TRACE system. Frm 00048 Fmt 4701 Sfmt 4702 Finally, FINRA has expertise creating repositories similar to that called for in the proposal, suggesting that the proposal would likely be more efficient than the alternative. The Commission is uncertain of how the benefits of this alternative would compare to the benefits of the proposal. While the alternative would not alter the content of the data in the proposal, the accessibility and timeliness depend on how the Commission would develop the functionality for distributing the data. In particular, we cannot at this time assess whether the alternative would result in more or less timely or accessible data or if the differences would be meaningful. For example, data obtained from the Commission could be less accessible if the Commission could not develop functionality allowing market participants to access the data with the same ease as the RNSA could do given the RNSA has more experience collecting and disseminating similar data (e.g., TRACE). Additionally, the regulatory benefits of the alternative relative to the proposal would depend on whether the Commission chooses to grant SROs direct access to the confidential data. If the Commission chose to do so, then the regulatory benefits of this alternative would be the same as the current proposal. If the Commission chose not to grant SROs access to the confidential data, then the regulatory benefits would decline significantly as many of the regulatory benefits, such as improved monitoring of broker-dealers for compliance with various legal requirements, require access to the confidential data. Thus, the regulatory benefits of the rule would be severely diminished. 8. Report Through an NMS Plan Because the nature of securities lending data is similar to the transaction data governed by the NMS data plans, such as the CT Plan,267 the Commission could propose to require a new NMS Plan to set up a reporting and dissemination process that mirrors the CT Plan. Specifically, reporting entities could report the data to a Transaction Reporting Facility operated by an SRO. The data would then be purchased by competing consolidators 268 to 267 Joint Industry Plan; Order Approving, as Modified, a National Market System Plan Regarding Consolidated Equity Market Data, Exchange Act Rel. No. 92586, 86 FR 44142 (Aug. 11, 2021) available at: https://www.sec.gov/rules/sro/nms/ 2021/34-92586.pdf, appeal filed, Nasdaq Stock Market LLC v. SEC, No. 21–1167 (D.C. Cir. Aug. 9, 2021). 268 A competing consolidator is a ‘‘securities information processor required to be registered pursuant to [17 CFR] 242.614 (Rule 614) or a E:\FR\FM\08DEP2.SGM 08DEP2 jspears on DSK121TN23PROD with PROPOSALS2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules consolidate and distribute for a fee. The NMS Plan would set the fee for competing consolidators as well as for those who purchase and consolidate the data for internal use. This alternative could provide for the public dissemination of securities lending transaction information without the reliance on the RNSA alone. It could also leverage the processes of the NMS Plan, but would require compliance costs by one or more SROs who choose to set up and operate a Transaction Reporting Facility. Fees for reporting transactions could offset such compliance costs. While we can’t be sure how these fees would compare to the fees paid under the proposal, the alternative provides for the opportunity for a reporting facility that could be more efficient than that of an RNSA. This alternative is more likely than the proposal to improve the competitiveness of the market for securities lending data in ways that could be less costly to incumbents than the proposal would be. Specifically, the alternative would not result in a situation in which existing data vendors had to compete with an RNSA that had superior data access. Instead, the current data vendors, who all have experience collecting and disseminating such information, could compete as competing consolidators for equity lending data and have the same access to the supply of consolidated data as any other competing consolidator, including an RNSA or SRO. It would also reduce the barriers to entry in selling securities lending data because all new entrants would have access to the same data for consolidation and distribution. While the alternative is unlikely to affect the content or timeliness of securities lending data relative to the proposal, the improvements in access to securities lending data under this alternative could be less than the improvements to access under the proposal. As in the proposal, the data vendors would not be as dependent on market participants providing data, consequently these market participants could not exert power over the data vendors to limit access. However, under this alternative, both the new NMS Plan and the competing consolidators under that Plan would be able to charge for access to the data, whereas under the proposal, the RNSA is not permitted to charge for access. Thus, the cost of data national securities exchange or national securities association that receives information with respect to quotations for and transactions in NMS stocks and generates a consolidated market data product for dissemination to any person.’’ 17 CFR 242.600(b)(16). VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 access under the alternative would be greater. This could mean some market participants, who could potentially have access to data under the proposal, could determine it was not cost-effective for them to purchase securities lending data under the alternative. F. Request for Comment The Commission is sensitive to the potential economic effects, including costs and benefits, of the proposed Rule. The Commission has identified certain costs and benefits associated with the proposal and requests comment on all aspects of its preliminary economic analysis, including with respect to the specific questions below. The Commission encourages commenters to identify, discuss, analyze, and supply relevant data, information, or statistics regarding any such costs or benefits. 76. Do you agree with the Commission’s assessment of the market failures? Are there additional market failures or other economic justifications related to these issues that are not described in this release? 77. Do you believe the Commission has sufficiently described the baseline for its economic analysis concerning the securities lending market, its characteristics and structure? Are there additional relevant market features or participants that are not discussed in the baseline which relate to this release? If so, please describe. Do you agree with the Commission’s description of the competitive landscape of the securities lending market? Please explain. 78. Do you agree that the securities lending market is opaque? If not, what sources of insight into the securities lending market activity do you believe provide transparency in the lending market? How do those sources compare to the transparency that would be provided by the proposed Rule? 79. Do you agree with the Commission’s assessment of the causes and effects of opacity in the securities lending market? Why or why not? What are the consequences of the current level of opacity in the securities lending market? Please provide details. Does opacity in the lending market inhibit some market participants from engaging in fundamental research? Why or why not? To what extent does the opacity in the lending market contribute to the wide variation in rebate rates or lending fees? Do you agree that the opacity results in high search costs or other costs in the securities lending market? Do you agree that this inhibits the securities lending market’s efficiency? Why or why not? 80. Do you believe the Commission has adequately described the baseline PO 00000 Frm 00049 Fmt 4701 Sfmt 4702 69849 for the market for securities lending data and analytics? Are there elements of this market that are relevant to the proposed Rule that are not discussed in the release? If so, please describe what information you believe is missing. Do you agree that the data provision services are an outgrowth of other businesses such as the analytics business? Please explain. 81. Do you agree with the Commission’s assessment that the proposed Rule will improve transparency of the securities lending market? Why, or why not? Do you agree that the proposed Rule would increase transparency by providing information about the securities lending market that is more complete than current information? Do you agree that the increased completeness would improve the accuracy of information on securities lending? Do you agree that the proposed Rule would result in information that is more accessible than current information? Do you agree that the proposed Rule would result in loanlevel information that is at least as timely as current information? Would the information on shares on loan and shares available be more or less timely than current information? Please explain. 82. Do you agree with the Commission’s assessment of the economic effects of the proposed rule, including the effects from improvements to transparency, the regulatory benefits, the compliance costs, and the indirect effects? Why or why not? If not, please provide the details that you believe are missing. 83. Do you agree that the proposed Rule will ameliorate information asymmetry in the securities lending market? Do you agree that this effect is sufficient to make security loan terms more competitive that they currently are? Would the public information in the proposed Rule have an impact on the risk of market instability? Would the public information in the proposed Rule have an impact on the efficiency of the securities lending market or the underlying market? Please explain. 84. How do the lending markets in equities differ significantly from lending markets for other securities? Do these markets have problems similar to those documented in the baseline for stocks? Please explain and provide data and analysis, if available. How would the economic effects of the proposed Rule differ across the different types of securities covered? Please explain. 85. Do you believe that the Commission has accurately quantified the compliance costs that the proposed Rule imposes on various market E:\FR\FM\08DEP2.SGM 08DEP2 jspears on DSK121TN23PROD with PROPOSALS2 69850 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules participants? If not, please provide alternative estimates. Are there any sources of compliance costs not included in the Commission’s estimates? If so, please describe the activity that generates the cost and provide estimates. 86. Do you agree with the Commission’s characterization of the effects of the proposed Rule on the commercial providers of security lending data? If not, please provide the details you believe are missing. 87. Do you agree with the Commission’s assessment of both the risk and the economic effects associated with potential substitution of repurchase agreements for securities lending? Why or why not? Is there anything missing from the Commission’s analysis of this issue that should be considered? Please provide details. How does the counterparty risk and other differences between securities lending and repo affect this risk? 88. Do you agree with the Commission’s assessment of the likely impacts on efficiency, competition and capital formation? Why or why not? Do commenters agree that the proposed Rule would improve competition? Please explain. 89. Do you agree with the Commission’s assessment of the effects of the alternative whereby only brokerdealers would be required to report to the RNSA? Why or why not? How would the alternative compare to the proposed Rule—would it be any more or less information or would it be any more or less biased? Please explain. 90. Do you agree with the Commission’s assessment of the effects of the alternative whereby some data would be made public that the proposed Rule indicates would only be accessible by the RNSA and the Commission? Why or why not? Are there any data elements that the proposed Rule does not make public that should be made public? If so, please identify the specific data elements and articulate their benefits and costs relative to the proposed Rule. 91. Do you agree with the Commission’s assessment of the effects of the alternative whereby additional data may be required to be reported to the RNSA? Why or why not? Should the Commission include any other additional data elements? Are there any additional data elements that could feasibly measure counterparty risk that could help explain variations in lending fees and rebate rates? Are there other factors that could help compare lending fees and rebate rates that could be including in Rule 10c–1? If so, what data elements and what are the costs VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 and benefits of including those data elements relative to the proposed Rule? 92. Do you agree with the Commission’s assessment of the effects of the alternative discussing different reporting or dissemination timeframes? Why or why not? Do securities lending transactions occur often enough during the day for intraday reporting to be beneficial? Would a shorter or longer time for reporting be more beneficial or less costly? Please explain. 93. Do you agree with the Commission’s assessment of the effects of the alternative whereby the RNSA could charge to distribute the data delivered on the RNSA website? Why or why not? Based on other data sold by an RNSA, would the ability to sell the data materially reduce the costs to those who report the information? 94. Do you agree with the Commission’s assessment of the effects of the alternative requiring the RNSA to keep and publicly disseminate the data for a longer time horizon? Why or why not? Are there additional benefits or costs to this approach not considered in this economic analysis? Please explain and provide details. 95. Do you agree with the Commission’s assessment of the effects of the alternative whereby reporting would be to the Commission rather than to an RNSA? Why or why not? How many entities who would have to report under the proposed Rule do not current file reports with the Commission and would, therefore, have to establish connections? Would reporting to the Commission significantly affect the regulatory benefits or any other benefits? Please explain. 96. Do you agree with the Commission’s assessment of the effects of the alternative whereby reporting would take place through an NMS plan? Why or why not? Would reporting through an NMS Plan be any more or less efficient than the proposed Rule? Would reporting through an NMS Plan create a more or less competitive environment for the sale of securities lending data than the proposed Rule? Please explain. 97. Are there any other reasonable alternatives that the Commission should consider? If so, how would the potential costs and benefits of the alternative compare to the Proposed Rule? Please provide quantification, if possible. VII. Regulatory Flexibility Act Certification The Regulatory Flexibility Act (‘‘RFA’’) 269 requires Federal agencies, in promulgating rules, to consider the 269 5 PO 00000 U.S.C. 601 et seq. Frm 00050 Fmt 4701 Sfmt 4702 impact of those rules on small businesses. Section 603(a) 270 of the Administrative Procedure Act,271 as amended by the RFA, generally requires the Commission to undertake a regulatory flexibility analysis of all proposed rules, or proposed rule amendments, to determine the impact of such rulemaking on ‘‘small businesses’’ 272 unless the Commission certifies that the rule, if adopted, would not have a significant impact on a substantial number of ‘‘small entities.’’ 273 As discussed above in the PRA above, first, the Commission preliminarily believes that the proposed Rule would impact 94 reporting agents. The Commission estimates that all reporting agents would be broker-dealers. A broker-dealer is a small entity if it has total capital (net worth plus subordinated liabilities) of less than $500,000 on the date in the prior fiscal year as of which its audited financial statements were prepared pursuant to 17 CFR 240.17a–5(d), and it is not affiliated with any person (other than a natural person) that is not a small business or small organization.274 Second, the Commission preliminarily believes that the proposed Rule would impact 278 investment companies that do not employ a lending agent. For purposes of Commission rulemaking in connection with the Regulatory Flexibility Act, an investment company is a small entity if, together with other investment companies in the same group of related investment companies, it has net assets of $50 million or less as of the end of its most recent fiscal year.275 Third, the Commission preliminarily believes that the proposed Rule would impact 37 lending agents, which would include broker-dealers and banks.276 For purposes of Commission rulemaking in connection with the Regulatory Flexibility Act, lending agents that are not broker-dealers, such as a bank, would be a small entity if on the last day of its most recent fiscal year, such 270 Id. 271 5 U.S.C. 551 et seq. Section 601(b) of the RFA defines the term ‘‘small business,’’ the statute permits agencies to formulate their own definitions. The Commission has adopted definitions for the term small business for the purposes of Commission rulemaking in accordance with the RFA. Those definitions, as relevant to this proposed rulemaking, are set forth in Rule 0–10 under the Exchange Act. Exchange Act Rule 0–10 (‘‘Rule 0–10’’). 273 5 U.S.C. 605(b). 274 Exchange Act Rule 0–10(c). 275 See 17 CFR 270.0–10(a). 276 For example, some investment companies report using a bank as a lending agent on Form N– CEN. 272 Although E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules issuer or person had total assets of $5 million or less.277 Furthermore, clearing agencies could also be lending agents for purposes of proposed Rule 10c–1. A clearing agency is a ‘‘small entity’’ if such clearing agency: (i) Compared, cleared, and settled less than $500 million in securities transactions during the preceding fiscal year, (ii) had less than $200 million of funds and securities in its custody or control at all times during the preceding fiscal year (or at any time that it has been in business, if shorter), and (iii) is not affiliated with any person (other than a natural person) that is not a small business or small organization.278 Based on a review of data, the Commission does not believe that any of the persons impacted by the proposed Rule are small entities under the above definitions.279 It is possible that in the future a small entity may become impacted by the Rule. Based on experience with persons who participate in this market, however, the Commission preliminarily believes that this scenario will be unlikely since firms that enter the market are unlikely to meet the criteria to be a small entity. For the foregoing reason, the Commission certifies that proposed Rule 10c–1 would not have a significant economic impact on a substantial number of small entities for purposes of the RFA. The Commission encourages written comments regarding this certification, and requests that commenters describe the nature of any impact on small entities and provide empirical data to illustrate the extent of the impact. jspears on DSK121TN23PROD with PROPOSALS2 VIII. Consideration of Impact on the Economy 17 CFR 240.0–10(a). 17 CFR 240.0–10(d). 279 See supra Parts V and VI. 278 See VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 Proposed Rule 10c–1 is being proposed pursuant to Sections 3, 10(b), 10(c), 15(c), 15(h), 15A, 17(a), 23(a) of the Securities Exchange Act of 1934, 15 U.S.C. 78c, 78j(b), 78j(c), 78k–1, 78o(c), 78o(g), 78o–3, 78q(a), and 78w(a), and Public Law 111–203, 984(b), 124 Stat. 1376 (2010). List of Subjects in 17 CFR Parts 240 Administrative practice and procedure, Reporting and recordkeeping requirements, Securities. Text of Rule Amendments For the reasons set out in the preamble, the Commission is proposing to amend title 17, chapter II of the Code of the Federal Regulations as follows. PART 240—GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934 1. The general authority citation for part 240 continues to read, and sectional authority for § 240.10c–1 is added to read, as follows: ■ Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c–3, 78c–5, 78d, 78e, 78f, 78g, 78i, 78j, 78j–1, 78k, 78k–1, 78l, 78m, 78n, 78n–1, 78o, 78o–4, 78o–10, 78p, 78q, 78q–1, 78s, 78u–5, 78w, 78x, 78dd, 78ll, 78mm, 80a–20, 80a–23, 80a–29, 80a–37, 80b– 3, 80b–4, 80b–11, and 7201 et seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 1350; Pub. L. 111–203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112–106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted. * * * * * Section 240.10c–1 also issued under 15 U.S.C. 78j(c), and Pub, L. 111–203, 984(b), 124 Stat. 1376 (2010). * For purposes of the Small Business Regulatory Enforcement Fairness Act of 1996, the Commission is also requesting information regarding the potential impact of the proposed amendments on the economy on an annual basis. In particular, comments should address whether the proposed changes, if adopted, would have a $100,000,000 annual effect on the economy, cause a major increase in costs or prices, or have a significant adverse effect on competition, investment, or innovations. Commenters are requested to provide empirical data and other factual support for their views to the extent possible. 277 See IX. Statutory Authority ■ * * * * 2. Add § 240.10c–1 to read as follows: § 240.10c–1 Securities lending transparency. (a) Reporting. (1) Any person that loans a security on behalf of itself or another person shall provide to a registered national securities association (RNSA) the information in paragraphs (b) through (e) of this section (Rule 10c– 1 information), in the format and manner required by the rules of an RNSA; provided however, (i)(A) A bank, clearing agency, broker, or dealer that acts as an intermediary to a loan of securities (lending agent) on behalf of a person that owns the loaned securities (beneficial owner) shall: (1) Provide the 10c–1 information to an RNSA on behalf of the beneficial owner within the time periods specified by Rule 10c–1; or PO 00000 Frm 00051 Fmt 4701 Sfmt 4702 69851 (2) Enter into a written agreement that meets the requirements of paragraph (a)(1)(ii)(A) of this section. (B) A beneficial owner is not required to provide the Rule 10c–1 information to an RNSA if a lending agent acts as an intermediary to the loan of securities on behalf of the beneficial owner. (ii)(A) A person required to provide Rule 10c–1 information under paragraph (a) of this section, including a lending agent, may enter into a written agreement with a broker or dealer that agrees to provide the Rule 10c–1 information to an RNSA (reporting agent) within the time periods specified in Rule 10c–1. (B) A reporting agent is required to provide the Rule 10c–1 information to an RNSA if it has entered into a written agreement under paragraph (a)(1)(ii)(A) of this section and is provided timely access to the Rule 10c–1 information. (C) Any person that enters into a written agreement under paragraph (a)(1)(ii) of this section with a reporting agent is not required to provide the Rule 10c–1 information to an RNSA if the reporting agent is provided timely access to the Rule 10c–1 information. (2) Any reporting agent that enters into a written agreement under paragraph (a)(1)(ii)(A) of this section shall: (i) Establish, maintain, and enforce reasonably designed written policies and procedures to provide Rule 10c–1 information to an RNSA on behalf of another person in the manner, format, and time consistent with Rule 10c–1; (ii) Enter into a written agreement with an RNSA that permits the reporting agent to provide Rule 10c–1 information to the RNSA on behalf of another person; (iii) Provide the RNSA a list of each person and lending agent on whose behalf the reporting agent is providing Rule 10c–1 information to the RNSA and provides the RNSA an updated list of such persons by the end of the day on the day such list changes; and (iv) Preserve for a period of not less than three years, the first two years in an easily accessible place: (A) The Rule 10c–1 information obtained by the reporting agent from any person pursuant to paragraph (a)(1)(ii) of this section, including the time of receipt, and the corresponding Rule 10c–1 information provided by the reporting agent to the RNSA, including the time of transmission to the RNSA; and (B) The written agreements under paragraphs (a)(1)(ii)(A) and (a)(2)(ii) of this section. (b) Transaction data elements. If required by paragraph (a) of this section, E:\FR\FM\08DEP2.SGM 08DEP2 jspears on DSK121TN23PROD with PROPOSALS2 69852 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules a person shall provide the following information to an RNSA within 15 minutes after each loan is effected, and the RNSA shall assign each loan a unique transaction identifier and make such information public as soon as practicable: (1) The legal name of the security issuer, and the Legal Entity Identifier (LEI) of the issuer, if the issuer has an active LEI; (2) The ticker symbol, ISIN, CUSIP, or FIGI of the security, if assigned, or other identifier; (3) The date the loan was effected; (4) The time the loan was effected; (5) For a loan effected on a platform or venue, the name of the platform or venue where effected; (6) The amount of the security loaned; (7) For a loan not collateralized by cash, the securities lending fee or rate, or any other fee or charges; (8) The type of collateral used to secure the loan of securities; (9) For a loan collateralized by cash, the rebate rate or any other fee or charges; (10) The percentage of collateral to value of loaned securities required to secure such loan; (11) The termination date of the loan, if applicable; and (12) Whether the borrower is a broker or dealer, a customer (if the person lending securities is a broker or dealer), a clearing agency, a bank, a custodian, or other person. (c) Loan modification data elements. If required by paragraph (a) of this section, a person shall provide the following information to an RNSA within 15 minutes after each loan is modified if the modification results in a change to information required to be provided to an RNSA under paragraph (b) of this section, and the RNSA shall make such information public as soon as practicable: (1) The date and time of the modification; (2) A description of the modification; and (3) The unique transaction identifier assigned to the original loan. (d) Confidential data elements. If required by paragraph (a), a person shall provide the following information to an RNSA within 15 minutes after each loan is effected, however, the RNSA shall keep such information confidential, subject to the provisions of applicable law: (1) The legal name of each party to the transaction, CRD or IARD Number, if the party has a CRD or IARD Number, market participant identification (‘‘MPID’’), if the party has an MPID, and the LEI of each party to the transaction, VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 if the party has an active LEI, and whether such person is the lender, the borrower, or an intermediary between the lender and the borrower (if known); (2) If the person lending securities is a broker or dealer and the borrower is its customer, whether the security is loaned from a broker’s or dealer’s securities inventory to a customer of such broker or dealer; and (3) If known, whether the loan is being used to close out a fail to deliver pursuant to 242.204 of this chapter (Rule 204 of Regulation SHO) or to close out a fail to deliver outside of Regulation SHO. (e) Securities available to loan and securities on loan. The following information shall be provided to an RNSA by the end of each business day that a person included in paragraphs (e)(1) or (2) of this section either was required to provide information to an RNSA under paragraph (a) of this section or had an open securities loan about which it was required provide information to an RNSA under paragraph (a) of this section: (1) A lending agent shall provide the following information directly to an RNSA or to a reporting agent who shall provide such information and the identity of the person on whose behalf it is providing the information to an RNSA: (i) The legal name of the security issuer, and the LEI of the issuer, if the issuer has an active LEI; (ii) The ticker symbol, ISIN, CUSIP, or FIGI of the security, if assigned, or other identifier; (iii) The total amount of each security that is not subject to legal or other restrictions that prevent it from being lent (‘‘available to lend’’): (A) If the lending agent is a broker or dealer, the total amount of each security available to lend by the broker or dealer, including the securities owned by the broker or dealer, the securities owned by its customers who have agreed to participate in a fully paid lending program, and the securities in its margin customers’ accounts; (B) If the lending agent is not a broker or dealer, the total amount of each security available to the lending agent to lend, including any securities owned by the lending agent; (iv) The total amount of each security on loan that has been contractually booked and settled (‘‘security on loan’’): (A) If the lending agent is a broker or dealer, the total amount of each security on loan by the broker or dealer, including the securities owned by the broker or dealer, the securities owned by its customers who have agreed to participate in a fully paid lending PO 00000 Frm 00052 Fmt 4701 Sfmt 4702 program, and the securities in its margin customers’ accounts; (B) If the lending agent is not a broker or dealer, the total amount of each security on loan where the lending agent acted as an intermediary on behalf of a beneficial owner and securities owned by the lending agent. (2) Any person that does not employ a lending agent shall provide the following information directly to an RNSA or to a reporting agent who shall provide such information and the identity of the person on whose behalf it is providing the information to the RNSA: (i) The legal name of the security issuer, and the LEI of the issuer, if the issuer has an active LEI; (ii) The ticker symbol, ISIN, CUSIP, or FIGI of the security, if assigned, or other identifier; (iii) The total amount of each specific security that is owned by the person and available to lend; (iv) The total amount of each specific security on loan owned by the person. (3) For each security about which the RNSA receives information pursuant to paragraphs (e)(1) or (2) of this section, the RNSA shall make available to the public only aggregated information for that security, including information required by (e)(1)(i) and (ii) and (e)(2)(i) and (ii) of this section. All identifying information about lending agents, reporting agents, and other persons using reporting agents, shall not be made publicly available, and the RNSA shall keep such information confidential, subject to the provisions of applicable law. For information that is required to be made publicly available, the RNSA shall make it available as soon as practicable, but not later than the next business day. (f) RNSA rules. The RNSA shall implement rules regarding the format and manner to administer the collection of information in paragraphs (b) through (e) of this section and distribute such information in accordance with rules approved by the Commission pursuant to section 19(b) of the Exchange Act and Rule 19b–4 thereunder. (g) Data retention and availability. The RNSA shall: (1) Retain the information collected pursuant to paragraphs (b) through (e) of this section in a convenient and usable standard electronic data format that is machine readable and text searchable without any manual intervention for a period of five years; (2) Make the information collected pursuant to paragraph (a)(2)(iii) and paragraphs (b) through (e) of this section available to the Commission or other persons as the Commission may E:\FR\FM\08DEP2.SGM 08DEP2 Federal Register / Vol. 86, No. 233 / Wednesday, December 8, 2021 / Proposed Rules jspears on DSK121TN23PROD with PROPOSALS2 designate by order upon a demonstrated regulatory need; (3) Provide the information collected under paragraphs (b) and (c) of this section and the aggregate of the information provided pursuant to paragraph (e) of this section available to the public in the same manner such information is maintained pursuant to paragraph (g)(1) of this section on the RNSA’s website or similar means of electronic distribution, without charge VerDate Sep<11>2014 18:29 Dec 07, 2021 Jkt 256001 and without use restrictions, for at least a five-year period; and (4) Establish, maintain, and enforce reasonably designed written policies and procedures to maintain the security and confidentiality of confidential information required by paragraphs (d) and (e)(3). (h) RNSA fees. The RNSA may establish and collect reasonable fees, pursuant to rules that are effective pursuant to section 19(b) of the PO 00000 Frm 00053 Fmt 4701 Sfmt 9990 69853 Exchange Act and Rule 19b–4 thereunder, from each person who provides any data set forth in paragraphs (b) through (e) of this section directly to the RNSA. By the Commission. Dated: November 18, 2021. J. Matthew DeLesDernier, Assistant Secretary.‘‘ [FR Doc. 2021–25739 Filed 12–7–21; 8:45 am] BILLING CODE 8011–01–P E:\FR\FM\08DEP2.SGM 08DEP2

Agencies

SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 86, Number 233 (Wednesday, December 8, 2021)]
[Proposed Rules]
[Pages 69802-69853]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 2021-25739]



[[Page 69801]]

Vol. 86

Wednesday,

No. 233

December 8, 2021

Part III





Securities and Exchange Commission





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17 CFR Part 240





Reporting of Securities Loans; Proposed Rule

Federal Register / Vol. 86 , No. 233 / Wednesday, December 8, 2021 / 
Proposed Rules

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

[Release No. 34-93613; File No. S7-18-21]
RIN 3235-AN01


Reporting of Securities Loans

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'' or 
``SEC'') is proposing a rule to increase the transparency and 
efficiency of the securities lending market by requiring any person 
that loans a security on behalf of itself or another person to report 
the material terms of those securities lending transactions and related 
information regarding the securities the person has on loan and 
available to loan to a registered national securities association 
(``RNSA''). The proposed rule would also require that the RNSA make 
available to the public certain information concerning each transaction 
and aggregate information on securities on loan and available to loan.

DATES: Comments should be received on or before January 7, 2022.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

     Use the Commission's internet comment form (https://www.sec.gov/regulatory-actions/how-to-submit-comments); or
     Send an email to [email protected]. Please include 
File Number S7-18-21 on the subject line.

Paper Comments

     Send paper comments to Vanessa A. Countryman, Secretary, 
Securities and Exchange Commission, 100 F Street NE, Washington, DC 
20549-1090.

All submissions should refer to File Number S7-18-21. This file number 
should be included on the subject line if email is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
internet website (https://www.sec.gov/rules/proposed.shtml). Comments 
are also available for website viewing and printing in the Commission's 
Public Reference Room, 100 F Street NE, Washington, DC 20549-1090 on 
official business days between the hours of 10 a.m. and 3 p.m. 
Operating conditions may limit access to the Commission's public 
reference room. All comments received will be posted without change. 
Persons submitting comments are cautioned that we do not redact or edit 
personal identifying information from comment submissions. You should 
submit only information that you wish to make available publicly.
    Studies, memoranda, or other substantive items may be added by the 
Commission or staff to the comment file during this rulemaking. A 
notification of the inclusion in the comment file of any such materials 
will be made available on our website. To ensure direct electronic 
receipt of such notifications, sign up through the ``Stay Connected'' 
option at www.sec.gov to receive notifications by email.

FOR FURTHER INFORMATION CONTACT: Theresa Hajost, Special Counsel, 
Samuel Litz, Special Counsel, John Guidroz, Branch Chief, Josephine 
Tao, Assistant Director, Office of Trading Practices, Division of 
Trading and Markets, Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549, at (202) 551-5777.

SUPPLEMENTARY INFORMATION: The Commission is proposing for public 
comment 17 CFR 240.10c-1 (``proposed Rule 10c-1'' or ``proposed 
Rule''), under the Securities Exchange Act of 1934 (``Exchange Act'') 
[15 U.S.C. 78a et seq.].
    Proposed Rule 10c-1 would apply to any person that loans a security 
(``securities lending transactions'') on behalf of itself or another 
person. It would require such persons to report the specified material 
terms for each securities lending transaction and related information 
to an RNSA. Proposed Rule 10c-1 would also require that the RNSA 
disseminate certain information concerning each securities lending 
transaction to the public and certain aggregate loan information.

Table of Contents

I. Executive Summary
    A. Introduction
    1. Market Background
    2. Intended Objectives
II. Background
    A. Market Structure
    B. Transaction Reporting
    1. Data Available From Private Vendors
III. Discussion of Proposed Rule
    A. Reporting
    1. Obligation To Provide Information to an RNSA
    (a) Obligation of Lender To Provide 10c-1 Information
    (b) Providing Information to an RNSA
    2. Persons Responsible for Providing Information to an RNSA
    (a) Lending Agent Provides Information to an RNSA
    (b) Reporting Agent Provides Information to an RNSA
    (c) Beneficial Owner Provides Information to an RNSA
    (d) Examples of Who Is Responsible for Providing Information to 
an RNSA
    B. Information To Be Provided to an RNSA
    1. Data Elements Provided to an RNSA
    (a) Initial Loan-Level Data Elements
    (b) Loan Modification Data
    (c) Material Transaction Data That Would Not Be Made Public
    (d) Total Amount of Securities Available to Loan and Total 
Amount of Securities on Loan
    C. RNSA Rules To Administer the Collection of Information
    D. Data Retention and Availability
    E. Report and Dissemination Fees
IV. General Request for Comment
V. Paperwork Reduction Act Analysis
    A. Background
    B. Proposed Use of Information
    C. Information Collections
    D. Information Collections Applicable to Lenders
    1. Lending Agents
    (a) Providing Lending Agents
    (i) Initial Burden
    (ii) Ongoing annual burden
    (b) Non-Providing Lending Agents
    (i) Systems Development and Monitoring
    (ii) Entering into Written Agreement With Reporting Agent
    2. Reporting Agents
    (a) Systems Development and Monitoring
    (i) Initial Burden
    (ii) Ongoing Annual Burden
    (b) Entering Into Written Agreements With Persons on Whose 
Behalf the Reporting Agent Would be Providing Information
    (c) Entering Into Written Agreement with RNSA
    (d) Recordkeeping Requirement
    3. Lenders That Would Not Employ a Lending Agent
    (a) Self-Providing Lenders
    (i) Initial Burden
    (ii) Ongoing Annual Burden
    (b) Lenders That Would Directly Employ a Reporting Agent
    (i) Systems Development and Monitoring
    (ii) Entering Into a Written Agreement with a Reporting Agent
    E. Information Collection Applicable to RNSAs
    1. RNSA Collection of Information From Lenders and Providing 
Information to the Public and the Commission
    (a) Initial Burden
    (b) Ongoing Annual Burden
    2. RNSA Retention of Collected Information
    F. Collection of Information is Mandatory
    G. Confidentiality
    H. Retention Period of Recordkeeping Requirement
    I. Request for Comment
VI. Economic Analysis
    A. Introduction and Market Failure
    1. Introduction
    2. Market Failures
    B. Baseline
    1. Securities Lending
    2. Current State of Transparency in Securities Lending

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    3. Characteristics of the Securities Lending Market
    4. Structure of the Securities Lending Market
    (a) Market for Borrowing and Borrowing Services
    (b) Market for Lending Services
    5. Market for Securities Lending Data and Analytics
    C. Economic Effects of the Proposed Rule
    1. Effects of Increased Transparency in the Lending Market
    (a) Reduction in Information Asymmetry
    (b) Improved Information for Participants in the Securities 
Lending Market
    (c) Improved Market Function Through Effects on Short Selling
    (d) Improved Financial Management for Financial Institutions
    2. Regulatory Benefits
    (a) Surveillance and Enforcement Uses
    (b) Market Reconstruction Uses
    (c) Market Research Uses
    3. Direct Compliance Costs
    4. Indirect Costs
    5. Risk of Circumvention Through Repurchase Agreements
    D. Impact on Efficiency, Competition, and Capital Formation
    1. Efficiency
    2. Competition
    3. Capital Formation
    E. Alternatives
    1. Broker-Dealer Reporting
    2. Publicly Releasing the Information in 10c-1(d)
    3. Additional Information in the Reported or Disseminated 
Information
    4. Alternative Timeframes for Reporting or Dissemination
    5. Allow an RNSA to Charge Fees to Distribute the Data
    6. Longer Holding Period Requirement
    7. Report to the Commission Rather Than to an RNSA
    8. Report Through an NMS Plan
    F. Request for Comment
VII. Regulatory Flexibility Act Certification
VIII. Consideration of Impact on the Economy
IX. Statutory Authority
List of Subjects in 17 CFR parts 240

I. Executive Summary

A. Introduction

1. Market Background
    The securities lending market is opaque.\1\ Section 984 of the 
Dodd-Frank Act provides the Commission with the authority to increase 
transparency, among other things, with respect to the loan or borrowing 
of securities.\2\ It also mandates that the Commission promulgate rules 
designed to increase the transparency of information available to 
brokers, dealers, and investors.\3\ Although various market 
participants, such as registered investment companies (``investment 
companies''), are required to make specified disclosures regarding 
their securities lending activities,\4\ parties to securities lending 
transactions are not currently required to report the material terms of 
those transactions.\5\ The value of securities on loan in the United 
States as of September 30, 2020, was estimated at almost $1.5 
trillion.\6\ Yet, despite its size, the securities lending market in 
the United States has a general lack of information available to its 
market participants, the public and regulators.\7\ Based on the lack of 
transparency and statutory objective \8\ to increase transparency in 
securities lending transactions, the Commission is proposing Rule 10c-1 
under the Exchange Act, which would require any person who loans a 
security on behalf of itself or another person (a ``Lender'') \9\ to 
provide the specified material terms of their securities lending 
transactions to an RNSA, as discussed more fully below.
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    \1\ See infra Part II.B. The corporate bond and municipal 
securities markets are now more transparent and efficient markets. 
The regulatory concerns that led to these transformations included 
the lack of publicly available pricing information, which is similar 
to the concerns that would be addressed by proposed Rule 10c-1. The 
changes to these markets have provided investors with greater 
pricing transparency, lower search costs and greater price 
competition. See, e.g., Louis Loss, Joel Seligman & Troy Paredes, 
Chapter 7.A.2--Bond Trading, in Fundamentals of Securities 
Regulation (6th ed. Supp. 2021). See also Interim Report of the 
Financial Stability Board Workstream on Securities Lending and 
Repos, Securities Lending and Repos: Market Overview and Financial 
Stability Issues, at 14 (Apr. 27, 2012), available at https://www.fsb.org/wp-content/uploads/r_120427.pdf.
    \2\ Public Law 111-203, 984(b), 124 Stat. 1376 (2010). Section 
984(a) of the Dodd-Frank Act (``DFA''), now Section 10(c)(1) of the 
Exchange Act, makes it ``unlawful for any person, directly or 
indirectly, by the use of any means or instrumentality of interstate 
commerce or the mails, or of any facility of any national securities 
exchange . . . to effect, accept or facilitate a transaction 
involving the loan or borrowing of securities in contravention of 
such rules and regulations as the Commission may prescribe as 
necessary or appropriate in the public interest or for the 
protection of investors.'' Section 984 of the DFA focuses on the 
loan or borrowing of securities; therefore, the Commission is not 
proposing to include repurchase agreements within the scope of the 
rule.
    \3\ Id. Section 984(b) of the DFA directs the SEC to 
``promulgate rules that are designed to increase the transparency of 
information available to brokers, dealers, and investors with 
respect to loan or borrowing securities.''
    \4\ Investment companies are required to disclose certain 
information about their securities lending activities. See, e.g., 
Form N-CEN, Item C.6 (requiring disclosures relating to an 
investment company's securities lending activities) and Form N-PORT, 
Items B.4 and C.12 (requiring disclosure by investment companies of 
certain information on borrowers of loaned securities and collateral 
received for loaned securities). See also 81 FR 81870 (Nov. 18, 
2016) (discussing requirements for securities lending disclosures by 
investment companies).
    \5\ See infra Part II.B.
    \6\ See Financial Stability Oversight Council (FSOC), 2020 
Annual Report, figure 3.4.2.8, at 41, available at https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf. (``FSOC 
2020 Annual Report''). See infra note 14.
    \7\ See infra Part VI.A.2.
    \8\ See supra note 3.
    \9\ Lender, when used in this release, refers to any persons 
that loans a security on behalf of itself or another person, 
including persons that own the securities being loaned (``beneficial 
owners''), as well as third party intermediaries, including banks, 
clearing agencies, or broker-dealers that intermediate the loan of 
securities on behalf of beneficial owners (``lending agent''). The 
term Lender does not extend to the borrower of securities in a 
securities lending transaction or any third party the intermediates 
the borrowing of securities on behalf of the borrower.
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    Private data vendors have attempted to address the opacity in the 
securities lending market by developing systems that provide data to 
clients who both subscribe to those systems and provide their 
transaction data to the data vendor. Only subscribers can use those 
systems to receive information regarding securities lending 
transactions.\10\ Moreover, as the private systems capture data only 
from their subscribers, the available data is not complete, nor is the 
transaction data captured by these private vendors available to the 
general public without a subscription, or available in one centralized 
location.
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    \10\ See infra Part II.B.1.
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    Industry observers and market participants have suggested that the 
Commission consider measures to provide additional transparency in the 
securities lending market.\11\ Furthermore, there have been other calls 
for additional transparency, including in testimony during a hearing 
before the House Financial Services Committee on March 17, 2021. Such 
testimony supported the creation of a ``consolidated tape'' or a public 
data feed of securities lending transactions.\12\
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    \11\ During a March 17, 2021, hearing before the House Financial 
Services Committee, Dennis Kelleher, CEO of Better Markets, former 
SEC Commissioner Michael Piwowar, now Executive Director of the 
Milken Institute Center for Financial Markets, and Michael 
Blaugrund, COO of the NYSE, each testified that additional 
transparency in the securities lending market is warranted. See Game 
Stopped? Who Wins and Loses When Short Sellers, Social Media, and 
Retail Investors Collide, Part II: Hearing Before the H. Comm. on 
Fin. Serv., 117th Cong. (2021). As Michael Blaugrund stated during 
the hearing, ``[a] system that anonymously published the material 
terms for each stock loan would provide the necessary data to 
understand shifts in short-selling activity while protecting the 
intellectual property of individual market participants.''
    \12\ Id.
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    The lack of public information and data gaps creates inefficiencies 
in the securities lending market. The gaps in securities lending data 
render it difficult for borrowers and lenders alike to ascertain market 
conditions and to know whether the terms that they receive are 
consistent with market conditions.\13\ These gaps also impact the

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ability of the Commission, RNSAs and other self-regulatory 
organizations (``SROs''), and other Federal financial regulators 
(collectively ``regulators'') to oversee transactions that are vital to 
fair, orderly, and efficient markets.\14\ Indeed, the size of the U.S. 
securities lending market can only be estimated as the data currently 
``available on . . . securities lending transactions are spotty and 
incomplete.'' \15\ Furthermore, the FSOC 2020 Annual Report noted data 
gaps in ``certain important financial markets including transaction 
data . . . for securities lending arrangements. . .'' \16\
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    \13\ See infra Part VI.A.2.
    \14\ In its 2020 Annual Report, FSOC describes securities 
lending as ``support[ing] the orderly operation of capital markets, 
principally by enabling the establishment of short positions and 
thereby facilitating price discovery and hedging . . . it is 
estimated that at the end of September 2020 the global securities 
lending volume outstanding was $2.5 trillion, with around 57 percent 
of it attributed to the U.S.'' Financial Stability Oversight Council 
(FSOC), 2020 Annual Report, at 45, available at https://home.treasury.gov/system/files/261/FSOC2020AnnualReport.pdf. See 
also Viktoria Baklanova, Adam Copeland & Rebecca McCaughrin, 
Reference Guide to U.S. Repo and Securities Lending Markets (Off. of 
Fin. Research, Working Paper No. 15-17, 2015) at 5, available at 
https://www.financialresearch.gov/working-papers/files/OFRwp-2015-17_Reference-Guide-to-U.S.-Repo-and-Securities-Lending-Markets.pdf 
(``OFR Reference Guide'').
    \15\ OFR Reference Guide, supra note 14, at 5.
    \16\ FSOC 2020 Annual Report, supra note 14, at 187.
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2. Intended Objectives
    To supplement the publicly available information involving 
securities lending, close the data gaps in this market, and minimize 
information asymmetries between market participants, proposed Rule 10c-
1 is designed to provide investors and other market participants with 
access to pricing and other material information regarding securities 
lending transactions in a timely manner. For example, the Commission 
preliminarily believes that the data collected and made available by 
the proposed Rule would improve price discovery in the securities 
lending market and lead to a reduction of the information asymmetry 
faced by end borrowers and beneficial owners in the securities lending 
market. The Commission preliminarily believes the proposed Rule would 
close securities lending data gaps, would also increase market 
efficiency, and lead to increased competition among providers of 
securities lending analytics services and to reduced administrative 
costs for broker-dealers and lending programs.\17\
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    \17\ See infra Part VI.A.1.
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    The data elements provided to an RNSA under proposed Rule 10c-1 are 
also designed to provide the RNSA with data that could be used for 
important regulatory functions, including facilitating and improving 
its in-depth monitoring of member activity and surveillance of 
securities markets. Further, the data elements are designed to provide 
regulators with information to understand: Whether market participants 
are building up risk; the strategies that broker-dealers use to source 
securities that are lent to their customers; and the loans that broker-
dealers provide to their customers with fail to deliver positions. 
Enhancing the transparency of data on securities lending transactions 
should provide more information to help illuminate investor behavior in 
the securities lending market and the broader securities market more 
generally. It will also provide beneficial owners and borrowers with 
better tools to ascertain current market conditions for securities 
loans and allow them to determine whether the terms that they receive 
for their loans are consistent with market conditions.
    The Commission preliminarily believes that public disclosure of 
specified material information regarding securities lending 
transactions could improve efficiency in the securities lending market 
and the securities market in general by reducing frictions that can 
exist where pricing information is not publicly available.\18\ In 
particular, providing access to timely, granular information about 
certain material terms of securities lending transactions would allow 
investors, including borrowers and lenders, to evaluate not only the 
rates for such transactions, but also any signals that rates provide, 
e.g., that changes in supply and demand for a particular security may 
indicate an increase in short sales of that security.\19\ In addition, 
increasing the accessibility of data could lower barriers to entry for 
would-be participants in the securities lending market as well as the 
securities markets more broadly because all market participants, not 
just counterparties to a trade or those that subscribe to certain 
services, would be able to view and analyze transactions that are 
taking place in the securities lending market. As a result, the 
disclosure of the specified material terms of securities lending 
transactions might improve the efficiency and resiliency of the 
securities market by reducing frictions in the cost of borrowing 
securities, which may also have positive effects on the markets for the 
securities themselves. Additional benefits from increased transparency 
could include increased savings and profits for investors, improved 
terms for beneficial owners participating in lending programs, and 
improved competitiveness in the lending agent and broker-dealer 
businesses. The proposal might also reduce the cost of short selling 
and lead to an increase in fundamental research, which contributes to 
more efficient prices.\20\ Finally, access to additional data can 
contribute to more informed portfolio management and lending 
decisions.\21\
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    \18\ Frictions in trading costs and price can stem from general 
lack of information on current market conditions, which can lead to 
inefficient prices for securities loans. See infra Part VI.A.2.
    \19\ Subject to certain exceptions, Rule 203 of Regulation SHO 
requires a broker-dealer to identify shares of a security that are 
available for borrowing prior to initiating a short sale in that 
security. See 17 CFR 242.203(b). Rule 204 of Regulation SHO requires 
a participant of a registered clearing agency to ``close out'' open 
short sale positions within specified timeframes by either 
purchasing or borrowing shares in order to make delivery. 17 CFR 
242.204. As a result, heightened demand for borrowing shares of a 
security is frequently associated with an increased level of short 
selling activity in that security.
    \20\ Fundamental research typically involves analyzing and 
interpreting publicly-available company information to determine 
whether a stock is under- or overvalued. See, e.g., Zvi Bodie, Alex 
Kane & Alan J. Marcus, Investments 363 (2008).
    \21\ See infra Part VI.C.1.b).
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II. Background

A. Market Structure

    Securities lending is the market practice by which securities are 
transferred temporarily from one party, a securities lender, to 
another, a securities borrower, for a fee.\22\ A securities loan is 
typically a fully collateralized transaction. Securities lenders, 
referred to as ``beneficial owners,'' are generally large institutional 
investors including investment companies, central banks, sovereign 
wealth funds, pension funds, endowments, and insurance companies.\23\
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    \22\ See, e.g., OFR Reference Guide, supra note 14, at 24.
    \23\ Id. at 29.
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    Beneficial owners of large, static, unleveraged portfolios, mainly 
pension funds, increasingly cite securities lending as an important 
income-enhancing strategy with minimal, or at least controlled, 
risk.\24\ This incremental income not only helps defined-benefit 
pension funds to generate income, but also provides investment company 
investors with additional returns.\25\
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    \24\ See Lipson, Sabel & Keane, infra note 37, at 1; OFR 
Reference Guide, supra note 14, at 29; A Pilot Survey of Agent 
Securities Lending Activity (Off. of Fin. Research, Working Paper 
No. 16-08, 2016) at 4. https://www.financialresearch.gov/working-papers/2016/08/23/pilot-survey-of-agent-securities-lending-activity/ 
(``OFR Pilot Survey'').
    \25\ OFR Reference Guide, supra note 14, at 29. See also Zoltan 
Pozsar, Shadow Banking: The Money View (Off. of Fin. Research, 
Working Paper No. 14-04, 2014), available at https://www.financialresearch.gov/working-papers/files/OFRwp2014-04_Pozsar_ShadowBankingTheMoneyView.pdf. The majority of passive and 
exchange traded funds (ETFs) also engage in securities lending. In 
each case, securities lending has been an important revenue source 
that can compound each year to offset fees and transaction costs, 
protect an asset manager's profit margins, and improve fund investor 
returns. See, e.g., Tomasz Mizio[lstrok]ek, Ewa Feder-Sempach & Adam 
Zaremba, The Basics of Exchange-Traded Funds, in International 
Equity Exchange-Traded Funds, at 97-98 (1st ed. 2020).

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    Broker-dealers are the primary borrowers of securities; they borrow 
for their market making activities or on behalf of their customers.\26\ 
Broker-dealers who borrow securities typically re-lend those securities 
or use the securities to cover fails to deliver or short sales \27\ 
arising from proprietary or customer transactions.\28\ While the 
identities of the ultimate securities borrowers are usually unknown, 
anecdotally, hedge funds rank among the largest securities borrowers 
and access the lending market mainly through their prime brokers.\29\ 
Brokers and dealers may also lend securities that are owned by the 
broker or dealer, customer securities that have not been fully paid for 
(i.e., have been purchased with a margin loan from the broker-dealer), 
and the securities of customers who have agreed to participate in a 
fully paid securities lending program offered by their broker-
dealer.\30\
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    \26\ Dealers, which often act as market makers, borrow 
securities to settle buy orders from customers. See OFR Reference 
Guide, supra note 14, at 33. See also Comptroller's Handbook: 
Custody Services/Asset Management, Off. of the Comptroller of the 
Currency, at 28 (Jan. 2002), https://www.occ.treas.gov/publications-and-resources/publications/comptrollers-handbook/files/custody-services/index-custody-services.html (``Comptroller's Handbook''); 
OFR Pilot Survey, supra note 24, at 2-3.
    \27\ Regulation SHO requires, among other things, that fails to 
deliver be closed out by purchasing securities of like kind and 
quantity by no later than the settlement day after settlement is 
due, or no later than two settlement days after settlement is due 
for short sales resulting from long sales or from bona fide market 
making activity. As previously emphasized by the Commission, the 
determination of whether a short sale qualifies for the bona fide 
market making is based on a variety of facts and circumstances 
surrounding a transaction, and must be made on a trade-by-trade 
basis. See Exchange Act Release No. 58775 (Oct. 14, 2008), 73 FR 
61690 (Oct. 17, 2008), available at https://www.sec.gov/rules/final/2008/34-58775fr.pdf.
    \28\ Brokers' and dealers' securities lending and borrowing 
activities are governed by a number of regulations including 17 CFR 
240.15c3-3 (``Exchange Act Rule 15c3-3''; commonly referred to as 
the ``Customer Protection Rule''), 17 CFR 240.15c3-1 (``Exchange Act 
Rule 15c3-1; commonly referred to as the ``Net Capital Rule''), 17 
CFR 240.8c-1 and 17 CFR 240.15c2-1 (``Exchange Act Rules 8c-1 and 
15c2-1 commonly referred to as the ``hypothecation rules''). See 
also Comptroller's Handbook, supra note 26, at 28.
    \29\ OFR Reference Guide, supra note 14, at 33. Many trading 
strategies rely on the ability of the trader to borrow securities. 
For example, traders often borrow securities to establish a short 
position in one security to hedge a long position in another 
security. Id.
    \30\ See Exchange Act Rule 15c3-3.
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    Securities lending transactions are usually facilitated by a third 
party. Custodian banks have traditionally been the primary lending 
agent or intermediary and lend securities on behalf of their custodial 
clients for a fee.\31\ Advances in technology and operational 
efficiency have made it easier to separate securities lending services 
from custody services. Such developments have given rise to specialist 
third-party agent lenders, who have established themselves as an 
alternative to custodial banks.\32\ Agent lenders provide potential 
borrowers with the inventory of securities available for lending on a 
daily basis.\33\
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    \31\ See infra Part VI. See, e.g., Comptroller's Handbook, supra 
note 26, at 27. Beneficial owners typically share a portion of their 
total compensation with the agent and it is common for the 
beneficial owner to retain most of it. See, e.g., OFR Pilot Survey, 
supra note 26, at 2.
    \32\ OFR Reference Guide, supra note 14, at 31.
    \33\ Id. at 34.
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    In addition to agent intermediaries, \34\ there are also principal 
intermediaries, such as prime brokers, securities dealers, and 
specialist intermediaries. The role of the principal intermediary is to 
provide credit transformation for lending clients who are not willing 
to assume exposure to certain types of borrowers. For example, a prime 
broker assumes credit exposure to the borrower.\35\ In short, agent 
intermediaries aggregate supply on lendable assets, while principal 
intermediaries aggregate demand for lendable assets.\36\ Some large 
investment companies and their fund managers have created their own 
securities lending programs and use their own employees to staff the 
program rather than using the services of a custodial bank lending desk 
or third-party agent lender.\37\
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    \34\ Agent intermediaries include custodian banks, agent lenders 
and other third parties, such as asset managers or specialized 
consultants. Id. at 30-31.
    \35\ Id. at 32.
    \36\ Id.
    \37\ As a low-margin business, beneficial owners' portfolios 
need to be of a sufficient size for a securities lending program to 
be economically feasible. See OFR Reference Guide, supra note 14, at 
29. See also Anthony A. Nazzaro, Chapter 4--Evaluating Lending 
Options, in Securities Finance, at 83-84 (Frank J. Fabozzi & Steven 
V. Mann ed. 2005). See also Fidelity, Fidelity Agency Lending, 
available at https://capitalmarkets.fidelity.com/fidelity-agency-lending; Fidelity, Q&A: New Securities Lending Agent for the 
Fidelity Funds (July 8, 2020), available at https://institutional.fidelity.com/app/proxy/content?literatureURL=/9899781.PDF. Also a few large pension and endowment funds lend 
directly. See Paul C. Lipson, Bradley K. Sabel & Frank M. Keane, 
Securities Lending, Federal Reserve Bank of New York Staff Report 
no. 555, at 2 (Mar. 2012), available at www.newyorkfed.org/research/staff_reports/sr555.pdf.
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    Traditionally, securities lending and borrowing transactions have 
been conducted on a bilateral basis.\38\ Generally, when an end 
investor wishes to borrow securities, and its broker-dealer does not 
have those securities available in its own inventory or through 
customer margin accounts to loan, the broker-dealer will borrow the 
securities from a lending agent with whom it has a relationship. The 
broker-dealer will then re-lend the securities to its customer. Loans 
from lending programs to broker-dealers occur in what is referred to as 
the ``Wholesale Market'', while loans from a broker-dealer to the end 
borrower occur in what is referred to as the ``Retail Market''. 
Obtaining a securities loan often involves an extensive search for 
counterparties by broker-dealers.\39\
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    \38\ See, e.g., id. at 36. Typically, the parties enter into a 
written contract that sets out their legal rights and obligations. 
See OFR Reference Guide, supra note 14, at 36. While there are some 
differences in the contract provisions used, usually the general 
terms are the same. See Lipson, Sabel & Keane, supra note 37, at 44-
45. In the United States, a Master Securities Loan Agreement (MSLA) 
is normally used to set out the legal rights and obligations of the 
parties in securities lending transactions. See OFR Reference Guide, 
supra note 14, at 36. A copy of the Master Securities Lending 
Agreement (``MSLA'') published by SIFMA is available at https://www.sifma.org/resources/general/mra-gmra-msla-and-msftas/.
    \39\ See, e.g., Adam C. Kolasinski, Adam V. Reed & Matthew C. 
Ringgenberg, A Multiple Lender Approach to Understanding Supply and 
Search in the Equity Lending Market, 68 J. Fin. 559-95 (2013).
---------------------------------------------------------------------------

    There are also digital platforms for secured financing 
transactions, including securities lending, which provide electronic 
trading in the securities lending market.\40\ Another approach to 
securities lending is based on a competitive blind auction to determine 
the optimal lending strategy for beneficial owners who opt to use the 
auction route. The auction process is intended to improve price 
transparency for borrowers who pay for access to lendable assets.\41\ 
There are also efforts to develop and expand peer-to-peer lending 
platforms involving multiple beneficial owners and borrowers, where 
securities lending transactions take place without the use of 
traditional intermediaries.\42\
---------------------------------------------------------------------------

    \40\ See, e.g., Equilend, Next-Generation Trading (NGT), https://www.equilend.com/services/ngt/.
    \41\ See, e.g., eSecLending, The eSecLending Difference, https://www.eseclending.com/why-eseclending/. See also OFR Reference Guide, 
supra note 14, at 32.
    \42\ See, e.g., The Global Peer Financing Association, available 
at https://globalpeerfinancingassociation.org.
---------------------------------------------------------------------------

    Additionally, the Options Clearing Corporation (``OCC'') has two 
stock loan

[[Page 69806]]

programs: The Stock Loan Program (formerly ``Hedge'') and the Market 
Loan program.\43\ The Stock Loan Program allows OCC clearing members to 
use borrowed and loaned securities to reduce OCC margin requirements, 
which OCC considers as reflecting the real risks of their intermarket 
hedged positions. In this program OCC serves as a principal 
counterparty, by becoming the lender to the borrower and the borrower 
to the lender for each transaction. In its Market Loan program OCC 
processes and maintains stock loan positions that have originated 
through a Loan Market.\44\ OCC acts as central counterparty to these 
matched loans and provides clearing and settlement services to the 
market and OCC clearing members.\45\
---------------------------------------------------------------------------

    \43\ See The Options Clearing Corporation, Stock Loan Programs, 
https://www.theocc.com/Clearance-and-Settlement/Stock-Loan-Programs; 
see also The Options Clearing Corporation, Market Loan Program FAQs, 
https://www.theocc.com/Clearance-and-Settlement/Stock-Loan-Programs/OCC-Market-Loan-Program-FAQs.
    \44\ OCC currently clears securities lending transactions for 
Automated Equity Finance Markets, Inc., a wholly owned subsidiary of 
EquiLend Clearing LLC. See The Options Clearing Corporation, Market 
Loan Program FAQs, https://www.theocc.com/Clearance-and-Settlement/Stock-Loan-Programs/OCC-Market-Loan-Program-FAQs.
    \45\ The Depository Trust & Clearing Corporation (DTCC), through 
its equities clearing subsidiary, National Securities Clearing 
Corporation (NSCC), has proposed a rule change for regulatory 
approval to centrally clear securities financing transactions, which 
would include securities loans. See SEC, Notice of Filing of 
Proposed Rule Change to Establish the Securities Financing 
Transaction Clearing Service and Make Other Changes, SR-NSCC-2021-
010 (Aug. 5, 2021), available at https://www.sec.gov/rules/sro/nscc.htm#SR-NSCC-2021-010.
---------------------------------------------------------------------------

    Securities loans may be either for a specific term or open-ended 
with no fixed maturity date. The typical market practice is for 
securities loans to be open-ended, allowing the security on loan to be 
recalled by the beneficial owner. The open recall feature of a 
securities loan is driven by the assumption that participation in 
securities lending should not impact the investment strategy of the 
lender.\46\ For example, a security may be recalled when its beneficial 
owner would like to sell it or exercise its voting rights.\47\ Loans 
that provide the borrower with certainty regarding the length of the 
loan can be more valuable to the borrower.\48\
---------------------------------------------------------------------------

    \46\ OFR Reference Guide, supra note 14, at 34.
    \47\ OFR Reference Guide, supra note 14, at 29.
    \48\ See, e.g., Mark C. Faulkner, Chapter 1--An Introduction to 
Securities Lending, in Securities Finance, at 8 (Frank J. Fabozzi & 
Steven V. Mann ed. 2005). A relatively static portfolio with low 
securities turnover is more attractive to securities borrowers 
because it minimizes recalls of loaned securities. See also OFR 
Reference Guide, supra note 14, at 29.
---------------------------------------------------------------------------

    Normally, the beneficial owner has specific guidelines regarding 
which counterparties can borrow its securities and the type of 
collateral it accepts. Lenders who are able and willing to be flexible 
on the type of collateral they will accept to secure the loan are more 
attractive to some borrowers.\49\ Beneficial owners may have different 
approaches to securities lending and associated risks.\50\ For example, 
some beneficial owners may prefer ``volume lending,'' in which large 
volumes of easier to lend securities are lent and returns can be 
enhanced with varying risk, such as the type of collateral accepted or 
investment of cash collateral in higher-yielding and riskier vehicles. 
Other beneficial owners may take a ``value lending'' approach where 
they lend in-demand securities, which generate higher borrower fees, 
and take a more conservative approach to the type of collateral 
accepted or the reinvestment of cash collateral.\51\ Different types of 
beneficial owners also operate under different laws and regulatory 
frameworks, which may or may not include regulations or regulatory 
guidance on securities lending activities. For example, investment 
companies are registered with the SEC under the Investment Company Act 
of 1940 and rules thereunder.\52\ Defined benefit plans are subject to 
the Employee Retirement Security Act (``ERISA''), as administered by 
the U.S. Department of Labor. Insurance companies are regulated at the 
state level.
---------------------------------------------------------------------------

    \49\ Faulkner, supra note 48, at 6.
    \50\ See OFR Reference Guide, supra note 14, at 30.
    \51\ See Mizio[lstrok]ek, et al., supra note 25, at 12.
    \52\ See supra note 4.
---------------------------------------------------------------------------

    In the United States, the most common form of collateral for equity 
security loans is cash. The borrower of the security typically deposits 
102% or 105% of the current value of the asset being loaned as 
collateral.\53\ The Lender then reinvests this collateral, usually in 
low-risk interest-bearing securities, then rebates a portion of the 
interest earned back to the borrower. The difference between the 
interest earned and what is rebated to the borrower is the lending fee 
earned by the Lender. The portion of the interest earned on the 
reinvested collateral that is returned to the borrower is called the 
rebate rate, and is a guaranteed amount set forth in the terms of the 
loan. It is possible for the Lender to lose money on the loan if the 
interest earned on the reinvestment of the collateral does not exceed 
the rebate rate. If the security is in high demand in the borrowing 
market, the rebate rate may be negative, indicating that the borrower 
does not receive any rebate and must also provide additional 
compensation to the Lender.
---------------------------------------------------------------------------

    \53\ OFR Pilot Survey, supra note 26, at 12. ``Margins on 
securities loans are negotiable. The variation around the standard 
margins of 102 percent and 105 percent can be attributed to firm-
specific differences in margining policies and the quality and type 
of the collateral security.''
---------------------------------------------------------------------------

    When collateral for a security loan is in the form of other 
securities, the borrower pays the Lender a set fee. The fee depends on 
the availability of the security being borrowed; securities in high 
demand command a higher fee.\54\
---------------------------------------------------------------------------

    \54\ OFR Pilot Survey, supra note 26, at 2.
---------------------------------------------------------------------------

    While a security is on loan the borrower receives any dividends, 
interest payments, and, in the case of equity security loans, holds the 
voting rights associated with the shares.\55\ Usually the terms of the 
loan stipulate that dividends and interest payments must be passed back 
to the beneficial owner in the form of substitute payments.
---------------------------------------------------------------------------

    \55\ See, e.g., OFR Reference Guide, supra note 14, at 36.
---------------------------------------------------------------------------

B. Transaction Reporting

    As discussed above, certain institutional investors, including 
pension funds (which provide retirement benefits) and mutual funds 
(which retail and institutional investors rely on to meet financial 
needs) lend out their securities to earn incremental income, help 
pension funds generate income, and provide additional returns for their 
long-term savers.\56\ As discussed below, the existing data are not 
comprehensive or centralized, and there are significant information 
asymmetries between market participants.\57\ The transaction 
information that would be provided to an RNSA under proposed Rule 10c-1 
would include securities lending transaction information from all 
Lenders, and most of the information would be made publicly available. 
The Commission preliminarily believes the proposed Rule would provide 
material, granular, and timely data regarding the terms of securities 
lending transactions thereby allowing market participants, the public, 
and regulators access to key market information.
---------------------------------------------------------------------------

    \56\ See supra Part II.A. See also OFR Reference Guide, supra 
note 14, at 30.
    \57\ See, e.g., infra Part VI.A.2.
---------------------------------------------------------------------------

1. Data Available From Private Vendors
    Currently, the predominant sources of pricing information for 
securities loans are private vendors who offer a variety of systems for 
borrowers and lenders of securities to provide and receive information 
regarding securities lending transactions. Some, if not all, of the

[[Page 69807]]

private vendors operate their systems on a ``give-to-get'' model, which 
effectively precludes access to their systems unless the would-be 
subscriber has securities lending transaction information to provide. 
Some private securities lending data vendors provide an intraday data 
feed or end of day information on securities lending transactions by 
various market participants as well as analytic services involving such 
data. The data are collected from securities lending transaction 
participants, including beneficial owners, broker-dealers, agent 
lenders and custodians.
    Commonly collected data elements include CUSIP identifiers for 
securities on loan, quantity, borrowing cost, utilization of available 
supply, owner domicile, and type of collateral held.\58\
---------------------------------------------------------------------------

    \58\ See OFR Reference Guide, supra note 14, at 63.
---------------------------------------------------------------------------

    However, the available data are incomplete, as private vendors do 
not have access to pricing information that reflects all transactions. 
This in part, reflects the voluntary submission of transaction 
information by subscribers to vendors and is compounded by the unknown 
comparability of data due to, among other things, the variability of 
the transaction terms disseminated, as well as how those terms are 
defined. As no single vendor has information for all securities lending 
transactions that take place, some persons pay to subscribe to multiple 
vendors' systems in order to capture as much of the currently available 
data as they determine to purchase, which can be expensive.\59\
---------------------------------------------------------------------------

    \59\ See, e.g., Beneficial Owners Demand Independent 
Benchmarking, Global Inv., 2017 WLNR 5380098 (Feb. 2, 2017).
---------------------------------------------------------------------------

III. Discussion of Proposed Rule

A. Reporting

1. Obligation To Provide Information to an RNSA
    The Commission is proposing Rule 10c-1(a), which would require any 
person that loans a security \60\ on behalf of itself or another person 
to provide to an RNSA the information required by paragraphs (b) 
through (e) of proposed Rule 10c-1 (``10c-1 information'') as discussed 
below \61\ in the format and manner required by the rules of the RNSA.
---------------------------------------------------------------------------

    \60\ See Section 3(a)(10) of the Exchange Act, which defines the 
term ``security.'' 15 U.S.C. 78c(a)(10).
    \61\ See infra Part III.B.
---------------------------------------------------------------------------

(a) Obligation of Lender to Provide 10c-1 Information
    Proposed Rule 10c-1 would apply to all Lenders. Section 10(c)(1) of 
the Exchange Act makes it unlawful for any person, directly or 
indirectly, by use of any means or instrumentality of interstate 
commerce or of the mails, or of any facility of any national securities 
exchange to effect, accept, or facilitate a transaction involving the 
loan or borrowing of securities in contravention of such rules and 
regulations as the Commission may prescribe as necessary or appropriate 
in the public interest or for the protection of investors.\62\ The term 
``person,'' for purposes of the Exchange Act, means a natural person, 
company, government, or political subdivision, agency, or 
instrumentality of a government.\63\ Accordingly, Section 10(c)(1) of 
the Exchange Act provides the Commission with broad authority to 
implement rules regarding securities lending transactions involving any 
person, including banks, insurance companies, and pension plans, so 
long as the rules involving the loan or borrowing of securities 
prescribed by the Commission are necessary or appropriate in the public 
interest or for the protection of investors. The Commission 
preliminarily believes that the proposed Rule is necessary or 
appropriate in the public interest or for the protection of investors. 
As discussed further in Part VI, the securities lending market lacks 
public information regarding securities lending transactions, which 
creates inefficiencies in the securities lending market. The proposed 
Rule is designed to address these inefficiencies in the securities 
lending market by making more comprehensive information regarding 
securities lending transactions publicly available, which could better 
protect investors by eliminating certain information asymmetries that 
currently exist in the securities lending market. The removal of such 
information asymmetries may improve market efficiencies in the 
securities market and enhance fair, orderly, and efficient markets for 
borrowing of the securities and the market for such underlying 
securities. Additionally, as discussed in greater detail in Part 
VI.C.2, proposed Rule 10c-1 would provide a number of regulatory 
benefits related to surveillance and enforcement, reconstruction of 
market events, and research.
---------------------------------------------------------------------------

    \62\ 15 U.S.C. 78j(c).
    \63\ 15 U.S.C. 78c(a)(9).
---------------------------------------------------------------------------

    Proposed Rule 10c-1(a) would require Lenders to provide certain 
terms of securities lending transactions to an RNSA.\64\ The Commission 
preliminarily believes that any person that loans a security on behalf 
of itself or another person,\65\ which would include banks, insurance 
companies, and pension plans, should be required to provide the 
material terms of lending transactions to ensure that proposed Rule 
10c-1 is appropriately ``designed to increase the transparency of 
information available to brokers, dealers, and investors, with respect 
to the loan or borrowing of securities.'' \66\ Although the majority of 
securities lending transactions involve broker-dealers, over which the 
Commission has direct regulatory oversight,\67\ a significant 
percentage of securities lending transactions occur away from broker-
dealers.\68\ The Commission preliminarily believes that any person that 
loans a security on behalf of itself or another person should be 
required to provide the specified terms of a securities lending 
transaction because excluding certain persons--such as banks, insurance 
companies, and pension plans--would lead to incomplete information 
regarding securities lending transactions, which might reduce the 
benefits of the public availability of 10c-1 information and 
potentially lead to competitive advantages for those Lenders that are 
not required to provide 10c-1 information to an RNSA.
---------------------------------------------------------------------------

    \64\ See infra Part III.A.2 (Discussion of which Lenders are 
required to provide the 10c-1 information to the RNSA).
    \65\ See infra Part III.A.2 (Discussion of the hierarchy 
regarding who is required to provide information to the RNSA).
    \66\ Public Law 111-203, 984(b), 124 Stat. 1376 (2010).
    \67\ See 15 U.S.C. 78o.
    \68\ While the Commission preliminarily believes that the 
majority of transactions involve broker-dealers the precise 
percentage is currently unknown. Based on 2015 survey data the 
Commission estimates that broker-dealers facilitate between 60% and 
90% of transactions in the equity lending market. See OFR Pilot 
Survey, supra note 26, at 7-8.
---------------------------------------------------------------------------

    The Commission proposes to limit the obligation to provide the 
specified material terms to an RNSA only to the Lender to avoid the 
potential double counting of transactions that could arise if the Rule 
required both sides of the securities lending transaction to provide 
the material terms. Furthermore, the Commission preliminarily believes 
that the Lender is in the better position to provide the material terms 
of the securities lending transactions. Lenders are more likely to have 
access to all of the 10c-1 information. For example, a borrower will 
not be privy to information required to be provided to the RNSA under 
paragraph (e) of proposed Rule 10c-1, such as the number of securities 
available to loan. Additionally, entities such as investment companies, 
broker-dealers, and banks, which engage in securities lending 
transactions, typically tend to be larger institutions because of the

[[Page 69808]]

scale necessary to make the lending of securities cost-effective.\69\ 
To the extent that smaller entities engage in securities lending, they 
generally employ lending agents, which as discussed below in Part 
III.A.2.a), would relieve these smaller lending entities from having to 
provide the 10c-1 information to the RNSA. Accordingly, the Commission 
preliminarily believes that requiring only the Lender to provide the 
10c-1 information will alleviate the potential for the double counting 
of transactions and limit the burdens of proposed Rule 10c-1 to larger 
institutions.
---------------------------------------------------------------------------

    \69\ See, e.g., Faulkner, supra note 48, at 6 (the economies of 
scale offered by agents that pool together the securities of 
different clients enable smaller owners of assets to participate in 
the market. The costs associated with running an efficient 
securities lending operation are beyond many smaller funds).
---------------------------------------------------------------------------

    Proposed Rule 10c-1 would apply to all securities.\70\ The 
Commission preliminarily believes that proposed Rule 10c-1 should apply 
to all securities to ensure that a complete picture of transactions 
involving the loan of securities is provided to the RNSA. According to 
the OFR Pilot Survey, nearly half of the dollar value of assets on loan 
in 2015 were debt instruments.\71\ If the Commission were to limit the 
scope of the proposed Rule (e.g., to only equity securities) then a 
significant number of securities lending transactions would be excluded 
and the market efficiencies and reduction of information asymmetry that 
the Commission anticipates will result from proposed Rule 10c-1 would 
not accrue to non-equity securities.\72\ Accordingly, the proposed Rule 
includes 10c-1 information for all securities lending transactions and 
is not limited to loans of equity securities.
---------------------------------------------------------------------------

    \70\ See Exchange Act Section 3(a)(10), supra note 60.
    \71\ See OFR Pilot Survey, supra note 26, at 8.
    \72\ Additionally, Congress did not limit or specify the classes 
of securities in Section 984 of the DFA.
---------------------------------------------------------------------------

    While the Commission welcomes any public input on this topic, the 
Commission asks commenters to consider the following questions:
    1. Should persons required to provide information regarding 
securities lending transactions to an RNSA under proposed Rule 10c-1 be 
limited to only persons registered with the Commission, such as 
brokers-dealers, investment companies, investment advisers, and 
clearing agencies? If so, why? What would be the impact or limitations 
on the information made available to the public and regulators if 
proposed Rule 10c-1 limited the requirement to provide information to 
an RNSA to persons registered with the Commission? Please identify any 
relevant data, such as the number of securities lending transactions 
that would not be provided to an RNSA if the rule were limited to 
registered persons and the dollar value of such transactions, which 
would be useful for the Commission in considering the effects of the 
proposed Rule.
    2. What, if any, are the broader impacts of requiring that certain 
information be provided to an RNSA, for example to help borrowers and 
lenders evaluate rates and signals, such as whether a security is hard 
to borrow or heavily shorted? Would such a requirement bring more 
efficiency to the market? Please explain.
    3. Are there certain types or categories of Lenders that should be 
excluded from the requirements under proposed Rule 10c-1 to provide 
10c-1 information to an RNSA? If so, please identify such Lender or 
Lenders, and explain why they should be excluded from the requirements 
under proposed Rule 10c-1. For example, should clearing agencies be 
excluded from the requirements under proposed Rule 10c-1 to provide 
Rule 10c-1 information to an RNSA? If so, why? How would such an 
exclusion impact the information available to the public and 
regulators? Should a broker-dealer that is borrowing securities from a 
Lender that is not a broker-dealer have a requirement to provide 10c-1 
information to an RNSA rather than the non-broker-dealer Lender? If so, 
why?
    4. Should borrowers be required to provide 10c-1 information 
instead of, or in addition to, Lenders providing such information? 
Would such a requirement increase the overall costs and burden of the 
requirement to provide 10c-1 information to an RNSA? Is there 
information that a borrower of securities is in a better position to 
provide? Do commenters agree that the requirement to provide 10c-1 
information to an RNSA is appropriately placed on Lenders? If not, why 
not?
    5. Does the proposed Rule not cover any transactions that 
commenters believe should be covered? Does the scope of the proposed 
Rule create opportunities for gaming or evasion of the reporting 
requirements, whether through other economically equivalent instruments 
or otherwise? If so, please explain.
    6. The Commission is proposing to include all securities in the 
scope of the Rule. Is this appropriate, or should certain types of 
securities be excluded from the Rule? If so, which types of securities 
should be excluded, and why? Are certain types of securities not lent?
    7. Should the proposed Rule include an exception or exemption for 
certain securities, such as government securities, from the requirement 
to provide 10c-1 information to an RNSA in proposed Rule 10c-1? If so, 
please identify the type of security and the rationale for excluding 
such security from the requirement to provide 10c-1 information to an 
RNSA in proposed Rule 10c-1.
    8. Should the Commission define what it means to ``loan a 
security''? Should such a definition be included in the Rule? What 
further information is needed?
    9. Is the discussion and overview of the securities lending market 
included in this release accurate? If not, what is inaccurate regarding 
the discussion of the securities lending market? Are there differences 
in the securities lending market depending on the type of security 
loaned, including whether the terms and structures of loans are the 
same or different depending on security type.
    10. As drafted, would the proposed Rule cover all securities 
lending transactions? If not, what transactions would not be covered by 
the proposed Rule? How might a Lender structure a securities lending 
transaction to avoid providing information to an RNSA?
(b) Providing Information to an RNSA
    The Commission preliminarily believes that Lenders should be 
required to provide the material terms of securities lending 
transactions to an RNSA. Currently, FINRA is the only RNSA and has 
experience establishing and maintaining systems that are designed to 
capture transaction reporting, such as the system in proposed Rule 10c-
1. For example, FINRA has established and operates several systems for 
the reporting of transactions in equity and fixed income 
securities.\73\ Indeed, the majority of securities lending transactions 
are through broker-dealers that are members of FINRA.\74\ Most broker-
dealers already have connectivity to FINRA's systems to report trades 
in equity and fixed income

[[Page 69809]]

securities. Accordingly, this requirement might help reduce the cost of 
providing information to an RNSA because most FINRA members will 
already have established connectivity to FINRA's systems. Furthermore, 
as discussed below,\75\ the proposal would allow Lenders, including 
lending agents, who are not members of FINRA to contract with reporting 
agents that have connectivity to FINRA. The Commission preliminarily 
believes that this could reduce the costs for a non-FINRA-member Lender 
because rather than incur the costs associated with directly reporting 
10c-1 information, including the costs of establishing connectivity 
with FINRA, it will have the option to use a third party with existing 
connectivity to provide the Lender's 10c-1 information to FINRA. In 
addition, requiring 10c-1 information be provided to FINRA could assist 
FINRA with its surveillance of FINRA Rules 4314 (Securities Loans and 
Borrowings), 4320 (Short Sale Delivery Requirements), and 4330 
(Customer Protection--Permissible Use of Customers' Securities) 
regarding securities lending and short selling.
---------------------------------------------------------------------------

    \73\ FINRA operates a number of transparency reporting systems 
including the Alternative Display Facility (displaying quotations, 
reporting trades, and comparing trades); OTC Transparency (over-the-
counter (OTC) trading information on a delayed basis for each 
alternative trading system (ATS) and member firm with a trade 
reporting obligation under FINRA rules); OTC Reporting Facility 
(ORF) (reporting of trades in OTC Equity Securities executed other 
than on or through an exchange and for trades in restricted equity 
securities effected under Rule 144A under the Securities Act of 1933 
and dissemination of last sale reports); Trade Reporting and 
Compliance Engine (TRACE) (facilitates the mandatory reporting of 
over-the-counter transactions in eligible fixed income securities); 
and Trade Reporting Facility (TRF) (reporting of transactions 
effected otherwise than on an exchange).
    \74\ See supra note 68.
    \75\ See infra Part III.A.2.
---------------------------------------------------------------------------

    Under Section 10 of the Exchange Act, the Commission has the 
authority to require persons that are not members of an RNSA to provide 
information to an RNSA, and has previously exercised this authority. 
Exchange Act Rule 10b-17 requires any issuer of a class of securities 
publicly traded by the use of any means or instrumentality of 
interstate commerce or of the mails to provide certain information to 
an RNSA within a prescribed period of time to give notice to the market 
regarding certain corporate events, such as the payment of dividends, 
stock splits, or rights offerings.\76\ The Commission approved FINRA 
rules and fees to support its administration of Exchange Act Rule 10b-
17, which provided for oversight of non-FINRA members' compliance with 
Rule 10b-17.\77\
---------------------------------------------------------------------------

    \76\ 17 CFR 240.10b-17.
    \77\ See FINRA Rule 6490; See also Exchange Act Release 62434 
(July 1, 2010); 75 FR 39603 (July 9, 2010) (approving FINRA Rule 
6490).
---------------------------------------------------------------------------

    The Commission could take an alternative approach to providing 10c-
1 information to an RNSA. For example, as discussed in Part VI below, 
the Commission could require that Lenders provide 10c-1 information 
directly to the Commission. The Commission does not currently have the 
systems designed to facilitate trade-by-trade reporting and disclosure 
as contemplated by the proposed Rule. As noted above, FINRA has 
established and maintained systems similar to what is contemplated in 
the proposed Rule. As such, the Commission preliminarily believes that 
requiring Lenders to provide 10c-1 information to FINRA rather than to 
the Commission, will effectively accomplish the policy objectives of 
the Rule. As discussed throughout this release, the Commission 
preliminarily believes that FINRA is well-positioned to accommodate the 
trade-by-trade reporting of securities lending transactions.
    While the Commission welcomes any public input on this topic, the 
Commission asks commenters to consider the following questions:
    11. Are there methods for the Commission to improve transparency in 
the securities lending market other than requiring Lenders to provide 
the material terms of a securities lending transaction to an RNSA? If 
so, how would the commenter suggest improving transparency in the 
securities lending market?
    12. Would Lenders use a reporting agent to provide 10c-1 
information to an RNSA? Why might a Lender choose not to use a 
reporting agent? Would Lenders be unwilling to use reporting agents due 
to concerns regarding maintaining the confidentiality of the 
information that the reporting agent would be required to provide an 
RNSA?
    13. Should proposed Rule 10c-1 require that Lenders provide 
material information to an entity other than an RNSA? For example, 
should proposed Rule 10c-1 require the material terms of a securities 
lending transaction be provided directly to the Commission, a clearing 
agency, or some other entity? If so, should the proposed Rule require 
that such entity be registered with the Commission? If the commenter 
believes the entity does not need to be registered with the Commission 
please explain how the Commission would oversee the repository of the 
information?
    14. Do commenters believe that FINRA, as the only current RNSA, is 
the appropriate organization to receive, store, and disseminate the 
10c-1 information? What concerns do commenters have, if any, about 
requiring Lenders that are not FINRA members to either provide 
information to FINRA themselves, or contract with a reporting agent to 
provide the information to FINRA on their behalf? Do commenters believe 
the proposed approach of establishing RNSAs as the exclusive recipients 
and disseminators of 10c-1 information has implications for data 
quality, compared to alternative approaches? If so, are there 
alternative approaches commenters believe would address or mitigate 
those implications?
2. Persons Responsible for Providing Information to an RNSA
    To reduce the potential for double counting of securities lending 
transactions and limit the burden on Lenders, proposed Rule 10c-1 would 
specify who is responsible for providing information to an RNSA in 
certain factual circumstances. First, although the proposed Rule places 
an obligation on any person that loans a security on behalf of itself 
or another person, if such Lender is using an intermediary such as a 
bank, clearing agency,\78\ or broker-dealer for the loan of securities, 
such lending agent shall have the obligation to provide the 10c-1 
information to an RNSA on behalf of the Lender.\79\ Second, persons 
with a reporting obligation, including a lending agent, could enter 
into a written agreement with a broker-dealer that agrees to provide 
the 10c-1 information to the RNSA on its behalf (``reporting agent''). 
Finally, Lenders are required to directly provide the RNSA with the 
10c-1 information if the Lender is not using a lending agent or not 
employing a reporting agent to provide the 10c-1 information to an 
RNSA.
---------------------------------------------------------------------------

    \78\ The Commission understands that certain clearing agencies 
currently are offering to act as an intermediary on behalf of 
beneficial owners to lend the beneficial owners' securities. In this 
circumstance, a clearing agency would be acting as a lending agent 
and would be required to provide 10c-1 information to an RNSA. 
Specifically, it is the clearing agency's action as an intermediary 
on behalf of a beneficial owner to loan the beneficial owner's 
securities that triggers the requirement to provide the proposed 
10c-1 information to an RNSA and not the clearance of the securities 
lending transaction by itself.
    \79\ As discussed in supra Part II.A, certain digital platforms 
provide electronic trading in the securities lending market. These 
platforms, to the extent they serve as lending agents on behalf of 
beneficial owners, would be required to provide the 10c-1 
information to an RNSA. If a platform is not serving as a lending 
agent, the beneficial owner would be required to provide the 10c-1 
information to an RNSA.
---------------------------------------------------------------------------

(a) Lending Agent Provides Information to an RNSA
    The Commission preliminarily believes it is appropriate to require 
lending agents to provide 10c-1 information to the RNSA on behalf of 
beneficial owners that employ lending agents, because lending agents 
are in the best position to know when securities have been loaned from 
the portfolios that the lending agent represents. Indeed, a beneficial 
owner might not know that the lending agent has lent securities from 
the portfolio until after the time prescribed by proposed Rule 10c-1 to 
provide 10c-1 information to the RNSA. Furthermore, by requiring the 
lending agent to provide 10c-1 information to the RNSA, the proposed

[[Page 69810]]

Rule would require the party intermediating the loan (i.e., the lending 
agent) to also be responsible for providing the material terms of the 
loan to the RNSA. Specifically, lending agents are directly involved 
with the loan of securities on behalf of a beneficial owner. In such a 
circumstance, the beneficial owner is passive. For purposes of proposed 
Rule 10c-1, a beneficial owner that makes available the securities in 
its portfolio for a lending agent to lend on its behalf is not directly 
involved with the lending of its securities. Rather, it is the active 
steps taken by the lending agent that directly results in a loan of 
securities. For example, a customer of a broker-dealer that 
participates in their broker-dealer's fully paid lending program might 
lack the ability to provide 10c-1 information to the RNSA.\80\ 
Additionally, the beneficial owner may lack access to some of the 10c-1 
information, such as the identifying information of the borrower. 
Similarly, an institutional investor that uses a lending agent to 
manage its securities lending program might not know within 15 minutes 
that the lending agent has loaned securities from the institutional 
investor's portfolio, or details on the specific borrower, negotiated 
fees, or rebate rates.\81\
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    \80\ See Exchange Act Rule 15c3-3(b)(3). 17 CFR 240.15c3-
3(b)(3).
    \81\ For additional discussion of how lending agents manage the 
portfolios of the beneficial owners that they lend shares on behalf 
of, see infra Part VI.B.4.b) (discussing how lending programs 
generally pool shares across accounts with which they have lending 
agreements to create a common pool of shares available to lend).
---------------------------------------------------------------------------

    Accordingly, under proposed Rule 10c-1(a)(1)(i)(B) the beneficial 
owner would not be required to provide the 10c-1 information to an RNSA 
for any loan of securities intermediated by a lending agent. The 
Commission preliminarily believes that responsibility for failing to 
provide 10c-1 information to an RNSA should be on the lending agent and 
not the beneficial owners because the lending agent is directly 
responsible for the loan of securities. Furthermore, placing 
responsibility on beneficial owners who do not have access to all the 
necessary information to provide information to the RNSA might have a 
chilling effect on persons being willing to loan securities, which 
could negatively impact the securities market generally.
(b) Reporting Agent Provides Information to an RNSA
    The Commission preliminarily believes it is appropriate that a 
Lender, including a lending agent, be able to enter into a written 
agreement with a broker-dealer acting as a reporting agent to permit 
the reporting agent to provide the 10c-1 information to an RNSA on 
behalf of the Lender because such an arrangement will ease burdens on 
Lenders, including lending agents, that do not have or do not want to 
establish connectivity to the RNSA. In order to employ a reporting 
agent to report the 10c-1 information to the RNSA on behalf of the 
Lender, proposed Rule 10c-1 would require the Lender and reporting 
agent to enter into a written agreement. Such written agreements under 
proposed Rule 10c-1(a)(1)(ii)(A) would memorialize and provide proof of 
the contractual obligations for the reporting agent to provide the 10c-
1 information to an RNSA. Proposed Rule 10c-1(a)(1)(ii)(B) would 
require the reporting agent to provide the 10c-1 information to an RNSA 
if the reporting agent has entered into a written agreement to provide 
the 10c-1 information to an RNSA pursuant to Rule 10c-1(a)(1)(ii)(A) 
and such reporting agent is provided timely access to such 10c-1 
information. The Commission preliminarily believes that it is 
appropriate for a reporting agent to be responsible for providing 
information to the RNSA if it contractually agrees to provide such 
information to the RNSA and it has timely access to such information. 
In such an instance, the person who enters into the written agreement 
with the reporting agent is not required to provide the 10c-1 
information to the RNSA. If, however, the reporting agent is unable to 
provide 10c-1 information to the RNSA because it lacks timely access to 
it, the person who enters into the written agreement with the reporting 
agent is responsible for providing such information to the RNSA.\82\ 
For purposes of proposed Rule 10c-1 ``timely access'' would mean that 
the reporting agent has access to the 10c-1 information with sufficient 
time to provide such information to the RNSA within the fifteen minutes 
after the securities loan is effected or the terms of the loan are 
modified. This paragraph of proposed Rule 10c-1 is designed to ensure 
that persons provide the 10c-1 information to a reporting agent so that 
the reporting agent can provide the information to an RNSA within the 
required timeframe. The Commission preliminarily believes that clearly 
delineating who is responsible for providing the 10c-1 information to 
the RNSA would aid in compliance with proposed Rule 10c-1 because each 
party will have a clear understanding of its obligations when it enters 
into a reporting agreement. Namely, the person or lending agent would 
have an obligation to provide access to the 10c-1 information to the 
reporting agent in a timely manner; and the reporting agent would have 
an obligation to provide the 10c-1 information to the RNSA.
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    \82\ For example, if a reporting agent establishes an automated 
system that pulls 10c-1 information directly from the records 
management system of a beneficial owner but the beneficial owner 
disables the connectivity to the automated system for any reason, 
the reporting agent would not have access to the 10c-1 information. 
As a result, the beneficial owner would be required to provide 10c-1 
information to an RNSA under paragraph (a)(1)(ii)(C) of proposed 
Rule 10c-1.
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    Furthermore, proposed Rule 10c-1(a)(2)(ii) would require that the 
reporting agent enter into a written agreement with the RNSA. Such 
written agreement must explicitly permit the reporting agent to provide 
10c-1 information on behalf of Lenders. Additionally, proposed Rule 
10c-1(a)(2)(iii) would require the reporting agent to provide the RNSA 
with a list of each beneficial owner or lending agent on whose behalf 
the reporting agent is providing 10c-1 information and to update the 
list by the end of the day when the list changes. By requiring a 
written agreement between the reporting agents and the RNSA, the 
proposed Rule would require that the parties create documentation 
regarding the agreement to provide 10c-1 information, which would 
further provide evidence of the commitment by the reporting agent to 
provide 10c-1 information to the RNSA. Additionally, requiring the 
reporting agent to provide the identities of each person and lending 
agent on whose behalf the reporting agent is providing 10c-1 
information to the RNSA provides the Commission with the ability to 
obtain the identities of such Lenders and broker-dealers (as discussed 
below) from the RNSA, which would aid the Commission with its oversight 
of the Lenders that have entered into agreements with reporting agents, 
including with their compliance with the proposed Rule.
    Under the proposed Rule, only a broker-dealer could serve as a 
reporting agent. The Commission preliminarily believes that limiting 
who can act as a reporting agent to broker-dealers, which are regulated 
directly by the Commission, is in the public interest and would protect 
investors because it would aid the Commission in overseeing compliance 
with proposed Rule 10c-1. Specifically, by limiting reporting agents to 
broker-dealers the Commission could directly oversee the reporting 
agent's compliance with the requirement to provide 10c-1

[[Page 69811]]

information to the RNSA. Additionally, requiring that reporting agents 
be broker-dealers provides the RNSA, as well as other self-regulatory 
organizations (``SROs''), with the ability to oversee the activity of 
its members that perform a reporting agent function. If reporting 
agents were to include other entities the Commission might lack an 
efficient way to oversee how the entity is complying with its 
responsibility to provide 10c-1 information to an RNSA under proposed 
Rule 10c-1.
    Proposed Rule 10c-1(a)(2)(i) would require any reporting agent that 
enters into a written agreement to provide information on behalf of 
another person to establish, maintain, and enforce reasonably designed 
written policies and procedures to provide 10c-1 information to an RNSA 
in the manner, format, and time consistent with Rule 10c-1. 
Accordingly, a broker-dealer could not act as a reporting agent unless 
the broker-dealer establishes, maintains, and enforces such written 
policies and procedures. The requirement for a reporting agent to have 
such written policies and procedures would provide regulators with a 
means to examine and enforce a reporting agent's compliance with 
proposed Rule 10c-1.
    Proposed Rule 10c-1(a)(2)(iv) would also require that the reporting 
agent maintain certain information for a period of three years, the 
first two years in an easily accessible place. The information required 
to be maintained would include the 10c-1 information provided by the 
beneficial owner or the lending agent to the reporting agent, including 
the time of receipt, as well as the 10c-1 information that the 
reporting agent sent to the RNSA, and time of transmission. 
Additionally, the reporting agent would have to retain the written 
agreements between the reporting agents and beneficial owners, lending 
agents, and the RNSA. The recordkeeping requirements are designed to 
help facilitate the Commission's oversight of reporting agents and 
review the reporting agents' compliance with the requirement to provide 
the 10c-1 information to the RNSA.
(c) Beneficial Owner Provides Information to an RNSA
    As discussed above, proposed Rule 10c-1(a)(1)(i)(B) and 
(a)(1)(ii)(C) provide that if a lending agent or reporting agent is 
responsible for providing information required by Rule 10c-1 to an RNSA 
pursuant to paragraphs (a)(1)(i) or (ii), the beneficial owner is not 
required to provide the 10c-1 information to the RNSA. Accordingly, if 
a beneficial owner does not employ a lending agent or enter into a 
written agreement with a reporting agent, the beneficial owner would be 
responsible for complying with the requirements of proposed Rule 10c-
1(a) to provide 10c-1 information to the RNSA. The Commission 
preliminarily believes that only large beneficial owners run their own 
lending programs without the assistance of a lending agent because 
securities lending is a low-margin business and portfolios need to be 
of a sufficient size for a securities lending program to be 
economically feasible.\83\ Furthermore, to the extent a beneficial 
owner is not using a lending agent, the Commission preliminarily 
believes that it would likely enter into a written agreement with a 
reporting agent.
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    \83\ See supra note 37.
---------------------------------------------------------------------------

(d) Examples of Who Is Responsible for Providing Information to an RNSA
    To provide clarity regarding who is responsible for providing 10c-1 
information to an RNSA the Commission offers the following examples:
    A. Beneficial Owner and Lending Agent: A beneficial owner is 
represented by a lending agent that is a bank. The lending agent 
intermediates the loan of securities to a broker-dealer (the borrower) 
on behalf of the beneficial owner. In this scenario, the lending agent 
would be responsible for providing the 10c-1 information to the RNSA. 
If, however, the beneficial owner uses a person to intermediate the 
securities lending transaction that is not a bank, clearing agency, or 
broker-dealer the beneficial owner would be responsible for providing 
the 10c-1 information to the RNSA.
    B. Beneficial Owner and Clearing Agency: As noted above, some 
clearing agencies have established programs to intermediate the loan of 
securities on behalf of beneficial owners. In such a scenario, the 
clearing agency would be a lending agent and, similar to example A, 
would be responsible for providing the 10c-1 information to the RNSA. A 
clearing agency not acting as a lending agent would not have a 
responsibility to provide 10c-1 information to an RNSA. For example, if 
the clearing agent cleared a securities lending transaction but did not 
act as an intermediary on behalf of a beneficial owner for the loan of 
securities, the clearing agency would not be responsible for providing 
the 10c-1 information to an RNSA.
    C. Lending Agent and Reporting Agent: Same scenario as example A, 
however, this time the lending agent has entered into a written 
agreement with a reporting agent, which happens to be the same broker-
dealer that borrowed the shares in example A. In this scenario, the 
reporting agent- even though it is the broker-dealer that borrowed the 
securities--would be responsible for providing the 10c-1 information to 
the RNSA.
    D. Onward Lending: Same scenario as example A, however, the broker-
dealer that borrowed the securities in example A loans the borrowed 
securities to a hedge fund. In this scenario, the broker-dealer would 
be responsible for providing the 10c-1 information to the RNSA 
regarding the securities lending transaction between the broker-dealer 
and the hedge fund because the broker-dealer is lending the securities 
that it borrowed. In this instance, the broker-dealer is loaning the 
securities on behalf of itself. The obligations to provide information 
as described in example A for the first lending transaction would 
remain unchanged.
    E. No Lending Agent or Reporting Agent: If a beneficial owner does 
not employ a lending agent or reporting agent, and loans its 
securities, the beneficial owner would be responsible for providing the 
10c-1 information to the RNSA.
    F. Reporting Agent Fails to Provide 10c-1 Information to the RNSA 
on Behalf of a Person or Lending Agent: A lending agent enters into a 
written agreement with a reporting agent to provide 10c-1 information 
to an RNSA. The lending agent provides the reporting agent with timely 
access to the 10c-1 information, but the reporting agent fails to 
provide such information to the RNSA. The reporting agent would have 
violated proposed Rule 10c-1 because it would have been responsible for 
providing 10c-1 information to the RNSA. However, if the reporting 
agent was not provided with timely access to the 10c-1 information by 
the lending agent, the lending agent would have been responsible for 
providing the 10c-1 information to the RNSA.
    G. Fully Paid Securities Lending Program: If a broker-dealer lends 
a customer's securities that are fully paid, the broker-dealer would be 
responsible for providing the 10c-1 information to the RNSA. In this 
instance, the broker-dealer, acting as the lending agent, is loaning 
the securities on behalf of its customer.
    While the Commission welcomes any public input on this topic, the 
Commission asks commenters to consider the following questions:
    15. Should proposed Rule 10c-1 permit reporting agents to be 
entities other than broker-dealers? If yes, what other persons should 
be added to the list of persons with whom a Lender can

[[Page 69812]]

enter into a written agreement to provide the 10c-1 information to an 
RNSA and why?
    16. Should lending agents include other entities in addition to 
banks, clearing agencies, and broker-dealers? If yes, what other 
entities should be added to the list of persons with whom a Lender can 
enter into a written agreement to provide the 10c-1 information to an 
RNSA and why?
    17. The proposed Rule requires a reporting agent that provides 10c-
1 information to an RNSA on behalf of another person to establish, 
maintain, and enforce written policies and procedures that are 
reasonably designed to ensure compliance with the proposed Rule by the 
reporting agent. Is such a requirement necessary or should it be 
modified? Please explain why or why not. The proposed Rule also 
requires that a reporting agent retain records of 10c-1 information 
provided to the RNSA for three years. Is such a requirement necessary 
or should it be modified? Please explain. Are there other records or 
supporting records that should be retained? If yes, what is the length 
of time that a reporting agent should retain such records and why?
    18. What impact, if any, would the recordkeeping requirements in 
paragraph (a)(2)(iv) have on liquidity in the lending market or the 
cash market for securities that are subject to the requirement to 
provide 10c-1 information?
    19. Should the proposed Rule require that a person who enters into 
a written contract whereby a reporting agent agrees to provide 10c-1 
information to an RNSA, pursuant to paragraphs (a)(1)(ii) of the 
proposed Rule, make a determination that it is reasonable to rely on 
the reporting agent to provide 10c-1 information? Please discuss. 
Should the reporting agent be required to provide regular notice to its 
principal of compliance by the reporting agent with its 10c-1 reporting 
responsibilities (e.g., if the reporting agent fails to timely provide 
the 10c-1 information to an RNSA)? Please discuss. Should the reporting 
agent be required to provide notice to its principal and/or the RNSA if 
it is unable to timely access the Lender's 10c-1 information? Please 
discuss.
    20. Should the Rule identify specific contractual terms that must 
be included in the written agreement between the reporting agent and 
the person with the requirement to provide 10c-1 information to the 
RNSA? If so, what specific contractual terms should the Rule include, 
e.g., notice when 10c-1 information is provided to the RNSA, notice 
that information was provided late?

B. Information To Be Provided to an RNSA

    As discussed throughout this release, to increase the transparency 
of information available to market participants with respect to the 
loan or borrowing of securities, proposed Rule 10c-1 contains data 
elements consisting of the specified material terms of securities 
lending transactions that Lenders must provide to an RNSA. The 
Commission preliminarily believes that the data elements that would be 
provided to an RNSA, and the subsequent public disclosure of certain of 
these data elements, would vastly increase the transparency of 
information available. Unlike the data that is currently available 
through private vendors, the data that an RNSA would make public under 
proposed Rule 10c-1 would be available to all without charge or usage 
restrictions, would have consistently applied definitions and 
requirements, and would capture all loans of securities. Proposed Rule 
10c-1 may, therefore, provide a more complete and timely picture of 
trading, including interest in short selling and price discovery for 
securities lending. The data elements provided to an RNSA under 
proposed Rule 10c-1 are also designed to provide RNSAs with data that 
might be used for in-depth monitoring and surveillance.
    Paragraphs (b) through (d) contain loan-level data elements. These 
data elements would be required to be provided to an RNSA within 15 
minutes after each loan is effected or modified, as applicable.\84\ 
Paragraph (e) contains additional data elements related to the total 
amount of each security available to loan and total amount of each 
security on loan that Lenders must provide to the RNSA by the end of 
each business day that such person was required to provide information 
to an RNSA under paragraph (a) or had an open securities loan about 
which it was required provide information to an RNSA under paragraph 
(a). Proposed Rule 10c-1 also requires RNSAs to make the data elements 
provided under paragraphs (b), (c), and (e) \85\ publicly available as 
soon as practicable, and in the case of paragraph (e) data, not later 
than the next business day. For the purposes of proposed Rule 10c-1, a 
loan would be effected when it is agreed to by the parties. Similarly, 
a loan would be modified when the modification is agreed to by the 
parties.
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    \84\ As discussed in detail below, paragraph (c) would only 
require that information about a modification be provided to an RNSA 
in certain circumstances. See Part III.B.1.b); see also proposed 
Rule 10c-1(c).
    \85\ As discussed below, proposed Rule 10c-1(d) requires the 
provision of certain data to an RNSA that will not be made public by 
the RNSA. These data elements are important for regulatory purposes 
but public release of the data would identify market participants or 
could reveal information about the internal operations of a market 
participant.
---------------------------------------------------------------------------

    As discussed in Part VI, the Commission preliminarily believes that 
the requirement to provide to an RNSA the loan-level data elements in 
proposed Rule 10c-1(b) through (d) within 15 minutes after each loan is 
effected (or, for modifications, within 15 minutes after a loan is 
modified) and the subsequent disclosure of certain of these data 
elements by the RNSA as soon as practicable would increase the 
transparency of information available to market participants by 
allowing for the evaluation of the terms of recently effected loans and 
any signals that these terms provide. Also, in a fast-moving market, 
market participants would benefit from visibility into recent 
transactions when considering whether to accept proposed terms for new 
loans or accept requests to modify existing loans.
    Further, as discussed in Part VI, the Commission also preliminarily 
believes that the requirement to provide to an RNSA the data elements 
concerning the total amount of securities available to lend and the 
total amount of securities on loan in proposed Rule 10c-1(e) at the end 
of each day will provide market participants with an understanding of 
the available supply of securities and a simple, centralized daily 
snapshot of the number of securities on loan.\86\ The total amount of 
securities on loan varies over the course of the day, but the 
Commission preliminarily believes that the intraday information would 
not be necessary in light of other 10c-1 information that will be made 
public intraday by the RNSA. For example, market participants can use 
the intraday loan-level data made public by the RNSA under paragraphs 
(b) and (c) and the most recent daily information made public by the 
RNSA under paragraph (e) together to estimate intraday information.
---------------------------------------------------------------------------

    \86\ As discussed below, the Commission is not specifying the 
parameters of ``the amount of the security'' to allow an RNSA 
flexibility with respect to any proposed rules. For example, an RNSA 
could propose rules that identify for different types of securities 
the information that constitutes the ``amount of the security.'' See 
infra Part III.B.1.a).
---------------------------------------------------------------------------

    Regardless of whether the data element is required to be provided 
to an RNSA intraday or daily, proposed Rule 10c-1 would require the 
RNSA to make certain data elements public as soon as practicable. The 
Commission

[[Page 69813]]

preliminarily believes that not mandating a specific timeframe will 
provide the RNSA with flexibility to structure its systems, policies, 
and procedures but anticipates that the RNSA would make the data 
publicly available on a rolling basis very shortly after receipt. With 
respect to information under paragraph (e), such information would be 
required to be made publicly available as soon as practicable but not 
later than the next business day. Because the RNSA would be required to 
perform calculations to aggregate by security the data elements 
provided under paragraph (e), the Commission preliminarily believes 
that specifying this timeframe would provide RNSAs with the time needed 
to perform these calculations while also requiring that the information 
be made publicly available in a timely manner.
    While the Commission welcomes any public input on this topic, the 
Commission asks commenters to consider the following questions:
    21. Does the reporting of loan-level information within 15 minutes 
after each loan is effected or modified, as applicable, provide 
sufficient transparency? Please explain why or why not. If it would 
not, please provide an alternative and explain why the alternative 
would be preferable. For example, would end of day reporting for loan-
level information provide sufficient transparency--why or why not?
    22. For the data elements provided to an RNSA under paragraphs (a) 
through (c), should the Commission specify how quickly an RNSA should 
make the information publicly available? If so, which information and 
how long should an RNSA be given? Would limiting an RNSA's flexibility 
to structure its systems, policies, and procedures by specifying a 
timeframe create operational problems for the RNSA?
    23. Should the Commission specify a different or more specific 
timeframe than ``not later than the next business day'' for the RNSA to 
make information provided under paragraph (e) publicly available? Does 
the ``no later than the next business day'' timeframe provide RNSAs 
with the time needed to perform these calculations while also requiring 
that the information be made publicly available in a timely manner?
1. Data Elements Provided to an RNSA
    As discussed, to facilitate transparency in the securities lending 
market, proposed Rule 10c-1(b) through (e) would require Lenders to 
report specified data elements to an RNSA and for the RNSA to make 
certain data elements publicly available. As a preliminary matter, 
because the RNSA would be required to implement rules regarding the 
format and manner to administer the collection of information,\87\ 
proposed Rule 10c-1 lists the data elements that persons would be 
required to provide to an RNSA, but does not specify granular 
instructions for data elements or the formatting required for 
submission to the RNSA.
---------------------------------------------------------------------------

    \87\ Proposed Rule 10c-1(f). For a further discussion of this 
provision of proposed Rule 10c-1, see infra Part III.C.
---------------------------------------------------------------------------

(a) Initial Loan-Level Data Elements
    Proposed Rule 10c-1(b) contains loan-level data elements that would 
be required to be provided to an RNSA within 15 minutes after a loan is 
effected and would be made public by an RNSA as soon as practicable. 
Proposed Rule 10c-1(b) also requires an RNSA to assign each loan a 
unique transaction identification identifier.\88\ The specific data 
elements in paragraph (b) generally fall into one of two categories: 
(1) Data elements that identify each loan of securities and (2) data 
elements that reflect the negotiated terms for each loan of securities.
---------------------------------------------------------------------------

    \88\ This unique reference identifier would be necessary to 
provide an RNSA with modified loan terms under proposed Rule 10c-
1(c).
---------------------------------------------------------------------------

    The data elements in paragraphs (b)(1) through (b)(5) contain 
material terms that are not negotiated between the parties. These data 
elements would provide important information that would allow market 
participants and regulators to track, understand, and perform analyses 
on the negotiated material terms that are discussed below. These data 
elements would also provide an RNSA with enough information to create a 
unique transaction identifier as required by proposed Rule 10c-1(b). 
Absent these data elements, market participants would not be able to 
track the time or date that loans are made or the platform where the 
loan was executed, or to identify which security was involved.
    These data elements are (1) the legal name of the security issuer, 
and the Legal Entity Identifier (``LEI'') of the issuer, if the issuer 
has an active LEI; (2) the ticker symbol, ISIN, CUSIP, or FIGI of the 
security, if assigned, or other identifier; (3) the date the loan was 
effected; (4) the time the loan was effected; and (5) for a loan 
executed on a platform or venue, the name of the platform or venue 
where executed.
    First, paragraphs (1) and (2) of proposed Rule 10c-1 identify the 
particular security being lent. Paragraph (1) is designed to provide 
information on the issuer, and paragraph (2) is designed to provide 
information on the particular security. These paragraphs are designed 
to be flexible and comprehensive so that every security that can be 
loaned is able to be identified. In particular, with respect to 
paragraph (b)(1), the Commission preliminarily believes that an issuer 
that lacks an LEI would have a legal name. With respect to paragraph 
(b)(2), the Commission preliminarily believes that securities usually 
would have at least one of the items listed assigned to it. If not, the 
RNSA could require an ``other identifier'' for further flexibility 
under paragraph (2).
    Next, both paragraphs containing the data elements concerning time 
and date required to be provided to the RNSA, (b)(3) and (b)(4), 
require that information be reported about the time and date that the 
transaction was effected. Because the loan-level data elements in 
paragraph (b) are designed for market participants to be able to 
evaluate the terms of recently effected loans and any signals that 
these terms provide, the Commission preliminarily believes that the 
time and date the transaction was effected will be more useful to 
market participants than other times and dates because market 
participants will be able to have a clear picture of the signals that 
the parties to that transaction were considering when entering into the 
loan.\89\
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    \89\ For example, the Commission could have chosen the time and 
date that a transaction settles. Since settlement may take a period 
of time to occur after agreement, however, there may be changes to 
market dynamics in the time period between agreement and settlement. 
In such a case, the information made publicly available by the RNSA 
may not be as useful because the conditions of the market at the 
time the loan was agreed to would not be known.
---------------------------------------------------------------------------

    For a loan effected on a platform or venue, paragraph (b)(5) would 
require the name of the platform or venue where effected. The 
Commission preliminarily believes that requiring the identity of a 
platform or venue where transactions are taking place could increase 
efficiency in the market by alerting investors to potential sources of 
securities to borrow.\90\ As discussed in Part II.A, there are 
currently digital platforms for securities lending, which provide 
electronic trading in the securities lending market. There are also 
efforts to develop and expand peer-to-

[[Page 69814]]

peer lending platforms involving multiple beneficial owners and 
borrowers, where securities lending transactions take place without the 
use of traditional intermediaries. The Commission is not defining 
``platform or venue'' in proposed Rule 10c-1 to provide an RNSA with 
the discretion to structure its rules so that different structures of 
platforms or venues could be accommodated.
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    \90\ Making information that would be provided to an RNSA under 
paragraph (d) about the identity of the parties lending securities 
publicly available would also alert investors to potential sources 
of securities to borrow. As stated infra in Part III.B.1.c), 
however, the Commission preliminarily believes that making this 
information available to the public would be detrimental because it 
would reveal a specific market participant's investment decisions.
---------------------------------------------------------------------------

    Based on the market conventions that are discussed in Part II.A, 
the Commission preliminarily believes that the data elements in 
paragraphs (b)(6) through (b)(12) reflect the material terms that 
borrowers and Lenders negotiate when arranging loans of securities. 
Because these terms are negotiated, increasing the transparency of 
information will provide market participants with meaningful data that 
could be used when structuring, pricing, or evaluating loans of 
securities. Increasing transparency would also allow market 
participants to analyze signals obtained from the securities lending 
market when considering investment or trading decisions for a security. 
Further, increasing transparency would also permit the RNSA to perform 
in-depth monitoring and surveillance of securities lending transactions 
to identify trends and any anomalous market patterns.
    These data elements are: (6) The amount of the security loaned; (7) 
for a loan not collateralized by cash, the securities lending fee or 
rate, or any other fee or charges; (8) the type of collateral used to 
secure the loan of securities; (9) for a loan collateralized by cash, 
the rebate rate or any other fee or charges; (10) the percentage of 
collateral to value of loaned securities required to secure such loan; 
(11) the termination date of the loan, if applicable; and (12) whether 
the borrower is a broker or dealer, a customer (if the person lending 
securities is a broker or dealer), a clearing agency, a bank, a 
custodian, or other person.
    With respect to the data element in paragraph (b)(6), the amount of 
the security loaned or borrowed, the Commission is not specifying the 
parameters of ``the amount of the security'' to allow an RNSA 
flexibility to propose rules that identify for different types of 
securities what information constitutes the ``amount of the security.'' 
For example, an RNSA could propose rules that require the number of 
shares be provided for equity securities and the par value of debt 
securities to accommodate differences in the markets for these 
securities. This data element would give market participants the 
ability to infer an estimate of the total amount of each security 
available to lend or on loan intraday by cross-referencing data made 
public the prior day by the RNSA pursuant to paragraph (e).\91\ It 
would also give market participants the ability to observe how the size 
of loans affects other terms of loans.
---------------------------------------------------------------------------

    \91\ For a discussion of the data elements in paragraph (e), see 
infra Part III.B.1.d).
---------------------------------------------------------------------------

    As discussed in Part II.A, loans of securities can be 
collateralized in different ways and the structure of the payments 
depends on the type of collateral used. The data elements in proposed 
Rule paragraphs (b)(7) through (b)(10) would capture compensation 
arrangements regardless of the collateral used.\92\ Accordingly, to 
provide context, paragraph (b)(8) would require information about the 
type of collateral used to secure the loan to be provided to the RNSA. 
For this data element, the asset class of the collateral would be 
provided, but the Commission is not including a list of asset classes 
in order to provide the RNSA with the discretion to determine a 
thorough list.\93\ To facilitate a deeper understanding of the 
collateral posted, paragraph (b)(10) would require that the percentage 
of collateral to value of loaned securities required to secure such 
loan be provided to the RNSA. Paragraph (b)(7) would require that, for 
a loan not collateralized by cash, the securities lending fee or rate, 
or any other fee or charges be provided to the RNSA. In contrast, for 
loans that are collateralized by cash, paragraph (b)(9) would require 
that the rebate rate or any other fees or charges be provided to the 
RNSA.
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    \92\ Certain of these data elements may not apply to every loan. 
For example, a Lender would not be able to provide data pursuant to 
paragraph (b)(9) if the loan is not collateralized by cash. The 
Commission is proposing to include each of these data elements in 
proposed Rule 10c-1 to capture pricing and collateral information 
for every loan, but the RNSA may provide Lenders with instructions 
about how to provide information when a data element is not 
applicable to a specific loan.
    \93\ For example, an RNSA could look to the 9 categories of 
collateral from the OFR Pilot Survey. These 9 categories were: (1) 
U.S. Treasury Securities; (2) U.S. Government Agency Securities; (3) 
Municipal Debt Securities; (4) Non-U.S. Sovereign or Multinational 
Agency Debt Securities; (5) Corporate Bonds; (6) Private Structured 
Debt Securities; (7) Equity Securities; (8) Cash as securities; and 
(9) Others. See Off. of Fin. Research, Securities Lending Pilot Data 
Collection, at 12 (Sep. 2015), available at https://www.financialresearch.gov/data/files/SecLending_Data_Collection_Instructions.pdf (``Securities Lending 
Pilot Data Collection'').
---------------------------------------------------------------------------

    Paragraph (b)(11) would require that the termination date of the 
loan be provided to the RNSA, if applicable. As discussed above in Part 
II.A, it is typical market practice for securities loans to be open-
ended, and, therefore, the securities may be recalled upon notice given 
by the Lender. In contrast, some loans are for a specific term. The 
Commission preliminarily believes that this information will provide 
market participants with an understanding of the potential future 
demand and supply of securities.\94\
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    \94\ For further discussion about how proposed Rule 10c-1 may 
affect the supply and demand of securities, see infra Part VI.
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    Finally, paragraph (b)(12) requires that the borrower type for each 
transaction be provided. The Commission preliminarily believes that 
this data element will be useful to provide context for evaluating the 
other data elements. For example, borrowers of securities that are 
broker-dealers may determine that loans of securities to other broker-
dealers are a more appropriate benchmark than all loans of securities. 
This data element, therefore, may enhance the transparency provided by 
the other data elements.
    While the Commission welcomes any public input on this topic, the 
Commission asks commenters to consider the following questions:
    24. What other data elements, if any, should be included to 
increase the transparency of securities lending?
    25. Would any of the listed data elements not be informative to the 
public or to regulators? If not, why not? Should any of the data 
elements be removed or modified? If so, why?
    26. Should all of the data elements in paragraph (b) be made public 
at the loan-level as proposed? As an alternative, should some be made 
public in the aggregate or only made available to regulators? Would 
providing aggregates of 10c-1 information provide the same or greater 
benefits than loan-level information as proposed? Please discuss how 
your response relates to the statutory objective of increasing 
transparency.
    27. Are there sufficient data elements to allow for the 
identification of loans of securities and permit the creation of a 
unique transaction identifier by the RNSA or should additional or 
different data elements be required for this purpose?
    28. Other than LEI, are there other issuer identifiers such as the 
EDGAR Central Index Key (commonly abbreviated as ``CIK'') that could be 
provided should the issuer have one? If yes, should the other 
identifier be required in addition to LEI or in the alternative?
    29. Are any of the data elements redundant such that an RNSA can 
determine the information without being provided that particular data 
element?

[[Page 69815]]

    30. Are the data elements in paragraphs (b)(7), (b)(8), and (b)(9) 
sufficient to capture the pricing terms of all loans? If not, how 
should the data elements be revised to capture the pricing terms of all 
loans?
    31. Would each data element proposed to be included help to achieve 
the goals of proposed Rule 10c-1 that are discussed above in Part 
I.A.2? If so, please explain why. If not, please explain why not. If 
any elements are not necessary please explain the benefits and costs of 
excluding those data elements.
(b) Loan Modification Data
    Subject to terms agreed to by the parties, loans of securities may 
be modified after they are made. To ensure that the transaction data 
reported and made public pursuant to proposed Rule 10c-1(b) reflects 
currently outstanding loans of securities and to prevent evasion, 
proposed Rule 10c-1(c) would require Lenders to provide data elements 
concerning modifications to loans of securities to an RNSA within 15 
minutes after each loan is modified. Proposed Rule 10c-1(c) would also 
require an RNSA to make such information available to the public as 
soon as practicable. Under paragraphs (c)(1) through (c)(3), Lenders 
would be required to provide the date and time of the modification and 
the unique transaction identifier of the original loan to the RNSA. The 
Commission preliminarily believes that this information is necessary to 
allow the RNSA to identify which loan is being modified, categorize the 
type of modification, and make information about the modification 
publicly available.
    Under paragraph (c), the requirement to provide information about a 
modification to an RNSA would be contingent on the modification 
resulting in a change to information required to be provided to an RNSA 
under paragraph (b). In these instances, Lenders would be required to 
provide the date and time of the modification, a description of the 
modification \95\ and the unique transaction identifier assigned to the 
original loan, if any. For example, termination of a loan would be a 
modification for which information would need to be provided to an RNSA 
under paragraph (c) because the termination would result in a reduction 
of the quantity of the securities initially provided to an RNSA for 
that loan under paragraph (b)(6). Another example would be where a loan 
that is collateralized by cash is modified so that the borrower pays a 
one-time fee to the lender without changing the rebate rate since a 
one-time fee would be an ``other fee or charge'' under paragraph 
(b)(9).\96\
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    \95\ The Commission is not specifying the parameters of the term 
``description of the modification'' to allow an RNSA flexibility to 
propose rules about the descriptions that could be needed for 
different types of modifications and how such information would be 
reflected in the updated information made public and stored in a 
machine readable format as required by paragraph (g)(1).
    \96\ An example of a modification that would not trigger the 
requirement in paragraph (c) would be when a borrower posts 
additional collateral in response to an increase in value of the 
loaned securities. Information about this change would not need to 
be provided under paragraph (c) because, while paragraph (b)(10) 
requires the Lender to provide the percentage of collateral to value 
of loaned securities required to secure such loan, it does not 
require information about the value of collateral posted in dollar 
terms.
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    32. Are the circumstances that would trigger an obligation to 
provide information to an RNSA about a modification under the proposed 
Rule clear? If not, please provide specific examples of circumstances 
where the proposed requirement to do so is unclear and explain why.
    33. Are there any modifications to information provided to an RNSA 
pursuant to proposed Rule 10c-1(b) that should not be required to be 
provided to an RNSA? Why or why not? Please explain how excluding such 
a term from reporting would not make the data already made public by an 
RNSA potentially misleading.
    34. Should additional data elements about modifications be provided 
to an RNSA? If yes, please explain why and how these data elements 
would increase transparency.
    35. Should the Commission require a data element that would list 
which party initiated the termination of the loan (e.g., whether shares 
were recalled by the Lender or whether the borrower returned the shares 
without a request from the Lender)? If yes, please explain the benefits 
of requiring that this information be provided and how it would be 
used.
(c) Material Transaction Data That Would Not Be Made Public
    As discussed, proposed Rule 10c-1 is designed to increase the 
transparency of information available to market participants with 
respect to the loan or borrowing of securities. Proposed Rule 10c-1 is 
also designed to provide regulators with data that could be used to 
better understand securities trading, including interest in short 
selling and price discovery for securities lending.\97\ The data 
elements in proposed Rule 10c-1(e) are necessary for these regulatory 
functions but the Commission preliminarily believes that making this 
information available to the public would identify market participants 
or reveal information about the internal operations of market 
participants. Accordingly, although proposed Rule 10c-1(d) requires 
certain data elements be provided to an RNSA within 15 minutes after 
each loan is effected, the RNSA shall keep such information 
confidential, subject to the provisions of applicable law.
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    \97\ Under paragraph (g)(2), an RNSA would make the information 
collected pursuant to paragraphs (b) through (f) available to the 
Commission or other persons as the Commission may designate by order 
upon a demonstrated regulatory need.
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    First, paragraph (d)(1) requires the Lender to provide ``[t]he 
legal name of each party to the transaction, CRD or IARD Number, if the 
party has a CRD or IARD Number, MPID, if the party has an MPID, and the 
LEI of each party to the transaction, if the party has an active LEI, 
and whether such person is the lender, the borrower, or an intermediary 
between the lender and the borrower.'' \98\ The Commission 
preliminarily believes that the provision of this data element to the 
RNSA will allow regulators to understand buildups in risk at market 
participants.\99\ Further, this data element will provide the RNSA with 
information that would be required to administer the collection of all 
data elements provided to it under paragraphs (b) through (d) of 
proposed Rule 10c-1, such as ensuring the completeness of submissions, 
contacting persons that have errors in their provided data, and 
troubleshooting person-specific technical issues. While this 
information is important for regulatory purposes, the Commission 
preliminarily believes that making this information available to the 
public would be detrimental because it may reveal a specific market 
participant's investment decisions.
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    \98\ Unlike borrowers who may not know the identity of the 
principal that has loaned them securities if a lending agent 
administers the lender's program, the Commission preliminarily 
believes that all lenders (or their lending agent) should have 
access to the identity of the borrower because lenders must track 
the parties to whom they have lent securities.
    \99\ To facilitate this understanding, paragraph (g)(2) would 
require RNSAs to make the information collected pursuant to 
paragraphs (b) through (e) of this section available to the 
Commission or other persons as the Commission may designate by order 
upon a demonstrated regulatory need.
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    If the Lender is a broker-dealer, proposed Rule 10c-1(d)(2) would 
require information about ``[w]hether the security is loaned from a 
broker's or dealer's securities inventory to a customer of such broker 
or dealer'' to be provided to an RNSA. The Commission

[[Page 69816]]

preliminarily believes that this information would provide regulators 
with information on the strategies that broker-dealers use to source 
securities that are lent to their customers. This data element would 
not apply to Lenders that are not broker-dealers. The Commission 
preliminarily believes that making this information available to the 
public would be detrimental because it may reveal confidential 
information about the internal operations of a broker-dealer.
    If a person that provides 10c-1 information knows \100\ that a loan 
is being used to close out a fail to deliver as required by Rule 204 of 
Regulation SHO,\101\ to close out a fail to deliver outside of 
Regulation SHO, proposed Rule 10c-1(d)(3) requires such information be 
provided to an RNSA. The Commission preliminarily believes that these 
data elements will provide regulators with information about short 
sales and the loans that broker-dealers provide to their customers with 
fail to deliver positions.
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    \100\ Because Lenders of securities may not be aware of the 
borrowers' motivations for a transaction, the data elements in 
paragraph (d)(3) would only need to be provided to an RNSA if known.
    \101\ 17 CFR 242.204.
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    In particular, Regulation SHO requires brokers-dealers that are 
participants of a registered clearing agency to take action to close 
out fail to deliver positions.\102\ One option for closing out a fail 
to deliver position is to borrow securities of like kind and quantity. 
Accordingly, broker-dealers may lend securities to their customers to 
close out the failure to deliver, which may constrain the supply of 
securities available to lend. Rule 204's close-out requirement is only 
applicable to equity securities and broker-dealers may also arrange for 
the borrowing of securities to cover a fail to deliver outside of 
Regulation SHO for all other types of securities.\103\ Paragraph (d)(3) 
would require the provision of this information, if known, to provide 
regulators with insight into loans to cover fails of non-equity 
securities. The Commission preliminarily believes that making these 
data elements available to the public would be detrimental because it 
may reveal information about the internal operations of market 
participants.
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    \102\ A fail to deliver occurs when a participant of a 
registered clearing agency fails to deliver securities to a 
registered clearing agency on the settlement date. See 17 CFR 
242.204(a).
    \103\ See 17 CFR 240.15c6-1 (Commission rule containing the 
standard settlement cycle for most securities transactions; See also 
Securities Transaction Settlement Cycle, Exchange Act Release No. 
80295, 82 FR 15564, at 7-10 (Mar. 22, 2017), available at https://www.sec.gov/rules/final/2017/34-80295.pdf (portion of release 
adopting changes to the settlement cycle discussing overview of 
settlement requirements).
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    While the Commission welcomes any public input on this topic, the 
Commission asks commenters to consider the following questions:
    36. Would the disclosure of the data element in paragraph (d)(1) 
(the identities of the parties) be helpful to investors, for example, 
to understand proxy voting issues?
    37. Should one or both of the data elements in paragraph (d)(2) or 
(d)(3) be made available to the public? If yes, please explain why and 
whether it should be at loan-level or in the aggregate.
    38. Are Lenders already collecting the information required by 
paragraph (d)(1)? In particular, are Lenders collecting a borrower's 
CRD, IARD, MPID, or LEI, if applicable? If not, should proposed Rule 
10c-1 only require Lenders to provide this information if the borrower 
makes it known to the Lender? Why or why not? Would Lenders be required 
to modify any existing agreements to provide this information to an 
RNSA?
    39. Should any of the data elements in paragraph (d) be modified or 
removed? If so, which ones and why?
    40. Should data elements be added to paragraph (d). If yes, please 
explain.
    41. Given the confidential 10c-1 information that the Lender and 
reporting agent would provide to an RNSA should there be requirements 
placed on the RNSA and/or the reporting agent to protect confidential 
10c-1 information?
    42. Should Lenders be required to provide all of the identifying 
data elements listed in d(1) for every loan of securities or should 
only one of those data elements be required? For example, would just 
providing a CRD be sufficient to allow the RNSA to identify the parties 
to a transaction? What are the costs and benefits of either approach? 
Further, would the lack of an LEI make it more challenging to identify 
entities across different data sets? Should borrowers be required to 
obtain an LEI if they do not already have one?
(d) Total Amount of Securities Available to Loan and Total Amount of 
Securities on Loan
    Paragraph (e) of proposed Rule 10c-1 would require data elements 
concerning securities available to loan and securities on loan be 
provided to an RNSA. These data elements would need to be provided by 
the end of each business day that a person included in paragraphs 
(e)(1) or (e)(2) of proposed Rule 10c-1 either was required to provide 
information to an RNSA under paragraph (a) or had an open securities 
loan about which it was required provide information to an RNSA under 
paragraph (a).\104\ For each security about which the RNSA receives 
information under paragraph (e), paragraph (e)(3) would require the 
RNSA to make available to the public only aggregated information for 
that security, as well as the information required by (e)(1)(i) and 
(ii) and (e)(2)(i) and (ii) as soon as practicable, but not later than 
the next business day.\105\ The Commission preliminarily believes that 
requiring the RNSA to make available to the public the information 
required by paragraph (e)(1)(i) and (e)(2)(i) (the legal name of the 
security issuer, and the LEI of the issuer, if the issuer has an active 
LEI) and (e)(1)(ii) and (e)(2)(ii) (the ticker symbol, ISIN, CUSIP, or 
FIGI of the security, if assigned, or other identifier) will provide 
identifying information for each security for which aggregate 
information would be made public. The data elements in proposed Rule 
10c-1(d) are necessary for these regulatory functions but the 
Commission preliminarily believes that making this information 
available to the public would identify market participants or reveal 
information about the internal operations of market participants. 
Accordingly, under paragraph (e)(3), all identifying information about 
lending agents, reporting agents, and other persons using reporting 
agents, would not be made publicly available, and the RNSA would be 
required to keep such information confidential, subject to the 
provisions of applicable law.
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    \104\ The Commission is not specifying exactly what time would 
be considered the ``end of each business day'' or what holidays 
should not be considered a ``business day'' to give the RNSA the 
discretion to structure its systems and processes as it sees fit and 
propose rules accordingly.
    \105\ Releasing data as provided would identify market 
participants. Consistent with the reasoning for not making the 
information required to be provided by paragraph (d) publicly 
available, the Commission preliminarily believes that this 
information should not be made public by an RNSA. Further, as 
described below, the Commission preliminarily believes that the 
information in paragraph (e) will be used by market participants to 
determine a utilization rate. Information aggregated by security is 
the input for that calculation.
---------------------------------------------------------------------------

    To specify the information that would be required to be provided to 
an RNSA under paragraph (e) and to ensure that all relevant securities 
available to loan or on loan are included, the data elements of 
paragraph (e) are separated between lending agents, who would provide 
the data elements in paragraph (e)(1), and persons who do not employ a 
lending agent, who would provide the data elements in paragraph (e)(2). 
As fully discussed below, despite their

[[Page 69817]]

different locations in the text of paragraph (e), however, the first 
two elements listed in paragraphs (e)(1) and (e)(2) are the same for 
all persons. In addition, the last two data elements require the same 
general information, but would provide certainty about the positions 
that should be included in the information that is provided to an RNSA. 
Further, both paragraphs would require that reporting agents provide 
the identity of the person on whose behalf it is providing the 
information to the RNSA. Identifying the person on whose behalf the 
information is being provided would facilitate regulatory oversight 
regarding compliance with the requirements of paragraph (e).
    As a preliminary matter, as more thoroughly discussed in Part VI, 
the Commission has designed the data elements provided to the RNSA 
under paragraph (e) to allow for the calculation of a ``utilization 
rate'' for each particular security. The utilization rate, which would 
be calculated by dividing the total number of shares on loan by the 
total number of shares available for loan, could be used by market 
participants to evaluate whether the security will be difficult or 
costly to borrow.
    The first two data elements that would be required to be provided 
to the RNSA by all persons under paragraph (e) would be the legal name 
of the security issuer; and the LEI of the issuer, if the issuer has an 
active LEI; and the ticker symbol, ISIN, CUSIP, or FIGI of the 
security, if assigned, or other identifier.\106\ These data elements 
are necessary to calculate the utilization rate from the total amount 
of each security on loan and available to loan.
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    \106\ Proposed Rule 10c-1(e)(1)(i) and 10c-1(e)(1)(ii) 
(requirements applicable to lending agents) and Proposed Rule 10c-
1(e)(2)(i) and 10c-1(e)(2)(ii) (requirements applicable to all other 
persons). The data elements in paragraphs (i) and (ii) of proposed 
Rule 10c-1(e)(1) and (e)(2) mirror the same requirements under 
paragraph (b)(1) and (b)(2). For an explanation of the flexibility 
of these requirements, see supra Part III.B.1.a).
---------------------------------------------------------------------------

    Next, all persons would be required to provide information about 
the total amount of each security that is available to lend and is on 
loan. The language ``total amount of each security'' would provide 
RNSAs with flexibility to accommodate market conventions of different 
types of securities. For example, if it chooses to do so, this language 
would give an RNSA the discretion to make rules that require the number 
of shares be provided for equity securities and par value of debt 
securities.\107\ Further, the language is designed to require that 
security-specific information is provided to market participants so 
that a security-specific utilization rate would be able to be 
calculated.
---------------------------------------------------------------------------

    \107\ This example was previously discussed above in reference 
to paragraph (b)(6). See supra Part III.B.1.a).
---------------------------------------------------------------------------

    All persons would be required to provide the total amount of each 
security that is available to lend under either paragraph (e)(1)(iii) 
or (e)(2)(iii). Per paragraph (e)(1)(iii), a security that is not 
subject to legal restrictions that would prevent it from being lent 
would be ``available to lend.'' \108\ For example, a lending agent that 
provides information on behalf of a beneficial owner should exclude any 
securities that the beneficial owner has specifically restricted from 
the lending program. Some programs may be subject to overall portfolio 
restrictions \109\ (e.g., no more than 20% of the portfolio may be lent 
at any time),\110\ and/or specific counterparty restrictions (e.g., 
counterparty rating). However, because those restrictions apply to the 
overall portfolio but not the specific securities held in those 
portfolios, those securities would be available to lend unless the 
securities are themselves subject to restrictions that prevent them 
from being lent. The Commission preliminarily believes that this 
approach would provide market participants with useful information 
because all securities that generally would be available to lend would 
be included.
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    \108\ This definition is consistent with the approach of the 
OFR's General Instructions for Preparation of the Securities Lending 
Pilot Data Collection. See Securities Lending Pilot Data Collection, 
supra note 93, at 2.
    \109\ For example, Commission staff guidance forms the basis for 
investment companies' securities lending practices. See Investment 
Company Derivatives Rule, 85 FR 83228, n. 742. As a result, 
investment companies typically do not have more than one-third of 
the value of their portfolio on loan at any given point in time. 
See, e.g., SEC Staff No-Action Letter, RE: The Brinson Funds, et 
al., available at https://www.sec.gov/divisions/investment/noaction/1997/brinsonfunds112597.pdf) (Nov. 25, 1997) (``One of the 
guidelines is that a fund may not have on loan at any given time 
securities representing more than one-third of its total assets.''). 
This staff statement represents the views of the staff of the 
Division of Investment Management. It is not a rule, regulation, or 
statement of the Commission. The Commission has neither approved nor 
disapproved its content. The staff statement, like all staff 
statements, has no legal force or effect: It does not alter or amend 
applicable law, and it creates no new or additional obligations for 
any person.
    \110\ For example, a beneficial owner that has program limits 
permitting the loan of any portfolio security, up to 20% of the 
portfolio would include 100% of the portfolio as lendable. A 
beneficial owner that will only lend specified securities, which 
represent 25% of the portfolio, would list only those specified 
securities as lendable. Similarly, a beneficial owner that will lend 
any security in its portfolio but has program limits in place to 
avoid loaning more than one-third of the value of their portfolio at 
any time would report 100% of its securities as available to lend.
---------------------------------------------------------------------------

    Next, all persons would be required to provide the total amount of 
each security that is on loan under either paragraph (e)(1)(iv) or 
(e)(2)(iv). Per paragraph (e)(1)(iv), a security would be ``on loan'' 
if the loan has been contractually booked and settled.\111\ Because a 
loan should be considered effected when it is agreed to by the 
parties,\112\ effected loans that have not been booked and settled 
would not be included in the total amount of each security on loan that 
is provided to the RNSA. The Commission preliminarily believes this 
information will provide information that is more relevant for this 
purpose of allowing market participants to plan their borrowing 
activity, since loans that have been booked and settled are truly no 
longer able to be lent by the Lender providing the information to the 
RNSA.\113\
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    \111\ Like the interpretation of ``available to loan'' discussed 
in note 108, the interpretation of ``on loan'' is consistent with 
the approach of the OFR's General Instructions for Preparation of 
the Securities Lending Pilot Data Collection. See Securities Lending 
Pilot Data Collection, supra note 93, at 2.
    \112\ See Part III.B.
    \113\ Further, while it may be possible to infer a rough 
estimate of the amount of securities on loan from the information 
provided under paragraphs (b) and (c) without using any information 
provided under paragraph (e), the Commission preliminarily believes 
that the information provided under paragraph (e) should allow 
market participants to calculate a utilization rate that is likely 
to be reliable.
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    To illustrate when Lenders would be required to provide information 
under paragraph (e) and the securities that would be considered 
``available to loan'' and ``on loan'' with an example: Consider a 
Lender that owns five shares of Issuer A, five shares of Issuer B, and 
five shares of Issuer C, none of which are subject to legal 
restrictions that prevent them from being lent. If on a business day 
this Lender does not have any outstanding securities loans and does not 
loan any securities, it would not be required to provide information 
about any of its securities under paragraph (e). In contrast, if on a 
business day this Lender loans three of its shares of issuer A, the 
Lender would be required to provide information to an RNSA under 
paragraph (e) because it would have been required to provide 
information about this loan to an RNSA under paragraph (a). This Lender 
would consider two shares of issuer A, five shares of Issuer B, and 
five shares of Issuer C as ``available to loan'' because none of these 
shares would be subject to legal or other restrictions that prevent 
them from being lent. Further, if the loan of three shares of Issuer A 
clears

[[Page 69818]]

and settles on that business day, this Lender would consider the three 
shares of Issuer A as ``on loan.''
    As noted above, to provide clarity about what would be required to 
be provided to an RNSA under paragraph (e) and to ensure that all 
relevant securities available to loan or on loan are included, the data 
elements of paragraph (e) are separated between lending agents, who 
would provide the data elements in paragraph (e)(1), and persons who do 
not employ a lending agent, who would provide the data elements in 
paragraph (e)(2).\114\
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    \114\ Paragraph (a)(1)(i)(A) defines lending agent as a ``bank, 
clearing agency, broker, or dealer that acts as an intermediary to a 
loan of securities . . . on behalf of a [beneficial owner].'' Under 
this definition, a lending agent that is not acting as a lending 
agent with respect to a particular securities loan would still be a 
lending agent, and, therefore be subject to paragraph (e)(1) and not 
(e)(2).
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    With respect to lending agents, paragraph (e)(1) contains different 
requirements for lending agents that are broker-dealers and lending 
agents that are not broker dealers. In particular, under paragraph 
(e)(1)(iii), if a lending agent is a broker or dealer, the lending 
agent would provide to the RNSA the total amount of each security 
available to lend by the broker or dealer, including the securities 
owned by the broker or dealer, the securities owned by its customers 
who have agreed to participate in a fully paid lending program, and the 
securities in its margin customers' accounts. If the lending agent is 
not a broker-dealer, the lending agent would provide to the RNSA the 
total amount of each security available to the lending agent to lend, 
including any securities owned by the lending agent in the total amount 
of each security available to lend provided.
    Similarly, under paragraph (e)(1)(iv), if a lending agent is a 
broker-dealer, the lending agent would provide to the RNSA the amount 
of each security on loan by the broker or dealer, including the 
securities owned by the broker or dealer, the securities owned by its 
customers who have agreed to participate in a fully paid lending 
program, and the securities that are in its margin customers' accounts 
in the total amount of each security on loan. If the lending agent is 
not a broker-dealer, the lending agent would provide to the RNSA the 
total amount of each security on loan where the lending agent acted as 
an intermediary on behalf of a beneficial owner and securities owned by 
the lending agent in the total amount of each security on loan provided 
to the RNSA.
    The Commission preliminarily believes that the requirements for 
lending agents will provide them with specificity around which 
positions to include in the information that is provided to an RNSA 
under paragraph (e). In addition, because some lending agents are 
broker-dealers, the Commission preliminarily believes that the 
applicable requirements should ensure that all relevant positions are 
included.
    With respect to all other persons, paragraphs (e)(2)(iii) and 
(e)(2)(iv) contain the requirements for the positions that should be 
included in the total amount of each security available to lend and on 
loan. Unlike paragraph (e)(1), paragraph (e)(2) does not distinguish 
among different types of persons in paragraph (e)(2) because, due to 
the definition of lending agent in paragraph (a)(1)(i)(A), persons 
subject to paragraph (e)(2) would not be loaning securities on behalf 
of other persons. It is not necessary, therefore, to distinguish 
between different types of market participants because these entities 
would, by definition, only be loaning securities that they own. 
Accordingly, persons subject to paragraph (e)(2)(iii) would provide to 
the RNSA the total amount of each security that is owned by the person 
and available to lend.\115\ In addition, under paragraph (e)(2)(iv), 
these persons would provide to the RNSA the total amount of each 
security on loan owned by the person.
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    \115\ Proposed Rule 10c-1(e)(2)(iii).
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    While the Commission welcomes any public input on this topic, the 
Commission asks commenters to consider the following questions:
    43. Should the RNSA make the information reported under proposed 
Rule 10c-1(e) public at the level it is provided (e.g., not aggregating 
the information by security)? Why or why not?
    44. Should Rule 10c-1 require the RNSA to make the information 
required by paragraph (e) publicly available in a manner that 
identifies the Lender if that Lender volunteers to make such 
information public? Why or why not? If so, should only beneficial 
owners be permitted to volunteer to make such information public and 
not lending agents? Why or why not?
    45. Should paragraph (e) be limited to only require information 
about certain types of securities, such as only equity securities? If 
so, please explain which securities should be included and why the 
excluded securities should not be included.
    46. Are the data elements required by paragraphs (e)(1)(i)/
(e)(2)(i) (the legal name of the security issuer, and the LEI of the 
issuer, if the issuer has an active LEI) and (e)(1)(ii)/(e)(2)(ii) (the 
ticker symbol, ISIN, CUSIP, or FIGI of the security, if assigned, or 
other identifier) both necessary? Would only requiring one of these be 
sufficient to allow identification of the security about which the 
information is being provided? Would only requiring one of these reduce 
the utility of the data in other ways, for example, by making it more 
challenging to identify entities and/or securities across multiple data 
sets?
    47. As noted above, the language ``total amount of each security'' 
is intended to provide the RNSA with flexibility to accommodate market 
conventions of different types of securities. For example, this 
language is intended to give an RNSA the discretion to make rules, if 
it chooses to do so, that require the number of shares be provided for 
equity securities and par value of debt securities. Instead of this 
approach, should the Commission specify the specific reporting 
obligations applicable to specific types of securities under paragraph 
(e) rather than leaving it to the discretion of an RNSA? If yes, please 
explain why and provide a methodology for determining the total amount 
of each security available for loan and on loan for various types of 
securities.
    48. The Commission recognizes that the definition of ``available to 
lend'' may overstate the quantity of securities that could actually be 
lent because the data would include securities that may become 
restricted if a limit is reached. Should a different definition be 
used? Is there another definition that would provide a better or more 
accurate estimate of securities available for loan than the proposed 
definition? In particular, please also explain how the alternative 
approach would operationally work and give market Lenders certainty 
around the securities it would classify as available to lend.
    49. If the number of shares available to lend was not made publicly 
available, are there alternative data that market participants could 
use to evaluate whether the security will be difficult or costly to 
borrow? For example, could a market participant look to the public 
float of a security instead? Why or why not? Would there be other 
impacts on the utility of the data?
    50. To avoid the provision of information about individual market 
participants' proprietary portfolios, should the Commission limit the 
requirement to provide information under paragraph (e) to lending 
programs that pool the securities of multiple beneficial owners? In 
addition or as an

[[Page 69819]]

alternative, should the Commission remove the requirement that a 
reporting agent would be required to provide the identity of the person 
on whose behalf it is providing the information? Would this be 
consistent with the purpose of the proposed rule, which is to increase 
transparency in the securities lending market? Why or why not?
    51. Do the definitions of ``available to lend'' or ``on loan'' 
conflict with market practice or other regulatory requirements? If yes, 
please explain.
    52. Do you believe that any of the information in paragraph (e) of 
the proposed Rule should not be required to be provided or that any of 
the requirements of paragraph (e) should be modified? Do you believe 
that any information in addition to the information required to be 
provided in paragraph (e) of the proposed Rule should be provided? 
Please explain why.
    53. Do you believe that the information provided pursuant to 
paragraph (e) of the proposed Rule should be provided more frequently 
or less frequently than each business day? Why or why not?

C. RNSA Rules To Administer the Collection of Information

    The Commission is proposing Rule 10c-1(f), which would require the 
RNSA to implement rules regarding the format and manner to administer 
the collection of information in proposed paragraphs (b) through (e) of 
this section and the distribution of such information pursuant to 
Section 19(b) of the Exchange Act. The Commission preliminarily 
believes that permitting an RNSA to implement rules regarding the 
administration of the collection of securities lending transactions 
would enable the RNSA to maintain and adapt potential technological 
specifications and any changes that might occur in the future. Under 
the proposal, and consistent with Exchange Act Section 19(b), the 
Commission would retain oversight of the RNSA's adoption of rules to 
administer the collection of information under proposed Rule 10c-
1.\116\
---------------------------------------------------------------------------

    \116\ 15 U.S.C. 78s(b).
---------------------------------------------------------------------------

    While the Commission welcomes any public input on this topic, the 
Commission asks commenters to consider the following questions:
    54. Should proposed Rule 10c-1 specify the format and manner that 
information should be provided to the RNSA rather than require the RNSA 
to adopt rules regarding such format and manner? Please discuss. Are 
there disadvantages to having an RNSA adopt a rule regarding the format 
and manner that information should be provided to the RNSA pursuant to 
proposed Rule 10c-1? What advantages would there be if Rule 10c-1 
specified the format and manner that information should be submitted to 
the RNSA?

D. Data Retention and Availability

    The Commission is proposing Rule 10c-1(g)(1) to require that an 
RNSA retain the information collected pursuant to paragraphs (b) 
through (e) of proposed Rule 10c-1 in a convenient and usable standard 
electronic data format that is machine readable and text searchable 
without any manual intervention for a period of five years. The 
Commission preliminarily believes that requiring the RNSA to retain 
records for five years is consistent with other retention obligations 
of records that Exchange Act rules impose on an RNSA. For example, 17 
CFR 240.17a-1, Exchange Act Rule 17a-1 requires RNSAs to keep documents 
for a period of not less than five years. Similarly, 17 CFR 
242.613(e)(8), Rule 613(e)(8) of Regulation NMS, on which the retention 
period for proposed Rule 10c-1 is modeled, requires the central 
repository to retain information in a convenient and usable standard 
electronic data format that is directly available and searchable 
electronically without any manual intervention for a period of not less 
than five years. Rule 10c-1(g)(1) is using a standard for storage that 
is similar to Rule 613(e)(8). The standard sets forth the criteria for 
how information must be stored but does not specify any particular 
technological means of storing such information, which should provide 
flexibility to the RNSA to adapt to technological changes that develop 
in the future. As with Exchange Act Rule 17a-1, the retention period is 
intended to facilitate implementation of the broad inspection authority 
given the Commission in Section 17(a) of the Exchange Act.\117\ The 
Commission preliminarily believes that including a retention period 
that is consistent with other rules applicable to RNSAs reduce the 
burden for an RNSA to comply with the retention requirements in 
proposed Rule 10c-1 because the RNSA will have developed experience and 
controls around administering record retention programs that are 
similar to the requirements of proposed Rule 10c-1(g)(1).
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    \117\ See, e.g., Recordkeeping and Destruction of Records, 
Exchange Act Release 10809 (May 17, 1974), 39 FR 18764 (May 30, 
1974); see also Recordkeeping and Destruction of Records, Exchange 
Act Release 10140 (May 10, 1974), 38 FR 12937 (May 17, 1973).
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    Furthermore, the Commission is proposing Rule 10c-1(g)(2), which 
would require the RNSA to make the information collected pursuant to 
paragraph (a)(2)(iii) and paragraphs (b) through (e) of this section 
available to the Commission or other persons, such as SROs or other 
regulators, as the Commission may designate by order upon a 
demonstrated regulatory need. The Commission preliminarily believes 
that stating explicitly that it would have access to the information 
that is being provided to the RNSA is appropriate because in times of 
market stress or extreme trading conditions, including spikes in 
volatility, the Commission will be able to quickly access and analyze 
activity in the market place. In addition to the Commission and the 
RNSA, other regulators may require access to the confidential 
information for regulatory purposes, for example to ensure enforcement 
of the regulatory requirements imposed on the entities that they 
oversee.
    The Commission is also proposing Rule 10c-1(g)(3), which would 
require the RNSA to provide the information collected under paragraphs 
(b) and (c) of this section and the aggregate of the information 
provided pursuant to paragraph (e) of this section available to the 
public without charge and without use restrictions, for at least a 
five-year period. The Commission preliminarily believes that requiring 
the RNSA to provide certain information to the public will further the 
direction by Congress in Section 984(b) of the DFA for the Commission 
to promulgate rules that are designed to increase the transparency of 
information to brokers-dealers and investors, with respect to the loan 
or borrowing of securities because the information required to be 
disclosed by the RNSA will include the specified material terms of 
securities lending transactions.
    The Commission preliminarily believes that access to the publicly 
available 10c-1 information as required by paragraph (g)(3) should be 
available on the RNSA's website or similar means of electronic 
distribution in the same manner such information is required to be 
maintained pursuant to paragraph (g)(1) of this section (specifically, 
``a convenient and usable standard electronic data format that is 
machine readable and text searchable without any manual 
intervention''), and be free and without use restrictions. The 
Commission acknowledges that establishing and maintaining a system to 
provide public access to certain 10c-1 information is not without cost. 
The Commission, however, preliminarily believes that such costs should 
be borne

[[Page 69820]]

by the RNSA in the first instance and permitted to be recouped by the 
RNSA from market participants who report securities lending 
transactions to the RNSA.\118\ Furthermore, proposed Rule 10c-1 would 
require that the publicly available 10c-1 information be made available 
without use restrictions. The Commission preliminarily believes that 
any restrictions on how the publicly available 10c-1 information is 
used will impede the utility of such information because such 
restrictions may limit the ability of investors, commercial vendors, 
and other third parties, such as academics, from developing uses and 
analyses of the information.\119\
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    \118\ See infra Part III.E.
    \119\ The requirement to provide the 10c-1 information in the 
same manner such information is maintained pursuant to paragraph 
(g)(1) of this section on the RNSA's website without charge and 
without use restrictions is not intended to preclude the RNSA from 
creating alternative means to provide information to the public or 
subscribers. For example, an RNSA might choose to file with the 
Commission proposed rules to establish data feeds of the Rule 10c-1 
information that vendors might subscribe to and repackage for onward 
distribution.
---------------------------------------------------------------------------

    The Commission preliminarily believes that five years is the 
appropriate length of time for the RNSA to make information available 
to the public, because such a time period will provide broker-dealers 
and investors with an opportunity to identify trends occurring in the 
market and in individual securities based on changes to the material 
terms of securities lending transactions.
    The Commission is also proposing Rule 10c-1(g)(4), which would 
require the RNSA to establish, maintain, and enforce reasonably 
designed written policies and procedures to maintain the security and 
confidentiality of the confidential information required by paragraphs 
(d) and (e)(3). As discussed above in Parts III.B.1.c) and d), Rule 
10c-1 would require Lenders to provide sensitive and confidential 
information to the RNSA. Furthermore, paragraphs (d) and (e)(3) would 
require that the RNSA keep such information confidential. The 
Commission preliminarily believes that the RNSA needs to protect this 
information from intentional or inadvertent disclosure to protect 
investors that provide such information by establishing reasonably 
designed written policies and procedures because the distribution of 
such information would identify market participants or could reveal 
information about the internal operations of market participants, which 
could be adverse to those providing information to the RNSA. For 
example, the disclosure of such information could reveal the portfolio 
holdings, trading strategies, and activity of a Lender, which other 
market participants might use to disadvantage the Lender.
    While the Commission welcomes any public input on this topic, the 
Commission asks commenters to consider the following questions:
    55. Is the retention of information collected by the RNSA for a 
period of five years in proposed paragraph 10c-1(g)(1) appropriate? If 
not, should the period under proposed paragraph 10c-1(g)(1) to preserve 
records under proposed paragraph 10c-1(b) through (e) be different--20 
years, 10 years, 3 years, or some other period of time and why? Should 
the proposed Rule require an RNSA to maintain the information 
indefinitely? What would be the benefits or costs if the proposed Rule 
required an RNSA to retain information for the life of the RNSA? Would 
investors, RNSAs, the Commission, or the public benefit from retention 
period that is longer than five years? Is a recordkeeping requirement 
in proposed Rule 10c-1(g)(1) necessary, or will an RNSA maintain the 
records of its own accord or pursuant to other regulatory recordkeeping 
obligations, such as Rule 17a-1?
    56. Is the retention requirement in proposed paragraph 10c-1(g)(1) 
unduly burdensome on the RNSA or overly costly? If so, in what ways 
could modifications to the Rule as proposed reduce these burdens and 
costs?
    57. What, if any, impact would the recordkeeping requirements in 
paragraph (g) have on liquidity in securities that are subject to the 
requirement to provide 10c-1 information?
    58. Is five years the appropriate length of time for the RNSA to 
make information available to the public? If not, should the period of 
time be for 20 years, 10 years, 3 years, or some other period of time? 
Please explain why.
    59. Are there other methods of distributing 10c-1 information that 
Rule 10c-1 should require besides the RNSA's website or similar means 
of electronic distribution? Please explain. Should Rule 10c-1 not 
explicitly name any type of technology currently in existence, such as 
a website? Should Rule 10c-1 require only that information has to be 
publicly available and let the RNSA determine how to best accomplish 
providing information to the public?
    60. Should the Commission include additional requirements designed 
to help ensure the confidentiality of information provided to the RNSA? 
Please explain. Do commenters believe the confidential information is 
as sensitive as discussed in this release? Please explain.

E. Report and Dissemination Fees

    To fund the reporting and dissemination of data provided pursuant 
to this Rule, the Commission is proposing paragraph 10c-1(h), which 
would reflect that the RNSA has authority under Exchange Act Section 
15A(b)(5) to establish and collect reasonable fees from each person who 
provides any data in proposed paragraphs (b) through (e) of proposed 
Rule 10c-1 directly to the RNSA. The Exchange Act allows RNSAs to adopt 
rules that ``provide for the equitable allocation of reasonable dues, 
fees, and other charges among members and issuers and other persons 
using any facility or system which the association operates or 
controls.'' \120\ The Commission preliminarily believes that it is 
appropriate to establish and collect reasonable fees from each person 
who directly provides the information \121\ set forth in the Rule to 
the RNSA. The Commission acknowledges that this might result in persons 
that are not members of an RNSA being required to pay fees to the RNSA 
for the use of the facility or system operated by FINRA, but in the 
absence of such a fee the RNSA and its members could be subsidizing the 
free riding of non-member Lenders that would be required to provide 
10c-1 information to the RNSA under the proposed Rule. Such an outcome 
might not result in an equitable allocation of reasonable dues, fees, 
and other charges among ``members and issuers and other persons'' 
providing 10c-1 information to a facility or system operated or 
controlled by the RNSA.
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    \120\ See 15 U.S.C. 78o-3(b)(5) (``The rules of the association 
provide for the equitable allocation of reasonable dues, fees, and 
other charges among members and issuers and other persons using any 
facility or system which the association operates or controls'').
    \121\ For example, lending agents and reporting agents would be 
providing proposed Rule 10c-1 information to an RNSA on behalf of 
beneficial owners and using the facility or system of the RNSA. 
However, the beneficial owners relying on such lending agent or 
reporting agent would not be using the facility or system of the 
RNSA.
---------------------------------------------------------------------------

    The Commission has previously approved a rule that permits an RNSA 
to charge fees to non-members that use the RNSA's systems to comply 
with rules adopted by the Commission. FINRA Rule 6490, which implements 
notice requirements of issuers for certain corporate actions pursuant 
to Rule 10b-17, establishes a fee schedule that issuers pay to FINRA 
for processing these corporate actions. The Commission exercised 
oversight of the

[[Page 69821]]

fees imposed by FINRA on non-members by noticing FINRA's Rule 6490 for 
comment, reviewing and considering comments, and approving Rule 6490. 
Similarly, the Commission would oversee fees that the RNSA proposed to 
charge by members and non-members to administer proposed Rule 10c-1. 
Specifically, any such fees would have to be filed with the Commission 
under Section 19(b) of the Exchange Act. The proposed fees would be 
published for notice and public comment. Since FINRA is currently the 
only RNSA, the Commission understands the potential for monopolistic 
pricing by FINRA on Lenders that are required to provide 10c-1 
information to FINRA. To the extent FINRA files a rule to charge fees 
for Lenders to provide 10c-1 information, the Commission would be 
analyzing costs to FINRA to establish the system required by proposed 
Rule 10c-1 consistent with the requirements under Section 15A(b).\122\ 
For example, Section 15A(b)(5) requires an equitable allocation of 
reasonable fees and other charges among members and issuers and other 
persons using any facility or system which the association operates or 
controls. Accordingly, to the extent FINRA fails to meet its burden in 
a rule filing with the Commission that the fees meet the requirements 
of the Exchange Act, the fees would not be permissible.
---------------------------------------------------------------------------

    \122\ See NetCoalition v. SEC, 615 F.3d 525 (D.C. Cir. 2010).
---------------------------------------------------------------------------

    While the Commission welcomes any public input on this topic, the 
Commission asks commenters to consider the following questions:
    61. Should proposed Rule 10c-1 explicitly state that an RNSA may 
collect a fee from persons that provide 10c-1 information to the RNSA? 
If so, why ?
    62. Are there alternative means to fund a system for providing 10c-
1 information to the RNSA? If so, please explain.

IV. General Request for Comment

    The Commission solicits comment on all aspects of proposed Rule 
10c-1 and any other matter that might have an impact on the proposal 
discussed above. In particular, the Commission asks commenters to 
consider the following questions:
    63. What, if any, impact would proposed Rule 10c-1 have on 
liquidity in securities that are subject to the requirement to provide 
10c-1 information? Please explain.
    64. Are there additional or different ways to structure the 
proposed Rule that would help provide additional transparency in the 
securities lending market? Please explain.
    65. Should the Rule be limited to certain securities? Why or why 
not? Please explain.
    66. How might the proposal positively or negatively affect investor 
protection, the maintenance of a fair, orderly, and efficient 
securities lending market, and capital formation?
    67. As currently drafted the proposed Rule would require that 
persons whose loans are processed through any of the lending programs 
such as those operated by the OCC comply with the requirement to 
provide 10c-1 information. Please discuss whether loans cleared through 
OCC, or similar processes, should be exempt from the proposed Rule's 
requirement to provide 10c-1 information or whether such exemptions 
should be considered on a case-by-case basis pursuant to paragraph (i) 
of the proposed Rule.
    68. As currently drafted paragraphs (b), (c), and (d) of the 
proposed Rule require that information be provided to the RNSA within 
15 minutes after the loan is effected or modified. Please comment on 
whether the time period for providing the information in paragraphs 
(b), (c), and (d) should be shorter, for example within 90 seconds, or 
longer, for example within 30 minutes, and explain why.
    69. As currently drafted paragraphs (b) and (c) of the proposed 
Rule require that the RNSA make the information provided to it pursuant 
to those paragraphs available to the public as soon as practicable. 
Please comment on whether making the information provided pursuant to 
paragraphs (b) and (c) publicly available as soon as practicable 
provides sufficient transparency in the securities lending market or 
whether such information should be published in a shorter or longer 
time frame and please explain why.
    70. As currently drafted the information required to be provided in 
paragraphs (b) and (c) of the proposed Rule would be made public by the 
RNSA. Please comment on whether the information provided pursuant to 
any of those paragraphs should not be made public and explain why. If 
there are any additional data elements that you believe the Commission 
should require to be provided, please include a description of such 
elements that explains why they should be added to the requirement to 
provide 10c-1 information and whether or not they should be made 
public. If there are any data elements in paragraphs (b) or (c) of the 
proposed Rule that should not be required to be provided, or that 
should be modified, please explain why.
    71. Please comment on whether the proposed Rule should include a 
definition of ownership of securities, which would specify who owns and 
can lend securities. For example, should the proposed Rule define 
ownership as meaning that a person, or the person's agent, has title to 
such security, has not pledged such security, and has custody or 
control of such security? Please comment.
    Comments are of great assistance to the Commission's rulemaking 
initiative when they are accompanied by supporting data and analysis of 
the issues addressed in those comments and if they are accompanied by 
alternative suggestions to the proposal where appropriate.

V. Paperwork Reduction Act Analysis

A. Background

    Certain provisions of proposed Rule 10c-1 impose ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (``PRA'').\123\
---------------------------------------------------------------------------

    \123\ 44 U.S.C. 3501, et seq.
---------------------------------------------------------------------------

    The Commission is submitting proposed Rule 10c-1 to the Office of 
Management and Budget (``OMB'') for review in accordance with the 
PRA.\124\ The title for the new information collection is ``Material 
Terms of Securities Lending Transactions.'' An agency may not conduct 
or sponsor, and a person is not required to respond to, a collection of 
information unless it displays a current valid control number.
---------------------------------------------------------------------------

    \124\ See 44 U.S.C. 3507; 5 CFR 1320.11.
---------------------------------------------------------------------------

    As detailed above, to supplement the information available to the 
public involving securities lending and close the data gaps in this 
market, proposed Rule 10c-1 is designed to provide, in a timely manner, 
investors and other market participants with unrestricted and free 
access to material information regarding securities lending 
transactions. The data elements provided to an RNSA under proposed Rule 
10c-1 are also designed to provide the RNSA with data that might be 
used for in-depth monitoring and surveillance. Further, the data 
elements are designed to provide regulators with information to 
understand: Whether market participants are building up risk; the 
strategies that broker-dealers use to source securities that are lent 
to their customers; and the loans that broker-dealers provide to their 
customers with fail to deliver positions.
    Because the Commission has not directly addressed the provision of 
the

[[Page 69822]]

material terms of securities lending transactions for purposes of the 
Federal securities laws, proposed Rule 10c-1 would create new 
information collections burdens on certain Lenders and RNSAs, as 
detailed below.

B. Proposed Use of Information

    The information collections in Proposed Rule 10c-1 are designed to 
increase the transparency and efficiency of the securities lending 
market by requiring any person that loans a security on behalf of 
itself or another person to provide the material terms of those 
securities lending transactions to an RNSA. As discussed above, the 
information available on securities lending transactions is spotty and 
incomplete.\125\ The information collections are necessary to remediate 
these issues by giving market participants and regulators unrestricted 
and free access to material information regarding securities lending 
transactions.
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    \125\ See supra Part I.A, (quoting 2020 FSOC Annual Report, 
supra note 14).
---------------------------------------------------------------------------

C. Information Collections

    As described in detail below, the information collections burdens 
in proposed Rule 10c-1 are directly related to either (1) Lenders \126\ 
capturing data elements and providing information to an RNSA and (2) an 
RNSA collecting the information and subsequently making certain data 
elements publicly available. Given the differences in the information 
collections applicable to these parties, the burdens applicable to 
Lenders are separated from those applicable to an RNSA in the analysis 
below for the sake of organization.
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    \126\ The Commission is proposing to limit the obligation to 
provide 10c-1 information to an RNSA only to the lender to avoid the 
potential double counting of transactions that could arise if the 
Rule required both sides of the securities lending transaction to 
provide the 10c-1 information to an RNSA.
---------------------------------------------------------------------------

D. Information Collections Applicable to Lenders

    Proposed Rule 10c-1 would apply to all Lenders. As defined 
above,\127\ Lenders include any person who loans a security on behalf 
of itself or another person.\128\ Proposed Rule 10c-1 would require 
that the data elements in paragraphs (b) through (e) within a specified 
time period be provided to an RNSA. In particular, paragraphs (b) 
through (d) contain loan-level data elements. These data elements would 
be required to be provided to an RNSA within 15 minutes after a loan is 
effected or modified, as applicable. Paragraph (e) contains data 
elements requiring the enumeration of total amount of each specific 
security available to loan and on loan. These data elements would be 
required to be provided to an RNSA at the end of each business day.
---------------------------------------------------------------------------

    \127\ See supra note 9.
    \128\ Because Rule 10c-1 is designed to increase the 
transparency of information available to brokers, dealers, and 
investors, with respect to the loan or borrowing of securities all 
persons engaged in the lending of securities are Lenders, including 
persons that are not registered with or directly regulated by the 
Commission.
---------------------------------------------------------------------------

    To reduce the potential for double counting of securities lending 
transactions and reduce the burden on Lenders, proposed Rule 10c-1 
would provide a hierarchy of who is responsible for providing 
information to an RNSA. First, although the proposed Rule places an 
obligation on each person that loans a security on behalf of itself or 
another person to provide information to an RNSA, if such Lender is 
using a lending agent, such lending agent shall have the obligation to 
provide the 10c-1 information to an RNSA on behalf of the lender. 
Second, persons with a reporting obligation, including a lending agent, 
may enter into a written agreement \129\ with a reporting agent. 
Finally, Lenders are directly required to provide the RNSA with the 
10c-1 information if the Lender is loaning its securities without a 
lending agent or reporting agent.
---------------------------------------------------------------------------

    \129\ The Commission preliminarily believes it is appropriate to 
permit a Lender, including a lending agent, to enter into a written 
agreement with a reporting agent to permit the reporting agent to 
provide the 10c-1 information to an RNSA because such an arrangement 
will ease burdens on Lenders that do not have and do not want to 
establish connectivity to FINRA. Additionally, the written 
agreements will memorialize and provide proof of the contractual 
obligations for the reporting agent to provide the 10c-1 information 
to an RNSA. See supra Part III.A.2.b).
---------------------------------------------------------------------------

    In addition, paragraph (a)(2) would require that reporting agents 
also enter into a written agreement with the RNSA. Such written 
agreement must include terms that permit the reporting agent to provide 
10c-1 information on behalf of another person. Reporting agents would 
also be required to provide the RNSA with a list of each person and 
lending agent on whose behalf the reporting agent is providing 10c-1 
information to the RNSA.
    For the purpose of organizing the below analysis, the Commission 
has separated Lenders into three categories based on who would actually 
provide the required data elements to the RNSA.\130\ These categories 
are (1) lending agents; (2) reporting agents, and (3) Lenders that 
would not employ a lending agent.\131\ The Commission preliminarily 
believes that Lenders that employ a lending agent would not be subject 
to any burdens because they would not be responsible for providing 
information to an RNSA.
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    \130\ While, as more fully discussed below, there would be some 
variation between Lenders that are in the same category, the 
Commission is organizing the analysis so that the discussion of 
Lenders who share commonalities allows for a logical presentation 
and discussion of burdens.
    \131\ As an example of variability between Lenders in the same 
category, the parties within the (1) lending agent category and the 
(3) lenders that would not employ a lending agent category may 
choose to employ a reporting agent. As discussed below, this choice 
will result in information collection burdens being different for 
Lenders within the same category.
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    As a preliminary matter, the opacity of the securities lending 
market makes estimating the number of respondents difficult. Indeed, 
the objective of proposed Rule 10c-1 is to close the data gaps in this 
market.\132\ Despite these data gaps the Commission has made estimates 
of the number of Lenders in each category.
---------------------------------------------------------------------------

    \132\ See supra Part I.A.2.
---------------------------------------------------------------------------

    First, the Commission estimates that there would be 37 lending 
agents. This estimate is based on a review of N-CEN reports filed with 
the Commission that identify the lending agents used by investment 
companies. Of these 37 lending agents, the Commission estimates that 3 
would provide information directly to an RNSA and 34 would provide 
information to a reporting agent.\133\
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    \133\ Of the 37 lending agents identified, three are broker-
dealers. Broker-dealers have experience providing information 
directly to RNSAs, so the Commission estimates that they would 
provide information directly to an RNSA. The other 34 lending agents 
are not broker-dealers, so the Commission estimates that they would 
provide information to a reporting agent rather than establishing 
connectivity directly to an RNSA.
---------------------------------------------------------------------------

    Next, the Commission estimates that there would be 94 reporting 
agents. This estimate is based on the number of broker-dealers that 
lent securities in 2020. The Commission estimates that these persons 
would be reporting agents because they would likely have experience 
providing RNSAs with information through other trade-reporting 
requirements and have experience with securities lending.\134\
---------------------------------------------------------------------------

    \134\ It is possible that some of these broker-dealers may 
choose not to be a reporting agent and that other persons may choose 
to be a reporting agent. Given uncertainty regarding future 
reactions to proposed Rule 10c-1 and a lack of granular data about 
the current market, however, the Commission preliminarily believes 
that the broker-dealers that lent securities in 2020 is a reasonable 
estimate of the number of reporting agents.
---------------------------------------------------------------------------

    Finally, the Commission estimates that there would be 278 Lenders 
that would not employ a lending agent. This estimate is based on the 
number of investment companies that do not employ a lending agent based 
on a review of N-CEN reports filed with the

[[Page 69823]]

Commission. Of these 278 Lenders, the Commission estimates that 139 
will provide information to an RNSA and 139 will provide information to 
a reporting agent.
1. Lending Agents
    Under proposed Rule 10c-1(a)(1), lending agents would be required 
to provide 10c-1 information to an RNSA (a ``providing lending agent'') 
or enter into a written agreement with a reporting agent to provide 
information to an RNSA (a ``non-providing lending agent''). In both 
cases, lending agents would face information collection burdens to 
comply with the rule.
(a) Providing Lending Agents
(i) Initial Burden
    Providing lending agents would incur initial burden to develop and 
reconfigure their current systems to capture the required data 
elements.\135\ Providing lending agents would also be subject to 
initial burden to establish connections that would allow it to provide 
the information to a RNSA.\136\
---------------------------------------------------------------------------

    \135\ While providing lending agents are likely already tracking 
the data elements as a part of the regular course of business, 
capturing this information would be a new regulatory requirement.
    \136\ In particular, they would be required to establish 
connections with the RNSA and the persons on whose behalf they are 
lending securities.
---------------------------------------------------------------------------

    The Commission preliminarily believes that burden for this 
requirement is similar to that of establishing the appropriate systems 
and processes required for collection and transmission of the required 
information under the under 17 CFR 242.613, Exchange Act Rule 613 
(commonly referred to as the ``Consolidated Audit Trail'' or the 
``CAT'') \137\ because of the general similarity between the systems 
established under that rule and the systems that would be required to 
be established under proposed Rule 10c-1.\138\ While similar enough to 
use as the basis for the estimate, the Commission preliminarily 
believes that systems that comply with proposed Rule 10c-1 will be 
significantly less complex than those required by the CAT because they 
will need to capture less information overall.\139\ Despite this 
difference, for the purposes of this analysis, out of an abundance of 
caution, the Commission is using certain specific estimates of internal 
burden from the CAT Approval Order, as detailed below. Unlike the 
burden in the CAT Approval Order, however, the Commission preliminarily 
believes that each party that would face PRA burdens under proposed 
Rule 10c-1 will have internal staff \140\ that can handle this 
task.\141\
---------------------------------------------------------------------------

    \137\ See Joint Industry Plan, Order Approving the National 
Market System Plan Governing the Consolidated Audit Trail, Exchange 
Act Release No. 79318 (Nov. 15, 2016), 81 FR 84696, 84921 (Nov. 23, 
2016) (``CAT Approval Order'').
    \138\ Both the CAT and proposed Rule 10c-1 would require the 
provision of trade information to a third-party information 
repository. The burden estimates in the CAT Approval Order are based 
on a study of cost estimate calculations. See id. at 84857 
(describing overview and methodology of the study).
    \139\ Exchange Act Rule 613(c)(1) requires the CAT NMS Plan to 
provide for an accurate, time-sequenced record of certain orders 
beginning with the receipt or origination of an order by a broker-
dealer, and further documenting the life of the order through the 
process of routing, modification, cancellation and execution (in 
whole or in part) of the order. Proposed Rule 10c-1, on the other 
hand, does not require order information be provided to an RNSA. 
Further, more trades that are reportable to CAT are executed than 
securities lending transactions. The Commission preliminarily 
estimates that these two differences will result in fewer data items 
under proposed Rule 10c-1 than the CAT. Accordingly, the systems 
required to comply with proposed Rule 10c-1 would be substantially 
less complex than the systems required to comply with the CAT.
    \140\ In the CAT NMS Plan Release, the Commission estimated that 
external costs may consist of, for example, the use of service 
bureaus, technology consulting, and legal services. See, e.g., CAT 
Approval Order, supra note 137, at 84935.
    \141\ The Commission preliminarily believes that, because of the 
sophisticated services associated with third-party providers' 
business, third-party providers would employ internal staff with the 
expertise required to comply with proposed Rule 10c-1.
---------------------------------------------------------------------------

    More specifically, the Commission is basing its estimates for 
systems development and monitoring on the burdens applicable to non-
OATS \142\ reporters under the CAT.\143\ The Commission chose this 
estimate because of the factors that were considered by the Commission 
in the CAT Approval Order when it categorized firms and estimated 
burdens. In particular, non-OATS reporters were estimated to be subject 
to the smallest burdens under the CAT NMS because of the limited scope 
of their reportable activity.\144\ Based on the overall size of the 
securities lending market and the number that would be providing 
information to an RNSA, the Commission preliminarily believes that the 
volume of securities lending transactions for providing lending agents 
will be, on average, of a similar scope to the volume of reports 
estimated by non-OATS reporters under the CAT NMS Plan Release.
---------------------------------------------------------------------------

    \142\ The FINRA website states: ``FINRA has established the 
Order Audit Trail System (OATS), as an integrated audit trail of 
order, quote, and trade information for all NMS stocks and OTC 
equity securities. FINRA uses this audit trail system to recreate 
events in the life cycle of orders and more completely monitor the 
trading practices of member firms.'' FINRA, Order Audit Trail System 
(OATS), available at https://www.finra.org/industry/oats (listing 
further information on OATS).
    \143\ CAT NMS Plan Release at 756 (discussing the burdens 
applicable to these broker-dealers).
    \144\ The CAT NMS Plan Release estimated that non-OATS reporters 
would have fewer than 350,000 reportable events each month. CAT 
Approval Order, supra note 137, at 84928.
---------------------------------------------------------------------------

    The Commission, therefore, estimates that each providing lending 
agent would incur 3,600 hours of initial burden to develop and 
reconfigure their current systems to capture the required data 
elements.\145\ Accordingly, the total industry-wide burden for this 
requirement would be 10,800 hours.\146\
---------------------------------------------------------------------------

    \145\ In the CAT Approval Order, the Commission estimated that, 
on average, the initial burden for non-OATS reporters would be two 
full-time-equivalent (``FTE'') employees working for one year (2 
FTEs x 1800 working hours per year = 3600 burden hours). See CAT 
Approval Order, supra note 137, at 84938. The Commission is using 
this estimate because of the similarities between the requirements 
applicable to providing lending agents under proposed Rule 10c-1 and 
the requirements applicable to non-OATS reporters under the CAT.
    \146\ 3,600 hours x 3 providing lending agents = 10,800 hours.
---------------------------------------------------------------------------

(ii) Ongoing Annual Burden
    Once a providing lending agent has established the appropriate 
systems and processes required for collection and provision of the 
required information to the RNSA,\147\ the Commission preliminarily 
estimates that proposed Rule 10c-1 would impose ongoing annual burdens 
associated with, among other things, providing the data to the RNSA, 
monitoring systems, implementing changes, and troubleshooting errors. 
The Commission estimates that the ongoing burden will be equivalent to 
the ongoing burden estimated for non-OATS reporters in the CAT Approval 
Order for the same reasons discussed with respect to initial burden.
---------------------------------------------------------------------------

    \147\ The Commission expects that the process of providing 
information to an RNSA will be highly automated so it is including 
the burden for doing so in this category.
---------------------------------------------------------------------------

    The Commission, therefore, estimates that it would take 1,350 
burden hours per year to comply with the rule per providing lending 
agent,\148\ leading to a total industry-wide ongoing annual burden of 
4,050 hours.\149\
---------------------------------------------------------------------------

    \148\ In the CAT NMS Plan Release, the Commission estimated 
that, on average, the ongoing annual burden non-OATS reporters would 
be .75 FTE employees (.75 FTEs x 1800 working hours per year = 1350 
burden hours). See CAT Approval Order, supra note 137, at 84938. The 
Commission is using this estimate because of the similarities 
between the requirements applicable to providing lending agents 
under proposed Rule 10c-1 and the requirements applicable to non-
OATS reporters under the CAT NMS Plan.
    \149\ 1,350 hours x 3 providing lending agents = 4,050 hours.
---------------------------------------------------------------------------

(b) Non-Providing Lending Agents
    Instead of providing information to an RNSA, paragraph (a)(1)(ii) 
would permit

[[Page 69824]]

non-providing lending agents to enter into a written agreement with a 
reporting agent that would provide the required information to the 
RNSA. These non-providing lending agents would be subject to distinct 
information collection burdens from those applicable to providing 
lending agents. First, because they would not have to establish 
connectivity to an RNSA and may have flexibility in the format of the 
information that it provides the reporting agent, non-providing lending 
agents would be subject to less initial and ongoing burden for systems 
development and monitoring. Second, non-providing lending agents would 
be subject to initial burden to negotiate and execute a written 
agreement with the reporting agent.
(i) Systems Development and Monitoring
(a) Initial Burden
    Like providing lending agents, non-providing lending agents would 
incur initial burden to develop and reconfigure their current systems 
to capture the required data elements. The Commission preliminarily 
believes that non-providing lending agents would be subject to less 
burden than providing lending agents, however, because they would 
likely have the flexibility to collaborate with a reporting agent to 
determine the most efficient means of establishing systems that comply 
with the proposed Rule. For example, if agreed to by both parties, the 
non-providing lending agent could have the flexibility to provide 
information that does not meet the specific format requirements of an 
RNSA to the reporting agent if the reporting agent is able to reformat 
the information once received.
    Given potential efficiencies, the Commission preliminarily 
estimates that a non-providing lending agent would be subject to half 
the initial burden of a providing lending agent to develop and 
reconfigure their current systems to capture the required data elements 
as a providing lending agent. The Commission, therefore, estimates that 
each non-providing lending agent would be subject to an initial burden 
of 1,800 hours, leading to a total industry-wide initial burden for 
this requirement of 61,200 hours.\150\
---------------------------------------------------------------------------

    \150\ 1,800 hours x 34 non-providing lending agents = 61,200 
hours.
---------------------------------------------------------------------------

(b) Ongoing Annual Burden
    Once a non-providing lending agent has established the appropriate 
systems and processes required for collection and provision of the 
required information to the reporting agent, the Commission 
preliminarily estimates that the proposed Rule would impose ongoing 
annual burdens associated with, among other things, providing the data 
to the reporting agent, monitoring systems, implementing changes, and 
troubleshooting errors. As with initial burden for this requirement, 
the Commission preliminarily believes that non-providing lending agents 
would be subject to less burden than providing lending agents because 
they would likely have the flexibility to collaborate with a reporting 
agent to determine the most efficient means of establishing systems 
that comply with the proposed Rule. For example, the reporting agent 
could design programs that create direct links to a non-providing 
lending agent's systems to facilitate the gathering of information such 
that ongoing intervention would not be required by the non-providing 
lending agent. In addition, non-providing lending agents and reporting 
agents could negotiate terms that may allow it to avoid providing 
certain 10c-1 information that can be gleaned from another data 
element, such as not requiring the provision of a securities issuer's 
name if a security has a valid CUSIP.
    Given the potential efficiencies, the Commission estimates that a 
non-providing lending agent would be subject to roughly half of the 
ongoing annual burden of a providing lending agent to develop and 
reconfigure their current systems to capture the required data elements 
as a providing lending agent. The Commission, therefore, estimates that 
each non-providing lending agent would be subject to an annual burden 
of 675 hours,\151\ leading to a total industry-wide annual burden for 
this requirement of 22,950 hours.\152\
---------------------------------------------------------------------------

    \151\ 1,350 hours (ongoing burden applicable to providing 
agents) x 50% = 675 hours.
    \152\ 675 hours x 34 non-providing lending agents == 22,950 
hours.
---------------------------------------------------------------------------

(ii) Entering Into Written Agreement With Reporting Agent
    Paragraph (a)(1)(ii) of proposed Rule 10c-1 would require a non-
providing lending agent to enter into a written agreement with a 
reporting agent. This requirement would subject non-providing lending 
agents to initial burden to draft, negotiate, and execute the 
agreements required by this paragraph. The Commission preliminarily 
believes that this requirement would not subject non-providing lending 
agents to ongoing annual burden once the agreement is signed because 
there would be no need to modify the written agreement or take 
additional action after it is executed.
    The Commission preliminarily believes that these agreements would 
likely be standardized across the industry since the data elements 
would be consistent for all persons. The Commission preliminarily 
estimates that the only terms that may require negotiation are price 
and the format of the information that would be required to be 
provided. To account for negotiation and any administrative tasks that 
would go into processing and executing agreements, the Commission is 
estimating non-providing lending agents would spend 30 hours on this 
task.\153\ Accordingly, the Commission estimates that the total 
industry-wide initial burden attributed to this proposed requirement 
would be 1,020 hours.\154\
---------------------------------------------------------------------------

    \153\ The Commission preliminarily believes that each lending 
agent would execute one such agreement because of the efficiencies 
gained from only having one reporting agent and the commoditized 
information that would be provided. Accordingly, the estimate of 30 
hours would be the initial burden required for one agreement.
    \154\ 30 hours x 34 non-providing lending agents = 1,020 hours.
---------------------------------------------------------------------------

2. Reporting Agents
    Three requirements of proposed Rule 10c-1 would subject reporting 
agents to initial and ongoing annual PRA burdens. The first requirement 
would be related to the development and monitoring of systems that 
would facilitate the provision of information to an RNSA. Because 
reporting agents would provide the same information as a providing 
lending agent, the Commission preliminarily estimates that the initial 
and ongoing annual burden for this task would be equivalent to the 
initial burden attributable to the same task for providing lending 
agents, as fully described below. The second would be related to the 
written agreements with the persons who would be providing the 
reporting agent information. Finally, the third would be related to 
entering into an agreement with a RNSA to provide 10c-1 information.
(a) Systems Development and Monitoring
(i) Initial Burden
    Under paragraph (a), reporting agents would provide 10c-1 
information to an RNSA on behalf of another person. The Commission 
preliminarily believes that a reporting agent would be subject to 
initial burden to develop and reconfigure their current systems to 
capture the required data elements because the Commission preliminarily

[[Page 69825]]

believes that they would need to change internal systems to collect the 
required information. Additionally, the reporting agent would need to 
establish, maintain, and enforce reasonably designed written policies 
and procedures to provide 10c-1 information to an RNSA on behalf of 
another person in the manner, format, and time consistent with Rule 
10c-1.\155\
---------------------------------------------------------------------------

    \155\ Proposed Rule 10c-1(a)(2)(i).
---------------------------------------------------------------------------

    Reporting agents would provide the same information to the RNSA as 
a providing lending agent,\156\ so the Commission preliminarily 
believes that the burden estimates should be consistent. The 
Commission, therefore, estimates that each reporting agent would incur 
3,600 hours of initial burden to develop and reconfigure their current 
systems to capture the required data elements.\157\ Accordingly, the 
industry-wide initial burden would be 338,400 hours.\158\
---------------------------------------------------------------------------

    \156\ While the information provided to the RNSA would be the 
same, certain aspects of the requirements applicable to reporting 
agents would be slightly different than those applicable to 
providing lending agents. For example, unlike providing lending 
agents, reporting agents would need to design systems to establish 
connectivity with the persons on whose behalf they are providing 
information to an RNSA. In addition, unlike providing lending 
agents, reporting agents would be required to provide to the RNSA 
the identity of the person on whose behalf it is providing the 
information under paragraph (e). Further, unlike any type of lending 
agent, reporting agents would be required to establish, maintain, 
and enforce reasonably designed written policies and procedures to 
provide information to an RNSA. Despite these differences, the 
Commission preliminarily believes that the estimates used in the CAT 
approval order are an appropriate basis from which to estimate the 
burdens for reporting agents in addition to providing lending agents 
because both provide the same information to the RNSA. Accordingly, 
this burden estimates for reporting agents is not being adjusted 
incrementally from the estimate for providing lending agents.
    \157\ See supra Part V.D.1.(a)(i).
    \158\ 3,600 hours x 94 reporting agents = 338,400 hours.
---------------------------------------------------------------------------

(ii) Ongoing Annual Burden
    Once a reporting agent has established the appropriate systems and 
processes required for collection and provision of the required 
information to the RNSA, the proposed Rule 10c-1 would impose ongoing 
annual burdens associated with providing the data to the RNSA 
(including an updated list of persons on whose behalf they are 
providing information, as needed), monitoring systems, implementing 
changes, and troubleshooting errors.
    As with the initial burden for this requirement, reporting agents 
would provide the same information to the RNSA as a providing lending 
agent, so the Commission preliminarily believes that the burden 
estimates should be consistent. The Commission, therefore, estimates 
that each reporting agent would incur 1,350 hours of ongoing annual 
burden on this requirement.\159\ Accordingly, the industry-wide ongoing 
annual burden would be 126,900 hours.\160\
---------------------------------------------------------------------------

    \159\ See supra Part V.D.1.(a)(ii).
    \160\ 1,350 hours x 94 reporting agents = 126,900 total hours.
---------------------------------------------------------------------------

(b) Entering Into Written Agreements With Persons on Whose Behalf the 
Reporting Agent Would Be Providing Information
    Paragraph (a)(1)(ii) of proposed Rule 10c-1 would require reporting 
agents to enter into written agreements with the persons on whose 
behalf they are providing information to an RNSA. This requirement 
would subject reporting agents to initial burden to draft, negotiate, 
and execute these agreements. The Commission preliminarily believes 
that this requirement would not subject reporting agents to ongoing 
annual burden once the agreement is signed because there would be no 
need to modify the written agreement or take additional action after it 
is executed.
    As discussed above, the Commission preliminarily believes that 
these agreements would likely be standardized across the industry since 
the data elements would be consistent for all persons.\161\ The 
Commission preliminarily estimates that the only terms that may require 
negotiation are price and the format of the information that would be 
required to be provided. As discussed above, however, the Commission 
preliminarily believes that this process would be highly automated. The 
Commission, therefore, preliminarily believes that it would take 
reporting agents the same amount of time to comply with this 
requirement of time as non-providing lending agents. Accordingly, the 
Commission estimates that each reporting agent would spend 30 hours on 
this task. As a result, the total industry-wide initial burden 
attributed to this proposed requirement would be 2,820 hours.\162\
---------------------------------------------------------------------------

    \161\ See supra Part V.D.1.(b)(ii).
    \162\ 30 hours x 94 reporting agents = 2,820 hours.
---------------------------------------------------------------------------

(c) Entering Into Written Agreement With RNSA
    In addition to written agreements with persons on whose behalf they 
would be providing information, paragraph (a)(2)(ii) of proposed Rule 
10c-1 would require reporting agents to enter into written agreements 
the RNSA. Since all reporting agents would be providing the same 
information to the RNSA, the Commission preliminarily believes that no 
terms of these agreements would not be negotiated. Instead, the RNSA 
would create a form agreement that would be consistent for all 
reporting agents.
    While it is possible that the burden may be very small since these 
agreements would likely be standardized, the Commission is 
conservatively estimating one hour of initial burden for each reporting 
agent to account for any administrative tasks that would go into 
processing and executing agreements.\163\ The Commission preliminarily 
believes that reporting agents that enter into written agreements with 
RNSAs would not incur any ongoing annual burden to comply with this 
requirement once the agreement is signed because there will be no need 
to modify the written agreement or take additional action because the 
information will not vary.\164\
---------------------------------------------------------------------------

    \163\ For example, a reporting agent may need to enter the 
written agreement into a contract management system or scan an 
executed paper agreement into an electronic format.
    \164\ The data elements that will need to be reported will not 
change and will be consistent across the industry. Therefore, there 
will be no need to modify or update agreements in any way.
---------------------------------------------------------------------------

    Accordingly, the Commission estimates that the industry-wide 
initial burden for this requirement would be 94 hours.\165\
---------------------------------------------------------------------------

    \165\ 1 hour x 94 reporting agents = 94 hours.
---------------------------------------------------------------------------

(d) Recordkeeping Requirement
    Paragraph (a)(2)(iv) of proposed Rule 10c-1 would require reporting 
agents to preserve for a period of not less than three years, the first 
two years in an easily accessible place, the 10c-1 information that it 
obtained from any person pursuant to paragraph (a)(1)(ii), including 
the time of receipt, and the corresponding 10c-1 information provided 
by the reporting agent to the RNSA, including the time of transmission 
to the RNSA, and the written agreements that the reporting agent 
entered into with the persons on whose behalf it was providing 
information and the RNSA. The Commission preliminarily believes that 
the initial burden associated with retaining the collected information 
is associated with reporting agent's burden to develop and reconfigure 
their current systems to capture the required data elements. 
Accordingly, the Commission is not assessing an initial burden 
associated with the recordkeeping of information required by proposed 
Rule 10c-1(a)(2)(iv).
    The Commission preliminarily believes that this recordkeeping 
requirement will be highly automated. The Commission, therefore, 
estimates

[[Page 69826]]

that reporting agents will spend one hour per week on upkeep and 
testing of records to ensure accuracy to comply with this requirement, 
for a total of 52 hours per year of annual burden per reporting agent. 
Accordingly, the estimates that the total ongoing annual burden for 
this requirement would be 4,888 hours.\166\
---------------------------------------------------------------------------

    \166\ 52 hours x 94 reporting agents = 4,888 hours.
---------------------------------------------------------------------------

3. Lenders That Would Not Employ a Lending Agent
    As discussed in Part II.A, some Lenders run their own securities 
lending program rather than employing a lending agent. Under proposed 
Rule 10c-1, these persons would be required to either (1) provide 10c-1 
information directly to an RNSA (a ``self-providing lender'') or (2) 
use a reporting agent to provide 10c-1 information to an RNSA (a 
``lender that directly employs a reporting agent''). The Commission 
preliminarily believes that the initial and ongoing annual burden would 
vary between these two types of lenders.
(a) Self-Providing Lenders
    Self-providing lenders would be subject to initial and ongoing 
annual burden to develop and reconfigure their current systems to 
capture the required data elements. Because the information that would 
be provided to an RNSA would be the same information as the information 
provided by a providing lending agent and a reporting agent, the 
Commission preliminarily believes that the initial and ongoing annual 
burden for this task would be equivalent to the initial burden 
attributable to the same task for providing lending agents and 
reporting agents, as more fully discussed below.
(i) Initial Burden
    Self-providing lenders would be subject to initial burden to 
develop and reconfigure their current systems to capture the required 
data elements because the Commission preliminarily believes that they 
would need to change internal order routing and execution management 
systems to collect the required information.
    Self-providing lenders would provide the same information to the 
RNSA as a providing lending agent and reporting agent, so the 
Commission preliminarily believes that the burden estimates should be 
consistent. The Commission, therefore, estimates that each self-
providing lender would incur 3,600 hours of initial burden to develop 
and reconfigure their current systems to capture the required data 
elements.\167\ Accordingly, the industry-wide initial burden would be 
500,400 hours.\168\
---------------------------------------------------------------------------

    \167\ See supra Part V.D.1.(a)(i); see also supra Part 
V.D.2.(a)(i).
    \168\ 3600 hours x 139 self-providing lenders = 500,400 hours.
---------------------------------------------------------------------------

(ii) Ongoing Annual Burden
    Once a self-providing lender has established the appropriate 
systems and processes required for collection and provision of the 
required information to the RNSA, the Commission preliminarily 
estimates that the proposed Rule 10c-1 would impose ongoing annual 
burdens associated with, among other things, providing the data to the 
RNSA, monitoring systems, implementing changes, and troubleshooting 
errors.
    As with the initial burden for this requirement, the Commission 
estimates that the ongoing annual burden for this task would be the 
same as providing lending agents and reporting agents because each 
would be providing the same information to the RNSA so the Commission 
preliminarily believes that the burden estimates should be consistent. 
The Commission, therefore, estimates that each reporting agent would 
incur 1,350 hours of ongoing annual burden on this requirement.\169\ 
Accordingly, the industry-wide ongoing annual burden would be 187,650 
hours.\170\
---------------------------------------------------------------------------

    \169\ See supra Part V.D.1.(a)(ii); see also supra Part 
V.D.2.(a)(ii).
    \170\ 1350 hours x 139 self-providing lenders = 187,650 total 
hours.
---------------------------------------------------------------------------

(b) Lenders That Would Directly Employ a Reporting Agent
    Lenders that directly employ a reporting agent would be subject to 
distinct information collection burdens from those applicable to self-
providing lenders. First, because they would not have to establish 
connectivity to an RNSA and may have flexibility in the format of the 
information that it provides the reporting agent, lenders that directly 
employ a reporting agent would be subject to less initial and ongoing 
burden for systems development and monitoring. Second, unlike self-
providing lenders, lenders that would directly employ a reporting agent 
would be subject to initial burden to negotiate and execute a written 
agreement with the reporting agent as required by paragraph (a)(1)(ii).
(i) Systems Development and Monitoring
(a) Initial Burden
    The Commission preliminarily believes that lenders that would 
directly employ a reporting agent would incur initial burden to develop 
and reconfigure their current systems to capture the required data 
elements and provide them to a reporting agent.
    Lenders that would directly employ a reporting agent would provide 
the same information to a reporting agent as a non-providing lending 
agent, so the Commission preliminarily believes that the burden 
estimates should be consistent.\171\ The Commission, therefore, 
preliminarily estimates that a lender that directly employs a reporting 
agent would be subject to an initial burden of 1,800 hours, leading to 
a total industry-wide initial burden for this requirement of 250,200 
hours.\172\
---------------------------------------------------------------------------

    \171\ See supra Part V.D.1.(b)(i)(a).
    \172\ 1,800 hours x 139 lenders that directly employ a reporting 
agent = 250,200 hours.
---------------------------------------------------------------------------

(b) Ongoing Annual Burden
    Once a lender that directly employs a reporting agent has 
established the appropriate systems and processes required for 
collection and provision of the required information to the reporting 
agent, the proposed Rule would impose ongoing annual burden associated 
with, among other things, providing the data to the reporting agent, 
monitoring systems, implementing changes, and troubleshooting errors.
    As with the initial burden for this requirement, the Commission 
estimates that the ongoing annual burden for this task would be the 
same as a non-providing lending agent, so the Commission preliminarily 
believes that the burden estimates should be consistent.\173\ The 
Commission, therefore, estimates that each lender that directly employs 
a reporting agent would be subject to an ongoing annual burden of 675 
hours, leading to a total industry-wide burden for this requirement of 
93,825 hours.\174\
---------------------------------------------------------------------------

    \173\ See supra Part V.D.1.(b)(i)(b).
    \174\ 675 hours x 139 lenders that directly employ a reporting 
agent = 93,825 hours.
---------------------------------------------------------------------------

(ii) Entering Into a Written Agreement With a Reporting Agent
    Paragraph (a)(1)(ii) of proposed Rule 10c-1 would require lenders 
that directly employ a reporting agent to enter into a written 
agreement with the reporting agent. This requirement would subject 
lenders that directly employ a reporting agent to initial burden to 
draft, negotiate, and execute these agreements. The Commission 
preliminarily believes that lenders that directly employ a reporting 
agent would not incur any ongoing burden to comply with this 
requirement once the agreement is signed because there will be no need 
to

[[Page 69827]]

modify the written agreement or take additional action because the 
information will not vary.\175\
---------------------------------------------------------------------------

    \175\ The data elements that will need to be reported will not 
change and will be consistent across the industry. Therefore, there 
will be no need to modify or update agreements in any way.
---------------------------------------------------------------------------

    Lenders that directly employ a reporting agent would largely 
provide the same information to the reporting agent as a non-providing 
lending agent,\176\ so the Commission preliminarily believes that the 
burden estimates for entering into the agreements should be 
consistent.\177\ The Commission, therefore, estimates that each lender 
that directly employs a reporting agent would spend 30 hours of initial 
burden on this task. As a result, the total industry-wide initial 
burden attributed to this proposed requirement would be 4,170 
hours.\178\
---------------------------------------------------------------------------

    \176\ See supra Part V.D.1.(b)(ii).
    \177\ Further, as with non-providing lending agents, because of 
the efficiencies gained from only having one reporting agent and the 
commoditized information that would be provided, each lender that 
directly employs a reporting agent would enter into an agreement 
with only one reporting agent.
    \178\ 30 hours x 139 lenders that directly employ a reporting 
agent = 4,170 hours.

                              PRA Table 1--Summary of Estimated Burdens for Lenders
----------------------------------------------------------------------------------------------------------------
                                                                     Number of     Total initial   Total annual
              Requirement                    Type of burden          entities        industry        industry
                                                                     impacted         burden          burden
----------------------------------------------------------------------------------------------------------------
Providing Lending Agents: Systems       Third-Party Disclosure..               3          10,800           4,050
 Development and Monitoring.
Non-Providing Lending Agents: Systems   Third-Party Disclosure..              34          61,200          22,950
 Development and Monitoring.
Non-Providing Lending Agents: Entering  Third-Party Disclosure..              34           1,020               0
 into Agreement with Reporting Agent.
Reporting Agents: Systems Development   Third-Party Disclosure..              94         338,400         126,900
 and Monitoring.
Reporting Agents: Entering into         Third-Party Disclosure..              94           2,820               0
 Agreement with Person who Provides
 10c-1 Information.
Reporting Agents: Entering into         Third-Party Disclosure..              94              94               0
 Agreement with RNSA.
Reporting Agents: Recordkeeping         Recordkeeping...........              94               0           4,888
 Requirement.
Self-Providing Lenders: Systems         Third-Party Disclosure..             139         500,400         187,650
 Development and Monitoring.
Lenders that Would Directly Employ a    Third-Party Disclosure..             139         250,200          93,825
 Reporting Agent: Systems Development
 and Monitoring.
Lenders that Would Directly Employ a    Third-Party Disclosure..             139           4,170               0
 Reporting Agent: Entering Into a
 Written Agreement with a Reporting
 Agent.
----------------------------------------------------------------------------------------------------------------

E. Information Collection Applicable to RNSAs

    Proposed Rule 10c-1 places new burdens on RNSAs. Proposed Rule 10c-
1(b)-10c-1(e) would require RNSAs to collect the 10c-1 information 
provided to the RNSA by Lenders and make this information publicly 
available as soon as practicable. The collection of 10c-1 information 
might cause an RNSA to exercise authority under proposed Rule 10c-1(f) 
and implement rules regarding the format and manner to administer the 
collection of information required by proposed Rule 10c-1.\179\ Rule 
10c-1(b) also requires the RNSA to create a unique transaction 
identifier and assign it to each loan reported to the RNSA under 10c-1. 
Furthermore, for each security about which the RNSA receives 
information pursuant to 10c-1(e)(1) and (e)(2), the RNSA would be 
required by Rule 10c-1(e)(3) to make available to the public only 
aggregated information for that security, including information 
required by (e)(1)(i) and (ii) and (e)(2)(i) and (ii), as soon as 
practicable, but not later than the next business day. Additionally, 
proposed Rule 10c-1(g)(1) would also require RNSAs to retain the 
information collected pursuant to paragraphs (b) through (e) of 
proposed Rule 10c-1 in a convenient and usable standard electronic data 
format that is machine readable and text searchable without any manual 
intervention for a period of five years; and proposed Rule 10c-1(g)(3) 
would require the RNSA to provide information collected under 
paragraphs (b) and (c) and the aggregate of the information provided 
pursuant to paragraph (e) available to the public, for a least a five-
year period. Proposed Rule 10c-1(g)(2) would require the RNSA to make 
10c-1 information available to the Commission or other persons as the 
Commission may designate by order upon a demonstrated regulatory need.
---------------------------------------------------------------------------

    \179\ The burden of filing any proposed rule changes by the RNSA 
is already included under the collection of information requirements 
contained in Rule 19b-4 under the Exchange Act. See Securities 
Exchange Act Release No. 50486 (Oct. 5, 2004), 69 FR 60287, 60293 
(Oct. 8, 2004) (File No. S7-18-04) (describing the collection of 
information requirements contained in Rule 19b-4 under the Exchange 
Act).
---------------------------------------------------------------------------

1. RNSA Collection of Information From Lenders and Providing 
Information to the Public and the Commission
    As discussed above, Lenders would be required to provide 
information to an RNSA pursuant to Rule 10c-1(a) and the RNSA would be 
required to make certain information publicly available on its website 
or similar means of electronic distribution, without charge and without 
use restrictions as soon as practicable. Accordingly, an RNSA would be 
required to create, implement and maintain the infrastructure to enable 
Lenders to provide the RNSA with the 10c-1 information, which would 
include establishing technical requirements and specifications for such 
infrastructure, creating a system that would generate unique 
identifiers, meeting with industry participants to gather feedback on 
the proposed infrastructure, drafting written policies and procedures 
to protect the confidentiality of certain information, and entering 
into written agreements with Lenders--including lending agents and 
reporting agents--for such information to be provided to the RNSA. 
Additionally, the infrastructure would need to comply with proposed 
Rule 10c-1(g)(2), which would require the RNSA to make the information 
collected pursuant to paragraphs (b) through (e) available to the 
Commission or other persons as the Commission may designate by order 
upon a demonstrated regulatory need.
    The Commission preliminarily believes that the initial burden for 
the RNSA to create and implement the infrastructure for Lenders to 
provide the required information to the RNSA and

[[Page 69828]]

for the RNSA to provide such information to the public is similar to 
the requirement for National Securities Exchanges and RNSAs to 
establish the appropriate systems and processes required for collection 
and transmission of the required information under the CAT NMS Plan 
\180\ submitted by SROs under Exchange Act Rule 613. While similar 
enough to use as the basis for the estimate, the Commission 
preliminarily believes that systems that comply with proposed Rule 10c-
1 will be significantly less complex than those that comply with the 
CAT because they will need to capture less information overall.\181\ 
Additionally, there is currently only one RNSA, rather than the 
multiple National Securities Exchanges, that will have the burden to 
create and implement the infrastructure for Lenders to provide 
information to the RNSA. Accordingly, the burden hour estimates for 
this collection of information will be substantially reduced from the 
CAT estimates, as detailed below. Further, the Commission preliminarily 
believes that the RNSA will have internal staff that can handle this 
task, so unlike the tasks under the CAT NMS Plan, the tasks under 
proposed Rule 10c-1 would not require any outsourcing.
---------------------------------------------------------------------------

    \180\ See CAT Approval Order, supra note 137.
    \181\ See supra note 139.
---------------------------------------------------------------------------

(a) Initial Burden
    The Commission estimates that it would take an RNSA approximately 
10,924 hours of internal legal, compliance, information technology, and 
business operations time to develop the infrastructure to enable 
Lenders to provide the information required by Rule 10c-1 to the RNSA 
and for the RNSA to provide such information to the public.\182\ The 
Commission preliminarily believes that the RNSA would not incur 
external costs for the implementation of the infrastructure to enable 
Lenders to provide the information required by the Rule to the RNSA and 
make such information publicly available because the sole RNSA, FINRA, 
has experience implementing systems to collect information from its 
members.\183\ Therefore, the Commission preliminarily estimates that 
the average one-time initial burden of developing the infrastructure to 
enable Lenders to provide the information required by proposed Rule 
10c-1 would be 10,924 burden hours for the RNSA.
---------------------------------------------------------------------------

    \182\ This estimate is based on the Commission's initial burden 
estimate for national securities exchanges and RNSAs regarding the 
data collection and reporting for the consolidated audit trail which 
was approximately 43,696.8 burden hours in total. See CAT Approval 
Order, supra note 137, at 84921. Given the size of the overall 
equity market vs. the size of the securities lending market the 
Commission preliminarily believes the CAT burden hours would 
overestimate the burden hours to develop the infrastructure to 
provide information required by Rule 10c-1 to the RNSA and for the 
RNSA to provide such information to the public. Accordingly, the 
Commission preliminarily believes that the initial burden should be 
calculated based on the size of the securities lending market in 
comparison to the size of the equities market. The Commission 
estimates that the average daily dollar value of securities lending 
transactions is approximately $120 billion dollars compared to the 
average daily equity trading volume of $475 billion. Accordingly, 
the size of the securities lending market is approximately 25% of 
the U.S. equity market. Therefore the Commission estimates that the 
initial burden to develop and implement the needed systems changes 
to capture and publish the 10c-1 information is 25% of the burden 
hours for CAT, which would be 10,924 burden hours.
    \183\ See supra note 73.
---------------------------------------------------------------------------

(b) Ongoing Annual Burden
    Once the RNSA has developed the infrastructure to enable Lenders to 
provide the 10c-1 information to the RNSA and for the RNSA to provide 
such information to the public, the Commission preliminarily estimates 
that Rule 10c-1 would impose on the RNSA ongoing annual burdens of 
7,739.5 hours to ensure that the infrastructure is up to date and 
remains in compliance with the proposed Rule,\184\ for an estimated 
annual burden of 7,739.5 hours.
---------------------------------------------------------------------------

    \184\ This estimate is similar to the Commission's ongoing 
annual burden estimate for national securities exchanges and RNSAs 
regarding the data collection and reporting for the consolidated 
audit trail which was approximately 30,958.20burden hours in total. 
See CAT Approval Order, supra note 137, at 84922. Given the size of 
the overall equity market vs. the size of the securities lending 
market the Commission preliminarily believes the CAT burden hours 
would overestimate the burden hours to develop the infrastructure to 
provide information required by Rule 10c-1 to the RNSA and for the 
RNSA to provide such information to the public. Accordingly, the 
Commission preliminarily believes that the initial burden should be 
calculated based on the size of the securities lending market in 
comparison to the size of the equities market. The Commission 
estimates that the average daily dollar value of securities lending 
transactions is approximately $120 billion dollars compared to the 
average daily equity trading volume of $475 billion. Accordingly, 
the size of the securities lending market is approximately 25% of 
the U.S. equity market. Therefore the Commission estimates that the 
initial burden to develop and implement the needed systems changes 
to capture and publish the 10c-1 information is 25% of the burden 
hours for CAT, which would be 7,739.5 burden hours.
---------------------------------------------------------------------------

2. RNSA Retention of Collected Information
    Proposed Rule 10c-1(g)(1) requires that the RNSA retain the 
information collected pursuant to paragraphs (b) through (e) of this 
section in a convenient and usable standard electronic data format that 
is machine readable and text searchable without any manual intervention 
for a period of five years. The Commission preliminarily believes that 
the initial burden associated with retaining the collected information 
is associated with RNSA's burden to implement and maintain the 
infrastructure for Lenders to report information to the RNSA. 
Accordingly, the Commission is not assessing an initial burden 
associated with the retention of information required to be reported 
under the proposed Rule.
    The Commission, however, preliminarily estimates that Rule 10c-1 
would impose on the RNSA ongoing annual burdens of 52 hours to retain 
the collected information required by the proposed Rule,\185\ for an 
estimated annual burden of 52 hours. The Commission preliminarily 
believes it is appropriate to add burden hours that already exist for 
17a-1 because the RNSA will have to retain records involving 10c-1 
information for Lenders that are not FINRA members.
---------------------------------------------------------------------------

    \185\ This estimate is similar to the Commission's ongoing 
annual burden estimate for national securities exchanges and RNSAs 
regarding the data collection and reporting for Rule 17a-1, which 
requires that every national securities exchange, national 
securities association, registered clearing agency, and the 
Municipal Securities Rulemaking Board keep on file for a period of 
not less than five years, the first two years in an easily 
accessible place, at least one copy of all documents, including all 
correspondence, memoranda, papers, books, notices, accounts, and 
other such records made or received by it in the course of its 
business as such and in the conduct of its self-regulatory activity. 
See Paperwork Reduction Act Extension Notice for Exchange Act Rule 
17a-1, 84 FR 57920 (Oct. 29, 2019).

[[Page 69829]]



                               PRA Table 2--Summary of Estimated Burdens for RNSA
----------------------------------------------------------------------------------------------------------------
                                                                     Number of     Total initial   Total annual
              Requirement                    Type of burden          entities        industry        industry
                                                                     impacted         burden          burden
----------------------------------------------------------------------------------------------------------------
Implement and maintain the              Reporting and Third                    1          10,924         7,739.5
 infrastructure for Lenders to report    Party Disclosure.
 information to the RNSA including
 written policies and procedures.
RNSA retain the information collected   Recordkeeping...........               1               0              52
 pursuant to paragraphs (b) through
 (f) of proposed Rule 10c-1.
----------------------------------------------------------------------------------------------------------------

F. Collection of Information Is Mandatory

    Each collection of information discussed above would be a mandatory 
collection of information.

G. Confidentiality

    The Commission could receive confidential information as a result 
of this collection of information, such as the identity of Lenders. The 
proposed Rule does not permit the RNSA to make such information public. 
Aside from this information, the collection of information is expected 
to be, for the most part, publicly available information. To the extent 
that the Commission does receive confidential information pursuant to 
this collection of information, such information will be kept 
confidential, subject to the provisions of applicable law.

H. Retention Period of Recordkeeping Requirement

    Pursuant to proposed Rule 10c-1(g)(1), an RNSA would be required to 
retain the information collected pursuant to paragraphs (b) through (e) 
of proposed Rule 10c-1 in a convenient and usable standard electronic 
data format that is directly available and searchable electronically 
without any manual intervention for a period of five years. Pursuant to 
proposed Rule 10c-1(a)(2)(iv) a reporting agent would be required to 
retain information for a period of not less than three years, the first 
two years in an easily accessible place.

I. Request for Comment

    The Commission requests comment on whether the estimates for burden 
hours and costs are reasonable. Pursuant to 44 U.S.C. 3506(c)(2)(B), 
the Commission solicits comments to (1) evaluate whether the proposed 
collections of information are necessary for the proper performance of 
the functions of the Commission, including whether the information 
would have practical utility; (2) evaluate the accuracy of the 
Commission's estimate of the burden of the proposed collections of 
information; (3) determine whether there are ways to enhance the 
quality, utility, and clarity of the information to be collected; and 
(4) determine whether there are ways to minimize the burden of the 
collections of information on those who are to respond, including 
through the use of automated collection techniques or other forms of 
information technology. The Commission also requests that commenters 
provide data to support their discussion of the burden estimates.
    While the Commission welcomes any public input on this topic, the 
Commission asks commenters to consider the following questions:
    72. Is the Commission adequately capturing the respondents that 
would be subject to the burdens under the proposed Rule? Specifically, 
would more or fewer than 37 lending agents, 94 reporting agents, and 
278 Lenders that would not employ a lending agent be required by 
proposed Rule 10c-1 to provide information to an RNSA?
    73. Are there any additional factors that the Commission should 
consider when estimating whether a Lender would employ a reporting 
agent?
    74. Are there any other hourly burdens associated with complying 
with the proposed Rule 10c-1? If so, what are the other hourly burdens 
associated with complying with the proposed Rule?
    75. Would any aspects of the proposed Rule that are not discussed 
in this PRA Analysis impact the burden associated with the collection 
of information?
    Any member of the public may direct to us any comments concerning 
the accuracy of these burden estimates and any suggestions for reducing 
the burdens. Persons submitting comments on the collection of 
information requirements should direct the comments to the Office of 
Management and Budget, Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
[email protected], and send a copy to Vanessa 
Countryman, Secretary, Securities and Exchange Commission, 100 F Street 
NE, Washington, DC 20549-1090, with reference to File No. S7-18-21. OMB 
is required to make a decision concerning the collection of information 
between 30 and 60 days after publication of this release. Consequently, 
a comment to OMB is best assured of having its full effect if OMB 
receives it within 30 days of publication. Requests for materials 
submitted to OMB by the Commission with regard to these collections of 
information should be in writing, refer to File No. S7-18-21, and be 
submitted to the Securities and Exchange Commission, Office of FOIA 
Services, 100 F Street NE, Washington, DC 20549-2736.

VI. Economic Analysis

A. Introduction and Market Failure

1. Introduction
    The Commission has considered the economic effects of the proposed 
Rule and wherever possible, the Commission has quantified the likely 
economic effects of the proposed Rule.\186\ The Commission is providing 
both a qualitative assessment and quantified estimates of the potential 
economic effects of the proposed Rule where feasible. The Commission 
has incorporated data and other information to assist it in the 
analysis of the economic effects of the proposed Rule. However, as 
explained in more detail below, because the Commission does not have, 
and in certain cases does not believe it can reasonably obtain, data 
that may inform the Commission on certain economic effects, the 
Commission is unable to quantify

[[Page 69830]]

certain economic effects. Further, even in cases where the Commission 
has some data, it is not practicable due to the number and type of 
assumptions necessary to quantify certain economic effects, which 
render any such quantification unreliable. Our inability to quantify 
certain costs, benefits, and effects does not imply that such costs, 
benefits, or effects are less significant. The Commission requests that 
commenters provide relevant data and information to assist the 
Commission in quantifying the economic consequences of the proposed 
Rule.
---------------------------------------------------------------------------

    \186\ Section 3(f) of the Exchange Act requires the Commission, 
whenever it engages in rulemaking and is required to consider or 
determine whether an action is necessary or appropriate in the 
public interest, to consider, in addition to the protection of 
investors, whether the action would promote efficiency, competition, 
and capital formation. Additionally, Section 23(a)(2) of the 
Exchange Act requires the Commission, when making rules under the 
Exchange Act, to consider the impact such rules would have on 
competition. Exchange Act Section 23(a)(2) prohibits the Commission 
from adopting any rule that would impose a burden on competition not 
necessary or appropriate in furtherance of the purposes of the 
Exchange Act.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed Rule would 
result in increased transparency in the securities lending market by 
making available the public portion of new 10c-1 information, which is 
more comprehensive than existing data, and by making such data 
available to a wider range of market participants and other interested 
persons than currently access existing data. This effect could be 
similar to what was observed with the implementation of TRACE in 
corporate bonds.\187\
---------------------------------------------------------------------------

    \187\ See infra Section IV.C.1.(a) for a discussion of TRACE.
---------------------------------------------------------------------------

    The subsequent benefits include a reduction of the information 
disadvantage faced by end borrowers and beneficial owners in the 
securities lending market, improved price discovery in the securities 
lending market, increased competition among providers of securities 
lending analytics services, reduced administrative costs for broker-
dealers and lending programs, and improved balance sheet management for 
financial institutions. The Commission preliminarily believes the 
proposed Rule would also likely reduce the cost of short selling, 
leading to improved price discovery and liquidity in the underlying 
security markets. The Commission also preliminarily believes the 
proposed Rule would also benefit investors by increasing the ability of 
regulators to surveil, study, and provide oversight of both the 
securities lending market and also individual market participants.
    The Commission preliminarily believes that there will be costs that 
would result from the proposed Rule. The proposed Rule would lead to 
direct compliance costs as entities providing the 10c-1 information to 
an RNSA would have to build or adjust systems to meet the requirements 
of the proposed Rule. Further, the RNSA managing the collection of data 
may impose fees on entities that provide 10c-1 information to an RNSA. 
These costs may be absorbed by the entities that provide 10c-1 
information to an RNSA in the form of lower profits, or they may be 
passed on to the end customer in the form of increased fees for broker-
dealer services or lending program services. The proposal would also 
impose direct costs on the RNSA responsible for collecting, 
maintaining, and distributing the data. Additionally, the Commission 
preliminarily believes that the proposed Rule would render existing 
securities lending data less valuable, leading to less revenue for the 
firms currently compiling and distributing this data. Also, broker-
dealers and lending programs would have costs in the form of lost 
information advantage when dealing with beneficial owners and end 
borrowers in the securities lending market. Lastly, making public 
securities lending data that is currently either not reported, or where 
access to the data is limited, may affect the profitability of certain 
trading strategies as investors use the data in the proposal to learn 
about market sentiment and adjust their trading strategies accordingly.
2. Market Failures
    The securities lending market is characterized by asymmetric 
information between market participants and a general lack of 
information on current market conditions,\188\ which can lead to 
inefficient prices for securities loans (including equity lending and 
fixed income lending).\189\ These information frictions stem from the 
fact that access to timely lending market data is very limited for some 
market participants. The current ``give-to-get'' model of commercial 
data for securities lending means that only those market entities with 
data to report for themselves are able to get access to the data. 
Furthermore, participation in the give-to-get data product is purely 
voluntary, meaning that the data could be missing observations in a 
systematic fashion, thus biasing the impression it creates of the 
lending market.
---------------------------------------------------------------------------

    \188\ See infra Part VI.B.2.
    \189\ The Commission preliminarily believes that the issues 
discussed in this part apply to all securities. The Commission 
requests comment on this belief.
---------------------------------------------------------------------------

    The Commission preliminarily believes that opacity in the lending 
market is unlikely to be solved by market forces. Firstly, the primary 
source for data about the securities lending market comes from 
commercial data vendors who operate under a give-to-get model where 
entities who wish to obtain securities lending are typically required 
to: (1), Be participants in the lending market themselves with data 
that they could provide; and (2), provide their data to the commercial 
vendor in order to access the full dataset provided by the vendor.\190\ 
Data vendors may see restricting access to the data as necessary to 
persuade current contributors to participate, and thus may be unable to 
change their current practice. If the data vendors expand who has 
access to their data then some of the entities that contribute data may 
choose to no longer contribute their data because they no longer have 
an incentive to do so, making the data less comprehensive than it 
currently is. By keeping access to the data somewhat restrictive data 
vendors enhance the comprehensiveness of the data, but they limit who 
has access.
---------------------------------------------------------------------------

    \190\ As discussed in Part VI.B.5, while the primary sources for 
lending market data come from the main commercial data vendors 
operating on a give-to-get system, some firms obtain and distribute 
securities lending data by surveying some fund managers about their 
lending experience.
---------------------------------------------------------------------------

    Secondly, those market participants who choose not to contribute 
data to existing private data products likely do so because they 
believe it is in their interest to keep their own data out of public 
view, making it unlikely that an entity will be able to produce a 
comprehensive lending data product.

B. Baseline

1. Securities Lending
    A securities loan is typically a fully collateralized transaction 
whereby the lender, also known as the beneficial owner, temporarily 
transfers legal right to a security to the borrower, the counterparty, 
in exchange for compensation. The form of compensation depends on the 
type of collateral used to secure the transaction. There are two 
general types of collateral: Cash and non-cash.
    In the United States, the most common form of collateral for equity 
security loans is cash. The borrower of the security deposits typically 
102% or 105% of the current value of the asset being loaned as 
collateral. The lender then reinvests this collateral, usually in low-
risk interest-bearing securities, then rebates a portion of the 
interest earned back to the borrower. The difference between the 
interest earned and what is rebated to the borrower is the lending fee 
earned by the lender. The portion of the interest earned on the 
reinvested collateral that is returned to the borrower is called the 
rebate rate, and is a guaranteed amount set forth in the terms of the 
loan. It is possible for the lender to lose money on the loan if the 
interest earned on the reinvestment of the collateral does not exceed 
the rebate

[[Page 69831]]

rate. If the security is in high demand in the borrowing market, the 
rebate rate may be negative, indicating that the borrower does not 
receive any rebate and must also provide additional compensation to the 
lender.
    Lending fees are influenced by factors including: The current 
demand for the given security, the potential difficulty a particular 
broker dealer may face finding an alternative source of loans, the 
length of the loan, the collateral used, the credit worthiness of the 
counterparty, and the relative bargaining power of the parties 
involved, among others. Consequently there is usually a significant 
range of fees charged for loans of the same security on the same day to 
different entities.\191\
---------------------------------------------------------------------------

    \191\ See Part VI.B.3 for statistics on the range of fees.
---------------------------------------------------------------------------

    Securities loans are most commonly obtained through bilateral 
negotiations between lending programs and broker-dealers, often with a 
phone call.\192\ Generally, when an end investor wishes to borrow a 
share, and its broker-dealer does not have the share available in their 
own inventory or through customer margin accounts to loan, its broker-
dealer will borrow a share from a lending agent with whom it has a 
relationship. The broker-dealer will then re-lend the share to its 
customer. As previously noted, loans from lending programs to broker-
dealers occur in the Wholesale Market and loans from a broker-dealer to 
the end borrower occur in what is referred to as the Retail Market. 
Obtaining a securities loan often involves extensive search for 
counterparties by broker-dealers.\193\
---------------------------------------------------------------------------

    \192\ Most broker dealers are regulated by FINRA and are subject 
to securities lending rules such as FINRA rules 4314, 4320, and 
4330.
    \193\ See e.g., Adam C. Kolasinski, Adam V. Reed & Matthew C. 
Ringgenberg, A Multiple Lender Approach to Understanding Supply and 
Search in the Equity Lending Market, 68 J. Fin. 559-95 (2013).
---------------------------------------------------------------------------

    Investors borrow securities for a variety of reasons. A primary 
reason for borrowing equity shares is to facilitate a short sale. 
Investors use short sales to take a directional position in a security, 
or to hedge existing positions.\194\ When investors execute a short 
sale, they do not borrow the shares on the day of the short sale. 
Rather, because the stock market settles at T+2 and the lending market 
has same day settlement, the loan actually occurs on the settlement 
day, two trading days after the stock market transaction took place.
---------------------------------------------------------------------------

    \194\ Market makers in the equity market also use short selling 
to facilitate liquidity provision in the absence of sufficient 
inventory. However, these short sales are not considered here 
because they are almost always reversed intraday and thus do not 
result in a securities loan.
---------------------------------------------------------------------------

    Option market activity can also be a source of demand for security 
loans as short selling is a critical component of delta hedging. Delta 
hedging occurs when options market participants, particularly options 
market makers, holding directional positions hedge their inventory 
exposure by taking offsetting positions in the underlying stock.\195\ 
Equity options markets are often significantly less liquid than the 
markets for their underlying securities. Delta hedging a long call or 
short put position requires short selling, which in turn requires 
borrowing the underlying asset.
---------------------------------------------------------------------------

    \195\ For a given option contract, a quantity known as the 
``delta'' captures the sensitivity of the option's price to a $1 
increase in the price of the underlying security. When hedging 
inventory, the market maker determines the appropriate position size 
in the underlying stock according to the delta.
---------------------------------------------------------------------------

    Equity security loans can also occur to close out a failure to 
deliver (FTD). FTDs occur when one party of a transaction is unable to 
deliver at settlement the security that they previously sold. FTDs can 
occur for multiple reasons.\196\ Regulation SHO Rule 204 states that a 
party needing to close out an FTD can borrow shares in the lending 
market and deliver the borrowed share to settle the transaction. Doing 
so allows more time for the individual to source the shares or purchase 
them in the open market.
---------------------------------------------------------------------------

    \196\ See e.g., Amendments to Regulation SHO at note 8, 61691, 
available at https://www.sec.gov/rules/final/2008/34-58775fr.pdf.
---------------------------------------------------------------------------

    The financial management activity of banks also drives securities 
loans, particularly in fixed income securities. It is the Commission's 
understanding that a significant fraction of debt security loans occur 
as banks manage liquidity on their balance sheet. Securities loans help 
banks manage liquidity on their balance sheets because when a security 
is on loan, legal claim to the security transfers to the borrower.\197\ 
Thus banks lacking sufficient high-quality liquid assets on their 
balance sheet may borrow such assets to bolster their liquidity 
ratios.\198\ Consequently, the most common securities to be lent are US 
Treasury/Agency bonds.\199\
---------------------------------------------------------------------------

    \197\ See e.g., Concept Release on the U.S. Proxy System, 
Exchange Act Release No. 62495 (July 13, 2010), 75 FR 42982, 42994 
(July 22, 2010) (``When an institution lends out its portfolio 
securities, all incidents of ownership relating to the loaned 
securities, including voting rights, generally transfer to the 
borrower for the duration of the loan.'').
    \198\ To ensure that the balance sheet is actually improved by 
the transaction, such loans are collateralized with securities 
instead of cash.
    \199\ See OFR Pilot Survey, supra note 24.
---------------------------------------------------------------------------

    Also, the Commission understands that some financial entities may 
use securities loans to obtain the type of collateral required by other 
agreements they are trying to enter into. For example, if a contract 
requires a certain kind of fixed income security as collateral, a firm 
may borrow that security to collateralize the contract.
    Additionally, because dividends and substitute dividends are 
sometimes taxed differently, an investor for whom a substitute dividend 
is taxed lower than a dividend may loan its shares to an investor for 
whom dividends are taxed less than substitute dividends.\200\
---------------------------------------------------------------------------

    \200\ This is known as dividend arbitrage. While the IRS has 
passed regulations to try to combat this type of dividend arbitrage, 
there is evidence that it still occurs. See Peter N. Dixon, Corbin 
A. Fox & Eric K. Kelley, To Own or Not to Own: Stock Loans around 
Dividend Payments, 140 J. Fin. Econ. 539-59 (2021).
---------------------------------------------------------------------------

    While a security is on loan, the borrower is the legal owner of the 
security and receives any dividends, interest payments, and, in the 
case of equity security loans, holds the voting rights associated with 
the shares.\201\ Usually the terms of the loan stipulate that dividends 
and interest payments must be passed back to the beneficial owner in 
the form of substitute payments. Voting rights cannot be transferred 
and remain with the borrower until the loan is returned.
---------------------------------------------------------------------------

    \201\ See e.g., OFR Reference Guide, supra note 14, at 36. See 
also Viktoria Baklanova, Adam M. Copeland, and Rebecca McCaughrin, 
``Reference Guide to US Repo and Securities Lending Markets,'' 740 
FRB of New York Staff Report (2015).
---------------------------------------------------------------------------

2. Current State of Transparency in Securities Lending
    As described above,\202\ data on securities lending are incomplete, 
and, may be unavailable to certain market participants. The available 
data are produced by commercial vendors. Data from commercial vendors 
are based on voluntary data contributions, largely from lending 
programs. Consequently, these data by and large only cover the 
Wholesale Market. Because the primary data providers to the commercial 
vendors are lending programs, which primarily lend to broker dealers in 
the Wholesale Market, the data have limited coverage of the Retail 
Market. Moreover, even in the Wholesale Market the data are incomplete 
as it is unlikely that the full universe of lending programs contribute 
all data to any given data provider. The voluntary nature of the 
submissions may mean that some data will be withheld. Market 
participants that choose not to disclose their data to the commercial 
providers likely do so because it is in their strategic interest

[[Page 69832]]

not to do so, resulting in nonrandom omissions. These omissions likely 
insert bias into the commercial databases. Because the data are 
missing, the extent of the biases cannot be determined.
---------------------------------------------------------------------------

    \202\ See supra Part VI.A.2.
---------------------------------------------------------------------------

    As mentioned above, these data lack significant coverage of the 
Retail Market. This omission has been noted by industry participants 
who have stated that even with the commercial data they still feel 
unable to benchmark the performance of their lending programs because 
they have very little insight in to the retail portion of the lending 
market.\203\
---------------------------------------------------------------------------

    \203\ See, e.g., Bob Currie, The Power of Reinvention, Sec. Fin. 
Times, Aug. 31, 2021, at 20, available at https://www.securitiesfinancetimes.com/sltimes/SFT_issue_285.pdf 
(interviewing Matthew Chessum).
---------------------------------------------------------------------------

    Access to data provided by the commercial vendors is also 
restricted, as only certain entities can purchase the data. The 
Commission understands that these entities access the data using 
various means such as an application programming interface (API), 
spreadsheet add-in applications, file downloads, or directly from the 
distributor's website. However, it is the Commission's understanding 
that some large institutional investors who would like the data, such 
as hedge funds, cannot access it, even for a fee, because they do not 
provide lending data to the commercial vendors and distributing the 
data to them may discourage other market participants from contributing 
their data to the data vendors. Expanding access to the commercial data 
may discourage some participants from contributing data because 
securities loans are often entered into to facilitate various trading 
and hedging strategies. Consequently, if sophisticated traders such as 
hedge funds can access the data, then some market participants may be 
leery of contributing data to the commercial data vendors for fear of 
hedge funds learning about their trading or hedging strategies. 
Additionally, while some data vendors do allow non-lending market 
participants, such as academics and regulators, to access the data for 
a fee, they sometimes place usage restrictions on the data that make it 
unusable for regulatory and some academic functions.
    The Commission preliminary believes, based on conversations with 
industry participants and our staff's use of some of the data, that the 
coverage and timeliness of the three biggest commercial data vendors 
are roughly comparable. Other firms provide a different approach to 
securities lending data by surveying fund managers about their 
borrowing experience, such as the fees they paid to borrow, from which 
they provide estimates of lending fees.\204\
---------------------------------------------------------------------------

    \204\ See Garango Antonio, Short Selling Activity and Future 
Returns: Evidence from FinTech Data (2020), at 1 and 3, available at 
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3775338.
---------------------------------------------------------------------------

    The current state of data availability, combined with the need for 
extensive search to facilitate security loans in the bilateral 
market,\205\ means that the largest and most centrally connected 
broker-dealers and lending programs likely have access to better 
information about the current state of the lending market than other 
participants, including their customers, the beneficial owners and end 
borrowers. This asymmetric information between those in the center of 
the lending market and those on the periphery may lead to inferior 
terms for those on the periphery, in the form of lower performance and 
less favorable prices for beneficial owners and end borrowers.\206\
---------------------------------------------------------------------------

    \205\ See e.g., Adam C. Kolasinski, Adam C., Adam V. Reed, and 
Matthew C. Ringgenberg. ``A multiple lender approach to 
understanding supply and search in the equity lending market. ``The 
Journal of Finance 68, no. 2 (2013): 559-595. For a discussion of 
search costs in the securities lending market.
    \206\ For example, broker-dealers acting on behalf of customers 
have an incentive to lend from their own inventory, even if lower 
cost borrowing options exists, because they keep the whole lending 
fee in this case. The lack of data available to the end borrower 
about the state of the lending market makes it difficult for the end 
borrower to monitor the performance of its broker-dealer for 
situations like this.
---------------------------------------------------------------------------

    Furthermore, because of the limited insight of existing commercial 
data into the retail market and the limits on access under the give-to-
get model used by these data vendors, the commercially available data 
products for the securities lending market do not alleviate this 
information asymmetry.
    In addition to the specific problem of information asymmetry, the 
lack of comprehensive and widely available data on securities lending 
activity likely means that the prices at which securities loans take 
place are not efficient, relative to the hypothetical case where 
complete information about securities lending activity were widely 
available. Asymmetric information deters outsiders from entering the 
market, as they anticipate not being able to transact on the same 
terms. This limits both liquidity (because fewer participants enter to 
transact) and price discovery (because not all information enters 
prices). Moreover, even connected participants lack a complete picture 
of the lending market, implying that the prices that they quote may not 
be as efficient as they otherwise would be.
3. Characteristics of the Securities Lending Market
    The value of securities available to be loaned generally far 
exceeds the total value on loan. The OFR Pilot Survey documented that 
in 2015 only about 10% of the value of securities available for lending 
were on loan.\207\ However, for a specific security it is not always 
true that shares available to loan far exceeds shares on loan. For some 
securities, particularly highly shorted securities, it can be extremely 
difficult and expensive to find securities to borrow. Securities that 
are difficult to borrow are said to be ``on special'' and can have 
average lending fees many times higher than a security that is not on 
special. In addition to significant variation in fees across different 
securities, there can also be a wide range of fees charged to borrow 
the same security on the same day.
---------------------------------------------------------------------------

    \207\ See Viktoria Baklanova, Cecilia Caglio, Frank M. Keane & 
R. Burt Porter, A Pilot Survey of Agent Securities Lending Activity 
(Off. of Fin. Research, Working Paper No. 16-08, 2016). Also, the 
number of shares available for loan must be interpreted carefully. 
It is the Commission's preliminary understanding that some 
beneficial owners may report a supply of shares available that, if 
borrowed, would exceed the total amount of securities lending they 
are willing to engage in, so that not all shares reported as 
available could in fact be borrowed at once. Investment companies 
that engage in securities lending consistent with SEC staff's 
current guidance generally limit securities lending to no more than 
one third of the value of their portfolio on loan at a given point 
in time. Some investment companies may set individual portfolio 
limits lower. See supra note 109.
---------------------------------------------------------------------------

    Table [1] provides descriptive statistics illustrating these 
characteristics of the securities lending market. The data come from 
FIS (a/k/a Fidelity National Information Services, Inc.) and so reflect 
conditions in the wholesale lending market for the sample of lenders 
for which FIS obtains data. The data cover US equities on the same days 
as the OFR Pilot Study.\208\ Panel A of Table[1] provides the 
distribution of utilization rates (defined as the percent of shares 
currently on loan relative to the total number of shares available for 
lending).\209\ This panel highlights that utilization rates are highly 
positively

[[Page 69833]]

skewed. For most stocks supply significantly outstrips demand with 
median utilization rates of approximately 12%. For stocks at the 90th 
percentile, utilization rates are near 70%, implying that an investor 
seeking to find shares of such a stock to borrow may have a difficult 
time doing so.
---------------------------------------------------------------------------

    \208\ We limited our sample to these dates for comparison to the 
OFR study. Additionally, while the data presented here is limited to 
equities, the proposal applies to all securities and the Commission 
preliminarily believes that given that there exists the same lack of 
transparency for fixed income loans and equity loans, the same 
economic structure likely applies to both fixed income and equities.
    \209\ The statistics in Table 1 derive from data obtained from 
FIS for U.S. common stocks. The table includes data from the same 
period of time as the OFR Pilot Survey (October 9, 2015, November 
10, 2015, and December 31, 2015).
---------------------------------------------------------------------------

    Panel B of Table [1] shows that the lending fees paid for 
securities loans exhibit a wide range.\210\ Some stocks, i.e., those on 
special, can have fees many times higher than the median stock. 
Specifically, stocks at the 90th percentile of lending fees have an 
average lending fee of 7% per year while the median stock has a lending 
fee of about 0.6% per year. Even when loans involve the same stock, and 
on the same day, there can be a significant range in fees paid to 
borrow securities.
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    \210\ This result is consistent with the academic literature See 
e.g., Peter N. Dixon, Corbin A. Fox, and Eric K. Kelley. ``To Own or 
Not to Own: Stock Loans Around Dividend Payments,'' Journal of 
Financial Economics, 140, 2 (2021), 539-559. Also consistent with 
the academic literature, average fees for each stock each day are 
computed by FIS as the share weighted average fee across all loans 
outstanding reported to FIS for a given stock on a given day. Stocks 
are sorted by average fee and percentiles are determined.
---------------------------------------------------------------------------

    Panel C of Table [1] highlights the range of fees charged for the 
same stock on the same day. The range in fees is defined as the 
difference in the maximum and minimum fees reported to FIS for loans of 
the same stock on that day. This range can be quite substantial. For 
the median stock the range is about 3 percentage points, or 
approximately five time the median fee charged for securities lending 
transactions.
    The level of average fees is affected by the overall demand for the 
security while the range of fees for the same security can be 
influenced by a number of characteristics: The Credit worthiness of the 
borrower, the type of collateral used, and the term of the loan. The 
range in fees may also represent asymmetric information between the 
parties to the loan negotiation, such that one party is able to charge 
a higher fee than would be possible if the other party were more aware 
of the current rates for the security to be loaned. It may also 
represent a general lack of price efficiency, as market participants 
operate without a clear view of the market as a whole.
BILLING CODE 8011-01-P
[GRAPHIC] [TIFF OMITTED] TP08DE21.006


[[Page 69834]]


BILLING CODE 8011-01-C
4. Structure of the Securities Lending Market
    The securities lending market is made up of a market for borrowing 
and borrowing services, and a market for lending services. End 
borrowers can borrow securities either through their broker-dealer, or 
by themselves if they maintain their own relationships with lending 
programs. If they borrow through their broker-dealer, then they 
transact in the Retail Market. If they maintain their own relationships 
and borrow directly from lending programs, then they transact in the 
Wholesale Market. Beneficial owners can either supply shares to the 
lending market by contracting with a lending program, or they can run 
their own lending program and lend directly to entities such as large 
hedge funds with which they maintain relationships. In either case, 
such a transaction occurs in the Wholesale Market. Lenders can also be 
broker-dealers who lend to end borrowers either from their own account 
or from customer margin accounts. These lenders transact in the Retail 
Market. The following sections discuss the structure of the market for 
borrowing and borrowing services and the market for lending services.
(a) Market for Borrowing and Borrowing Services
    A market participant wishing to borrow shares usually does so 
through its broker-dealer, who offers to find shares to borrow as part 
of its suite of services offered to customers. A broker-dealer may 
start by providing a security loan to its customer with shares from its 
own inventory or out of another customer's margin account. The 
Commission understands that in order to facilitate the amount of 
borrowing customers wish to do, a broker-dealer will typically have to 
find external sources of shares. To that end, broker-dealers maintain 
relationships with various lending programs.
    Additionally, some large institutions, such as banks, credit 
unions, pension funds, and hedge funds, choose to maintain their own 
relationships with lending programs. These entities bypass broker-
dealers to search for borrowable shares themselves. This option is not 
feasible for smaller institutions, who lack both the scale to make it 
cost effective, and the creditworthiness to be an acceptable 
counterparty for the lending programs in the absence of an 
intermediary, e.g., a broker-dealer.
    The OFR Pilot Survey estimated that there were approximately $1 
trillion of shares on loan. The OFR primarily focuses on the Wholesale 
Market, consequently the overwhelming majority of borrowers were 
broker-dealers, who are generally arranging the loan on behalf of a 
customer (such as a hedge fund) that wishes to borrow shares, typically 
to deliver shares to settle a short transaction. Consequently the OFR 
Pilot Survey does not provide much insight into who the end borrowers 
are for the trades facilitated by broker-dealers. Figure [1] provides 
the fraction of total securities on loan by type of borrower based on 
the OFR Pilot Survey. 
[GRAPHIC] [TIFF OMITTED] TP08DE21.007

    There is currently no common source that those seeking security 
loans can use to determine where to find shares available to lend, 
which is why broker-dealers rely on relationships with lending programs 
to secure loans. This situation has contributed to high search costs in 
this market.\211\ High search costs imply that transactions cannot take 
place without a costly effort to find a favorable counterparty. The 
need for such costly effort can inhibit market efficiency.
---------------------------------------------------------------------------

    \211\ Kolasinski, Reed & Ringgenberg, supra note 193.
---------------------------------------------------------------------------

    Broker-dealers possess some market power over their customers. 
Generally, broker-dealers assist investors in finding shares to borrow 
as part of a suite of services and switching costs to selecting a new 
broker dealer can be high. This relationship can make it difficult for 
investors to change broker-dealers if they underperform in one area 
because it is not just a securities lending relationship that would be 
changed, but the whole suite of broker-dealer services would be 
affected.\212\ Additionally, the

[[Page 69835]]

relationship nature of the lending market favors larger broker-dealers 
who can maintain high-volume relationships with more lending programs. 
Finally, the lack of data make it difficult for customers to evaluate 
the performance of broker-dealers. Customers as well as lenders thus 
rely on relationships and reputation, a situation that also leads to 
market power.
---------------------------------------------------------------------------

    \212\ Some entities, such as some hedge funds, have multiple 
prime-brokers. For such institutions it would be less difficult to 
switch between broker-dealers if one is performing poorly as they 
could redirect securities lending business to their top performing 
prime-broker.
---------------------------------------------------------------------------

(b) Market for Lending Services
    The primary sources of shares to loan are long term investors such 
as investment firms, pension and endowment funds, governmental 
entities, and insurance companies. These entities generally make their 
shares available to lend either through a lending program run by a 
lending agent or by running their own lending program. Additionally, 
broker-dealers may lend shares from their own inventory, from fully 
paid shares, and from customer margin accounts.
    As described above, a beneficial owner seeking to lend shares will 
generally provide those shares to a lending agent, which runs a lending 
program. There are two broad categories of lending programs: Custodian 
banks and third-party lending programs. In the case of custodian banks, 
the lending program is generally offered as part of their general 
custodian services.
    Both types of lending programs will generally pool shares across 
accounts with which they have lending agreements to create a common 
pool of shares available to lend. As shares are lent out the revenue 
earned from the pool of shares is generally distributed across all 
accounts contributing shares to the pool of shares on loan on a pro-
rata basis. In pooled lending programs the lending program generally 
splits the fees generated from lending with the beneficial owners. 
Based on the staff's experience, the Commission preliminarily believes 
that the lending program will usually take about a third of the fees 
earned. In the case of custodian banks, the custodian bank may, rather 
than return the lending revenue directly to the beneficial owner, 
instead apply the beneficial owner's portion of the lending revenue to 
other fees charged by the custodian bank for other services.
    Lending programs typically indemnify the beneficial owner from 
default by the borrower. This indemnity gives the lending program an 
incentive to ensure the creditworthiness of the borrower, and a lending 
program may assess higher fees to borrowers it deems as less 
creditworthy.
    Lastly, over the past two decades, auction-based security lending 
has become an alternative for lender-borrower interactions. In this 
setting, unlike the directed lending programs, positions of different 
beneficial owners are not pooled to cater to security-specific demand 
from borrowers. Instead, after determining the desired income streams, 
the lender's entire portfolio, or its segments, are offered via blind 
single-bid auctions.
    In some cases, a beneficial owner may choose to set up its own 
lending program. This course is more common among very large funds that 
have the resources to build up the expertise necessary to operate a 
lending program.
    The Commission preliminarily believes that the current relationship 
and network structure of lending programs and broker-dealers favors 
larger lending programs that have the resources to maintain 
relationships with more and larger lending broker-dealers. Thus, the 
Commission preliminarily believes that the market for lending services 
is likely dominated by a few large lending programs, including those 
run by the large custodian banks.
    The OFR Pilot Survey estimated that as of the latter part of 2015 
there were approximately $9.5 trillion worth of shares available for 
lending.\213\ Figure [2] provides a breakout of the percent of shares 
available for lending provided by the various entities.
---------------------------------------------------------------------------

    \213\ Commercial vendors typically report a value for securities 
available to loan that is larger than what is reported in the OFR 
study. This difference is likely due to sample construction. The 
commercial vendors likely have a larger sample of lending programs 
to draw from, particularly the lending programs based outside of the 
United States.
[GRAPHIC] [TIFF OMITTED] TP08DE21.008


[[Page 69836]]


5. Market for Securities Lending Data and Analytics
    The market to collect and disseminate securities lending data is an 
outgrowth of the market for securities lending market analytics.\214\ 
This market consists of a few established vendors that specialize in 
geographic areas (U.S. and non-U.S.) but seek to compete in all 
geographic areas. Most vendors collect the data to support the analysis 
business in which they provide data-based service to institutions and 
other lending programs. Others collect data through their facilitation 
of security loans. As such, the data vendor business is often an 
outgrowth of another business.
---------------------------------------------------------------------------

    \214\ See the business model descriptions in IHS Markit's 
comment letter responding to FINRA's Regulatory Notice 21-19, 
available at https://www.finra.org/sites/default/files/NoticeComment/IHS%20Markit_Paul%20Wilson_21-19_9.30.2021%20-%20IHSM%20Cmt%20Ltr%20re%20FINRA%20RFC%20Short%20Interest%20Position%20Reporting.pdf.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the data provided by the 
various data vendors are largely comparable.\215\ However the entities 
providing data to the vendors are also their customers. This 
relationship limits the market power of the vendors with respect to 
their clients who provide data but results in the clients' incentives 
limiting the competitiveness of the market.\216\ This results in the 
market being largely inaccessible for many entities that could use the 
data for their own benefit or the benefit of the market as a 
whole.\217\
---------------------------------------------------------------------------

    \215\ See Truong X. Duong, Zsuzsa R. Husz[aacute]r, Ruth SK Tan, 
and Weina Zhang. ``The Information Value of Stock Lending Fees: Are 
Lenders Price Takers?'' Review of Finance 21, no. 6 (2017): 2353-
2377 (who provide a comparative analysis of the datasets of two of 
the main commercial data vendors and find very high correlations 
between the values presented in the different datasets).
    \216\ See supra Part VI.A.2.
    \217\ See supra Part VI.B.4.(b).
---------------------------------------------------------------------------

    The give-to-get model for securities lending data is a significant 
barrier to entry to any firm seeking to provide analytics services. 
Firms cannot provide analytics services without data, and the biggest 
three data vendors have established relationships with data 
contributors to collect data. Such data contributors have an incentive 
to also control who can access that data. Consequently, the Commission 
understands that the market for securities lending data and securities 
lending analytics is largely concentrated among the three biggest data 
vendors.

C. Economic Effects of the Proposed Rule

1. Effects of Increased Transparency in the Lending Market
    The Commission preliminarily believes that the primary impact of 
the proposed Rule would be to increase transparency in the securities 
lending market. The proposed Rule would improve transparency through 
increased completeness, accuracy, accessibility, and timeliness of 
securities lending data. Due to uncertainties about existing data 
discussed in IV.B.2, the Commission has some uncertainty in describing 
how much more complete, accurate, and timely the data provided by the 
proposal will be. However, the Commission preliminarily believes that 
the data provided by the proposal will improve upon existing data in 
each of these areas. While commercial data vendors collect data only 
from a segment of the market, the proposed Rule would seek to collect 
all security loan transactions. In addition, unlike the often voluntary 
data reporting of subscribers to commercial data vendors, the proposed 
Rule mandates reporting. As such, the data provided by the proposed 
Rule would be more comprehensive than the data offered by any 
individual data vendor.
    The data provided by the proposed Rule would encompass more data 
fields than those offered by individual existing commercial data 
vendors, improving the breadth of the available securities lending 
data. While both commercial data and the data provided by the proposal 
will provide information on fees (rebate rates) and the dollar value of 
the loan, the proposed rule requires reporting of additional 
information relevant to the loan including: The name of the platform or 
venue where the security loan transaction was executed, the security 
loan's termination date, type of collateral, and borrower type. In 
addition, as described in Part III.B.1.b), the proposed Rule would 
collect detailed security loan modification data while existing 
commercially available data often fails to cover such information.
    Commercial data vendors restrict data access via usage 
restrictions. In contrast, the proposed Rule expands accessibility of 
the data by allowing all market participants to access data.\218\ While 
the Commission preliminarily believes that the lack of such usage 
restrictions would expand access, the Commission is uncertain as to 
whether the RNSA would develop systems to facilitate access with a 
degree of convenience comparable to current data vendors. Nevertheless, 
the Commission preliminarily believes that the commercial vendors may 
process the data available through the RNSA to provide conveniently 
accessible comprehensive securities lending data, along with the other 
relevant products, to clients.\219\
---------------------------------------------------------------------------

    \218\ See Part VI.C.3 for estimated compliance costs.
    \219\ The Commission understands that there are different ways 
that market participants currently access data as discussed in Part 
VI.B.1, and that these ways may be different from how market 
participants access the data created by the Proposal. However, the 
Commission preliminarily believes that how market participants 
access the data will likely have a significantly smaller impact on 
the economic effects of the rule relative to the effects of the 
content of the data, its accessibility, and its timeliness. The 
Commission preliminarily believes that market participants will 
relatively easily adapt to optimally use the data generated by the 
proposal. These adaptations will likely be relatively small given 
the similarity of the structure of the current data with the data 
generated by the Proposal. Thus the Commission's discussion of 
economic effects in this section focus on the content of the data.
---------------------------------------------------------------------------

    Lastly, the proposed Rule would likely improve the timeliness of 
data available to the public. While the Commission understands that 
most of the major data vendors provide some data on transactions 
intraday, it is unclear if all do. These vendors make intraday data 
available in 15 minute increments. However it is not clear whether 
these data vendors require their data contributors to report 
transactions within 15 minutes thus the Commission is uncertain about 
the comprehensiveness of existing intraday data offerings.\220\ 
Consequently, the proposed Rule's 15 minute reporting window will in 
the extreme case likely result in data that is at least as timely as 
some existing data and will likely be more timely.
---------------------------------------------------------------------------

    \220\ Fifteen-minute reporting frequency is currently 
implemented in corporate bond markets, where reporting is often 
handled manually. Hence, in any market with a degree of automation, 
e.g., security lending markets, a 15-minute reporting frequency 
would be unlikely to present technological challenges.
---------------------------------------------------------------------------

    While the Proposal provides improvements in many areas as discussed 
above, and the Commission preliminarily believes that the Proposal will 
lead to an overall increase in transparency, the Commission 
preliminarily believes that in some areas, the Proposal will produce 
data that that may be less timely than existing commercial data. For 
example the Proposal requires the RNSA to report end of day quantities 
of securities available for lending and loans outstanding. These data 
will be made available to the public as soon as practicable, but not 
later than the next business day. The Commission preliminarily 
understands that the

[[Page 69837]]

current practice by market participants is to provide preliminary 
statistics on the same day based on the intraday data collected by the 
vendors--potentially one day sooner than the Proposal--while the main 
data are disseminated one day later. Thus while the Commission 
preliminarily expects that the data for shares on loan and shares 
available to loan could be more comprehensive than existing commercial 
data, it may also be disseminated one day later than the preliminary 
statistics produced by the commercial vendors.
    Despite this potential reduction in the timeliness of one data 
element, increased transparency from the proposed Rule would have 
several notable economic effects. First, it reduces information 
asymmetries, which would be beneficial to some and costly to others. 
The improvements in the information available to various participants 
could affect revenues from borrowing securities, lending securities, 
intermediating loans and selling data. Third, the improvements in 
efficiency in the securities lending market would reduce the costs of 
short selling, potentially affecting markets more broadly. Finally, 
improvements in transparency in the securities lending market can 
assist financial institutions in managing collateral and their balance 
sheets more broadly.
    As discussed below, the Commission preliminarily believes that the 
data provided by the proposal may decrease the cost of lending. 
Consequently, some investors may see returns decrease due to more 
competitive fee pricing which may lower securities lending revenue for 
some lenders. On the other hand, other investors may see returns 
increase if the cost of borrowing securities decreases as it will 
facilitate investment, hedging, and potentially market making 
strategies. Many investors may experience both effects. In general, the 
Commission believes that reductions in transaction costs ultimately 
benefit investors.
(a) Reduction in Information Asymmetry
    The Commission preliminarily believes that the transparency created 
by the proposed Rule would reduce information asymmetries between 
various market participants. Specifically, it would reduce the 
information asymmetries between dealers and end borrowers and between 
beneficial owners and lending programs, resulting in lower costs for 
end borrowers but reduced revenues for some broker-dealers and lending 
programs. In addition, beneficial owners could benefit from better 
terms but could also experience reduced revenues from their lending 
activities.
    The Commission preliminarily believes that the transparency created 
by the proposed Rule would benefit end borrowers by reducing the 
information disadvantage they have with a broker when borrowing shares, 
leading to lower prices for end borrowers. Because most security loans 
are facilitated through broker-dealers, the data would allow end 
borrowers to determine the extent to which their broker-dealer is 
obtaining terms that are better, worse, or consistent with current 
market conditions for loans with similar characteristics. If a 
particular broker-dealer is consistently underperforming relative to 
the rest of the market, an investor would have the tools to identify 
such underperformance and address it with his or her broker dealer, or 
to find a new broker dealer.\221\ Such improvements are consistent with 
the experience in other markets. For example, the implementation of 
TRACE in the corporate bond markets improved transparency in that 
market and has been studied extensively. Research has shown that TRACE 
lowered both the average cost of transacting as well as the dispersion 
of transaction costs--largely by reducing the information asymmetries 
between customers and their broker-dealers.\222\ Additionally, recent 
research from Brazil has shown that improving securities lending 
transparency led to lower fees, increased liquidity, and increased 
price efficiency.\223\
---------------------------------------------------------------------------

    \221\ The costs associated with switching broker dealers may be 
high, particularly for smaller borrowers. Switching broker-dealers 
may not be cost effective for these borrowers, however, the data 
would provide benchmark statistics that may enable smaller borrowers 
to select higher performing broker-dealers initially.
    \222\ See e.g., Amy K. Edwards, Lawrence E. Harris, and Michael 
S. Piwowar. ``Corporate Bond Market Transaction Costs and 
Transparency.'' The Journal of Finance 62.3 (2007): 1421-1451, 
Michael Goldstein, Edith S. Hotchkiss, and Erik R. Sirri. 
``Transparency and Liquidity: A Controlled Experiment on Corporate 
Bonds.'' The Review of Financial Studies 20.2 (2007): 235-273, 
Hendrik Bessembinder, William Maxwell, and Kumar Venkataraman. 
``Market Transparency, Liquidity Externalities, and Institutional 
Trading Costs in Corporate Bonds.'' Journal of Financial Economics 
82.2 (2006): 251-288, Michael A. Goldstein, and Edith S. Hotchkiss. 
``Dealer Behavior and the Trading of Newly issued Corporate Bonds.'' 
AFA 2009 San Francisco meetings paper. 2007, and Hendrik 
Bessembinder and William Maxwell. ``Markets: Transparency and the 
Corporate Bond Market.'' Journal of economic perspectives 22.2 
(2008): 217-234.
    \223\ See F[aacute]bio Cereda, Fernando Chague, Rodrigo De-
Losso, Alan Genaro, and Bruno Giovannetti. ``Price transparency in 
OTC equity lending markets: Evidence from a loan fee benchmark.'' 
Journal of Financial Economics (Forthcoming).
---------------------------------------------------------------------------

    The Commission preliminarily believes that the proposed Rule would 
benefit beneficial owners by reducing their information disadvantage 
with respect to their lending programs. By allowing beneficial owners 
to more easily benchmark their lending programs through access to data 
on lending fees and other characteristics of recently transacted 
security loans, the proposed Rule would provide these lenders with an 
improved ability to determine the quality of the loans that their 
lending program executes on their behalf relative to other loans with 
similar characteristics and to discuss performance with their lending 
program, find a different lending program, or find a new route to 
market.
    Reduction in information asymmetry could result in reduced revenue 
for some broker-dealers and lending programs. Because end borrowers and 
beneficial owners would have more information about the state of the 
lending market, broker dealers and lending programs who consistently 
underperform the market may lose customers to better performing broker-
dealers and lending programs, or begin offering better terms to their 
customers. Both possibilities represent a reduction in revenue for 
broker-dealers and lending programs. It is possible some broker-dealers 
and lending programs may choose to exit some or all of the market for 
lending services as a result of this loss of revenue.\224\ The loss of 
revenue will in part be a transfer to end borrowers, beneficial owners, 
better performing lending programs, and better performing broker-
dealers.
---------------------------------------------------------------------------

    \224\ See infra Part VI.D.
---------------------------------------------------------------------------

    Lending programs may also experience reduced revenues through the 
change in terms offered by broker-dealers to their customers. If a 
given lending program has become skilled in cultivating relationships 
with broker-dealers willing currently to pay higher fees, then the 
increased competition that broker-dealers face as a result of the rule 
may lead to lower overall fees being charged for security loans--
lowering the total lending revenue produced by securities lending.\225\ 
Lower overall lending fees may reduce the revenue earned by beneficial 
owners and would represent a partial transfer to the end borrowers who 
may receive better terms on average as a result of decreased 
information asymmetries.\226\
---------------------------------------------------------------------------

    \225\ For a discussion of the potential for broker-dealers to 
face increased competition, see supra Part VI.D.2.
    \226\ See supra Part VI.B.

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[[Page 69838]]

(b) Improved Information for Participants in the Securities Lending 
Market
    The Commission preliminarily believes that the increased 
transparency that would result from the proposed Rule would increase 
the information about the state of and activity in the securities 
lending markets that is available to market participants generally. 
This would result in benefits in the form of increased trading profits 
for investors and beneficial owners, reduced costs of business for 
broker-dealers, improved performance and reduced costs for lending 
programs, improved price discovery in the securities lending market, 
and new business opportunities for data vendors. The increase in 
securities lending information would also result in costs in the form 
of lost revenue for current providers of commercial securities lending 
data.
    The Commission preliminarily believes the improved information that 
would result from the proposed Rule would lead to increased profits for 
certain investors by increasing their certainty regarding investment 
strategies that require borrowing securities. Prior to a short sale 
transaction, the end borrower will be able to get a better sense of the 
likely costs associated with such an investment strategy, using the 
information that would be provided under the proposed Rule. This 
increase in certainty regarding the costs of borrowing a security may 
decrease risk, and thereby increase risk-adjusted profits, of pursuing 
investment strategies that require short sales.
    The improved information access would lead to the benefit of 
improved price discovery in the security lending market itself. As all 
participants in the securities lending market obtain better data on 
that market, utilize the insights contained in the data, and then 
improve their decisions based on it, the price discovery process would 
improve. This would lead to more efficient prices for securities loans.
    Access to the information that would be made available by this 
proposal would benefit investors by potentially enabling them to make 
more informed decisions about whether to buy, hold, or sell a given 
security. Extant research has demonstrated that securities lending data 
has information relevant to the prices of the underlying security.\227\ 
This information may therefore enable more informed investment 
decisions by those investors who utilize the insights into the 
underlying market available from the lending market. More informed 
investment decisions facilitated by the proposal may also improve 
market stability by allowing investors to better manage risk.
---------------------------------------------------------------------------

    \227\ See Truong X. Duong, Zsuzsa R. Husz[aacute]r, Ruth S. K. 
Tan & Weina Zhang, The Information Value of Stock Lending Fees: Are 
Lenders Price Takers? 21 Rev. Fin. 2353-77 (2017). This study shows 
that after controlling for the level of short selling, securities 
lending fees are predictive of future stock returns with higher fees 
associated with lower future returns. These result imply that, all 
things equal, lenders charge higher fees to lend their shares when 
they have negative information about a company. And See Kaitlin 
Hendrix & Gavin Crabb, Borrowing Fees and Expected Stock Returns 
(2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3726227.
---------------------------------------------------------------------------

    Furthermore, this improved information access may also improve 
price discovery in the market for the securities underlying the 
security loans. Because these data currently are not widely observed, 
\228\ it is possible that the information about the underlying 
securities contained in security lending market data are not 
incorporated in those underlying securities' prices. For example, 
existing research shows that lending fees themselves contain 
information that is relevant to prices.\229\ Additionally, a more 
accurate estimation of shares on loan can provide a clearer view into 
daily changes in short interest which can provide market participants 
with improved information about bearish sentiment. Consequently, by 
publicly disseminating securities lending data, the proposal may 
increase price efficiency by allowing a broader section of investors to 
learn from and trade based on signals obtained from the securities 
lending market.
---------------------------------------------------------------------------

    \228\ See supra Part VI.B.2.
    \229\ See, e.g., Duong, Husz[aacute]r, Tan, and Zhang supra note 
215.
---------------------------------------------------------------------------

    Additionally, an improved view of current lending market conditions 
for various securities could help inform beneficial owners in making 
decisions concerning which shares to make available for lending, 
potentially leading to more profitable lending. For instance, to the 
extent that beneficial owners do not currently have a way of 
determining which securities are in high demand, the new information 
may be able to alert them about securities with high lending fees, 
which would enable them to better optimize which shares in their 
portfolio they make available for lending.\230\
---------------------------------------------------------------------------

    \230\ This decision can be important because beneficial owners 
that engage in securities lending activities consistent with the SEC 
staff's current guidance limit the portion of their portfolios that 
can be on loan at any point in time. See supra note 109. This 
additional information may help a beneficial owner that is close to 
its program limit to optimally choose which shares to make 
available.
---------------------------------------------------------------------------

    A clearer understanding of lending market conditions facilitated by 
the dissemination of new 10c-1 information may benefit broker-dealers 
by decreasing the cost incurred to obtain a locate in order to 
facilitate a short sale on behalf of a customer. The increased 
information that would be created by the proposed Rule would allow a 
broker-dealer to better ascertain current market conditions for 
security loans with certain characteristics prior to calling lending 
programs to get competing quotes. As described in Part VI.B.4., broker-
dealers tend to find loans for their customers through their network of 
lending programs with which they have relationships, after they have 
exhausted their own inventory and customer margin accounts.\231\ The 
data from the proposed Rule would enable them to determine whether or 
not a quote from a lending program is competitive with greater ease. It 
is possible new broker-dealers may choose to enter this market as a 
result of this reduction in cost.\232\
---------------------------------------------------------------------------

    \231\ See also supra Part VI.B.1 (discussing the role of broker-
dealers in facilitating borrowing by customers).
    \232\ See infra Part VI.D.
---------------------------------------------------------------------------

    The proposed Rule would benefit lending programs by providing a 
means by which they may improve the performance of their lending. New 
10c-1 data will provide lending programs with a source of more 
comprehensive data on the securities lending market than existing 
commercial data. With this data the lending programs would have an 
improved ability to determine prevailing market conditions as they 
compete to lend shares, which may improve their lending performance.
    The Commission preliminarily believes that the proposed Rule may 
cause a loss in revenue for the commercial vendors of securities 
lending data. The proposed Rule would create data that are similar to, 
but more comprehensive than the data currently available from private 
data vendors. Consequently, for many users the data provided by the 
proposal may supplant the data currently provided by the commercial 
vendors, and these users would then drop their subscriptions to the 
data vendors.
    The Commission preliminarily believes that a potential mitigating 
factor that could reduce the severity of this loss in revenue would be 
that commercial data vendors could offset some of the impact of lowered 
demand for their data by enhancing their related businesses \233\ using 
the data in the proposed Rule. As discussed in Part VI.B.5, commercial 
data vendors also

[[Page 69839]]

provide analytics to their customers, and would be able to support 
these analytics data with the data provided by the proposed Rule. 
Further, because the commercial vendors would not need to protect their 
relationship with their current data vendors, they could provide 
analytics to more market participants. However, as discussed below in 
Part VI.D.2, the data vendors may see increased competition for data 
analytics services as the barriers to entry for providing analytics 
services decline and new entrants compete to provide analytics 
services. This effect would lower what the data vendors can charge for 
analytics services. Additionally, to the extent that the commercial 
data vendors offer their customers other securities lending services, 
such as execution services, the proposal may enhance their other 
business lines by providing more comprehensive data to support other 
securities lending market services.
---------------------------------------------------------------------------

    \233\ The proposal would also lower barriers to entry for new 
entrants desiring to offer analytics solutions for the equity 
lending market. This outcome is discussed in Part VI.D.2.
---------------------------------------------------------------------------

    The Commission recognizes that these benefits are somewhat limited 
because the data will not contain all information necessary to 
perfectly compare the fees on different loans, though the Commission 
preliminarily believes that the proposed Rule improves the ability to 
compare loans. For example, as discussed in Part IV.B.1, loan fees are 
determined by a variety of factors including counterparty 
creditworthiness--which is not captured in the proposal's data. As 
such, two loans could appear to be similar in the information the 
proposed Rule would provide, but the counterparty risk differences 
could result in different fees. While recognizing this limitation, the 
Commission does not believe this limitation could be solved by adding 
information on counterparty risk. In particular, the Commission is 
unaware of reliable measures for counterparty risk that would be 
informative when attached to transaction information. However, the 
Commission requests comment on whether commenters believe any such 
measures exist.
(c) Improved Market Function Through Effects on Short Selling
    As described in Parts VI.C.1.a) and VI.C.1.b), the Commission 
preliminarily believes that the proposed Rule would likely reduce the 
cost to borrow securities. This would have a number of effects through 
the impact on short selling. Because maintaining a short position 
requires borrowing the security, reducing the cost to borrow securities 
would reduce the cost to short sell. Reduced costs for short selling 
would result in benefits in the form of enabling investors to 
profitably engage in more fundamental research, improving price 
discovery in securities markets, providing more discipline for 
corporate managers, and increasing liquidity in the stock and options 
markets.
    The reduced costs to short selling would benefit investors by 
enabling them to profitably engage in more fundamental research. 
Indeed, academic research indicates that when short selling costs 
diminish, investors will do more fundamental research because it is 
easier to trade on their information if they uncover negative 
information.\234\ This new fundamental research may in turn lead to 
better investment decisions for these investors.
---------------------------------------------------------------------------

    \234\ See Dixon, Fox & Kelly, supra note 200. It is not 
necessary that the information uncovered by this research be 
negative in nature for this to be true. The possibility of easier 
securities borrowing ensures that if the information happens to be 
negative, it will still be profitable. Thus, the risk of engaging in 
costly research decreases and more information, both positive and 
negative, is uncovered as a result.
---------------------------------------------------------------------------

    Additionally, by facilitating more short selling and more research, 
the proposed Rule would benefit market participants by improving price 
discovery. Academic research shows that short sellers, through their 
research, contribute to price efficiency by gathering and trading on 
relevant private information.\235\
---------------------------------------------------------------------------

    \235\ See e.g. Jesse Blocher, Adam V. Reed, and Edward D. Van 
Wesep. ``Connecting Two Markets: An Equilibrium Framework for 
Shorts, Longs, and Stock Loans.'' Journal of Financial Economics 
108, no. 2 (2013): 302-322 and Peter Dixon, Why Do Short Selling 
Bans Increase Adverse Selection and Decrease Price Efficiency? 
Review of Asset Pricing Studies 1(1), 122-168.
---------------------------------------------------------------------------

    Short sellers also serve as valuable monitors of management. Extant 
research has demonstrated that when management knows that short sellers 
may be studying their firms, they are less likely to engage in 
inappropriate and/or value-destroying behavior.\236\ Research also 
indicates that when short selling becomes easier the effectiveness of 
short sellers as monitors increases.\237\
---------------------------------------------------------------------------

    \236\ See e.g. Eric C. Chang, Tse-Chun Lin, and Xiaorong Ma. 
``Does Short-Selling Threat Discipline Managers in Mergers and 
Acquisitions Decisions?'' Journal of Accounting and Economics 68, 
no. 1 (2019): 101223. See also Massimo Massa, Bohui Zhang, and Hong 
Zhang. ``The Invisible Hand of Short Selling: Does Short Selling 
Discipline Earnings Management?'' The Review of Financial Studies 
28, no. 6 (2015): 1701-1736.
    \237\ See e.g. Vivian W. Fang, Allen H. Huang, and Jonathan M. 
Karpoff. ``Short Selling and Earnings Management: A Controlled 
Experiment.'' The Journal of Finance 71, no. 3 (2016): 1251-1294.
---------------------------------------------------------------------------

    Reducing the costs of short selling may also have the benefit of 
increasing the liquidity in the underlying securities. Short sellers 
are key contributors to liquidity in both equity and options markets 
and existing research shows that when short selling is constrained by 
tightness in the securities lending market, the stock market is less 
liquid.\238\Also, lower costs to short selling would have potential 
benefits in the options markets in the form of increased liquidity. As 
discussed in Part VI.B.1, securities lending affects liquidity in the 
options market through its impact on how easily options market makers 
can delta hedge. Less costly delta hedging may therefore increase 
liquidity in the options market.
---------------------------------------------------------------------------

    \238\ See Dixon, Fox & Kelley, supra note 200. 18.6 (2014):, 18, 
6, 2153-2195.
---------------------------------------------------------------------------

    Also, since some price discovery occurs in the options market, to 
the extent that the rule increases the ease with which investors can 
trade in options, the proposal may further enhance price efficiency in 
the spot market.\239\
---------------------------------------------------------------------------

    \239\ See, e.g., David Easley, Maureen O'Hara & Pulle 
Subrahmanya Srinivas, Option Volume and Stock Prices: Evidence on 
Where Informed Traders Trade, 53 J. Fin. 431-65 (1998); Jun Pan & 
Allen M. Poteshman, The Information in Option Volume for Future 
Stock Prices, 19 Rev. Fin. Stud. 871-908 (2006); Sophie Ni, Neil D. 
Pearson & Allen M. Poteshman, Stock Price Clustering on Option 
Expiration Dates, 78 J. Fin. Econ. 49-87 (2005).
---------------------------------------------------------------------------

    However, the proposal may somewhat diminish the value of collecting 
and trading on negative information. Specifically, the proposal would 
provide information that may provide a more timely view into short 
selling activity than currently exists. Increasing short selling 
transparency may make it more costly for short sellers to implement 
their positions as other market participants would more quickly learn 
about and react to short sellers' activities. These dynamics decrease 
the profitability of short selling and may mitigate some of the 
benefits discussed in the preceding paragraphs. \240\
---------------------------------------------------------------------------

    \240\ While the literature examining the effects of short 
selling on financial markets is overwhelming positive, it is not 
uniformly so. Two theoretical studies posit that in certain 
circumstances short selling can lead to stock price manipulation 
with adverse effects for the firms whose stock prices are 
manipulated. See Markus K. Brunnermeier and Martin Oehmke, Predatory 
Short Selling Review of Finance, 18, 6 (2014), 2153-2195. See also 
Itay Goldstein and Alexander Guembel, Manipulation and the 
Allocational Role of Prices, The Review of Economic Studies,75, 1 
(2008), 133-164. However, there has yet to be strong empirical 
evidence supporting these studies. One study shows using 
international empirical data that the markets that allow short 
selling tend to exhibit more negative skewness, implying an increase 
in risk for extremely negative return events. It is unclear whether 
this pattern indicates that short sellers exacerbate crash risk, or 
whether this pattern simply reflects short sellers quickly 
incorporate negative information into stock prices (a behavior that 
enhances price efficiency). See Arturo Bris, William N. Goetzmann, 
and Ning Zhu, Efficiency and the Bear: Short Sales and Markets 
around the World, The Journal of Finance, 62, 3 (2007), 1029-1079.

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[[Page 69840]]

(d) Improved Financial Management for Financial Institutions
    As discussed in Part VI.B.1, financial institutions such as banks 
and broker-dealers use the securities lending market in order to manage 
collateral needed for other transactions. These entities can face the 
same opacity concerns as do end borrowers and beneficial owners, and 
thus an increase in market transparency may lead to improved ability to 
manage collateral.
    Also, as discussed in Part VI.B.1, banks borrow securities to 
manage their balance sheets, and the Commission expects that this too 
may become easier to do as a result of the proposed Rule, leading to 
the benefit of improved balance sheet management by banks.
2. Regulatory Benefits
    The proposed Rule would improve upon current data sources by 
providing an RNSA (FINRA is the only RNSA) and the Commission access to 
securities lending information that identifies the parties to the 
loans, indicates when a broker-dealer loans its own securities to its 
customers, and indicates whether the purpose of such a loan was to 
close out a failure to deliver. Further, the improved access and 
comprehensiveness and reduced bias of the publicly available data would 
also accrue to FINRA and the Commission, as well as any other 
regulators using this data. This access would benefit investors by 
enhancing regulatory tools employed to promote fair and orderly 
securities transactions. In particular, benefits to investors could 
result from improved surveillance and enforcement uses, market 
reconstruction uses, and market research uses.
(a) Surveillance and Enforcement Uses
    The party identities and purpose information could facilitate 
better surveillance by FINRA for regulatory compliance by its members, 
and could improve its ability to enforce such regulations. 
Additionally, FINRA would be able to notify another regulator as 
appropriate.
    For example, for FINRA, the information on whether the security is 
loaned from a broker-dealer's securities inventory to its customer 
could assist FINRA in determining whether the broker-dealer was 
charging lending fees or paying rebates commensurate with the market. 
Thus, beneficial owners and end borrowers, who engage in securities 
lending transactions, would be protected against potential unfair 
pricing of securities by broker-dealers. In addition, FINRA can use the 
data more generally to assist in its surveillance of FINRA Rules 4314, 
4320, and 4330 regarding securities lending and short selling that 
primarily intend to reduce information asymmetry in the securities 
lending markets. For instance, the proposed Rule could help FINRA 
identify broker-dealers who tend to lend to or borrow from non-FINRA 
members to examine compliance with provisions of FINRA rules 4314 and 
4330 that entail agreement, disclosure, and other requirements for this 
activity. In addition, the information on how much borrowing particular 
FINRA members engage in can assist FINRA in identifying which broker-
dealers to examine for compliance with FINRA rule 4320--which contains 
short sale delivery requirements. These types of activities would 
better protect investors by helping to ensure that entities engaging in 
certain securities lending transactions are authorized to do so and are 
in compliance with applicable regulations. FINRA can also use the 
information to monitor when broker-dealers are building up risk, 
thereby protecting broker-dealers' customers against potential 
instabilities. FINRA could use data on the identity and activity of its 
members to provide an early warning with regard to the behavior of its 
members during a short squeeze.
    Additionally, the securities lending data would facilitate the 
Commission's oversight of compliance with Regulation SHO, such as the 
locate requirement and the close out requirement. In particular, the 
information on shares available and shares on loan would provide the 
Commission with a way to identify securities for which obtaining a 
locate would be more difficult because securities with little 
difference between shares available and shares on loan would be harder 
to locate and borrow. Coupled with other data, the Commission could 
identify short sale orders, short sellers, and their broker-dealers who 
are active in such securities, which would allow the Commission to more 
efficiently target broker-dealers for locate examinations. In addition, 
the information on whether the loan is being used to close out a fail 
to deliver could assist in examinations for Rule 204 compliance. 
Importantly, being able to estimate the securities lending revenues and 
costs of particular participants could help to fine tune disgorgement 
estimations. The Commission could also use the data to oversee broker-
dealer compliance with Exchange Act rule 15c3-3.\241\
---------------------------------------------------------------------------

    \241\ See 17 CFR 240.15c3-3.
---------------------------------------------------------------------------

(b) Market Reconstruction Uses
    The data provided by the Proposal may help regulators reconstruct 
market events. For example, in January 2021 trading in so called `meme' 
stocks led to many questions about securities lending being asked by 
law makers, investors, and the media as well as calls by some for 
increased regulation in some areas.\242\ The data provided by the 
proposal would allow for more detailed evaluations of such events in 
the future than was possible with existing data during January 2021. 
For example, January 2021 information on market participants' 
securities lending activity would have provided FINRA and Commission 
staff a more timely and fulsome view of who was entering into new loans 
and who was no longer borrowing securities. This would have facilitated 
a deeper understanding of how the events were or were not impacting 
market participants. Such analysis can help determine if further 
regulatory intervention in markets is warranted, and can inform the 
nature of any intervention.
---------------------------------------------------------------------------

    \242\ See, e.g., supra note 11.
---------------------------------------------------------------------------

(c) Market Research Uses
    Greater access and more comprehensive data on the securities 
lending market would improve the quality and expand the scope of 
research by both academics and regulators, which would better inform 
the regulators. In particular, improving the information available for 
their policy decisions would promote fair, orderly, and efficient 
markets and the protection of investors. For example, the data could 
facilitate research on the effectiveness of regulations such as 
Regulation SHO or FINRA Rules 4320 and 4330. Additionally, research 
conducted by academic researchers and market participants could also 
improve the value of public comment letters on Commission and FINRA 
proposals, which would also better inform policy decisions.
3. Direct Compliance Costs
    The Proposal will require various entities to enter into contracts 
and develop recording and reporting systems to comply with the 
proposal. This section provides estimates of those costs.

[[Page 69841]]

[GRAPHIC] [TIFF OMITTED] TP08DE21.009

    Table [2] shows that the Commission preliminary believes that the 
proposed requirements would impose a one-time cost of $3.50 million and 
ongoing expenses of $2.48 million on FINRA, the only RNSA. As discussed 
in Part V, the RNSA would incur these costs to develop systems to take 
and disseminate data required by the proposal. These include larger 
costs associated with creating and maintaining the infrastructure to 
enable Lenders to provide the RNSA with the 10c-1 information and 
entering into written agreements with Lenders, as well as smaller costs 
associated with providing such information to the public.
    Table [2] also shows that Lenders and reporting agents would, in 
aggregate, incur roughly $375 million in initial costs and $140 million 
annually in ongoing costs to comply with the proposal. These costs come 
from costs to develop and maintain systems and from costs to enter into 
agreements. Tables [3] and [4] break these costs down by those incurred 
by Lenders and reporting agents based on the decision by Lenders to 
self-report or use a reporting agent.
BILLING CODE 8011-01-P

[[Page 69842]]

[GRAPHIC] [TIFF OMITTED] TP08DE21.010

BILLING CODE 8011-01-C
    Table [3] shows that Lenders and reporting agents would incur an 
aggregate of roughly $371 million in initial costs and $140 million 
annually in ongoing costs to develop and maintain systems for reporting 
securities lending information. These include larger costs associated 
with developing and reconfiguring their current systems to capture the 
required data elements, as well as smaller costs associated with 
implementing changes and monitoring systems, most of which would be 
incurred by Self-Providing Lenders.

[[Page 69843]]

[GRAPHIC] [TIFF OMITTED] TP08DE21.011

    Table [4] shows that Lenders and reporting agents would incur an 
aggregate of $3.56 million in initial costs and $0 annually in ongoing 
costs to enter into agreements for reporting securities lending 
information. These include costs associated with drafting, negotiating, 
and executing agreements with counterparties, most of which would be 
incurred by Lenders that would directly employ a reporting agent, but 
there would not be ongoing costs because once an agreement is signed, 
there would be no need to modify the written agreement or take 
additional action after it is executed.
    In addition to the above enumerated costs, the estimated 409 
reporting entities would also be required to pay reporting fees to the 
RNSA. The Commission estimates these costs would be reasonably related 
to the cost that the RNSA would incur to administer and distribute the 
data.\243\ As shown in Table [2], the Commission expects the RNSA to 
incur ongoing costs of $2.48 million per year. Consequently, dividing 
the cost incurred by the RNSA by the 409 reporting entities to estimate 
the fees for the reporting entities results in an annual fee per 
reporting entity of approximately $6,000, or approximately $500 per 
month. This estimate represents a lower bound on the estimated fees 
levied by the RNSA as the RNSA likely would need to recoup some of the 
initial fixed costs associated with administering the data.\244\
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    \243\ SRO rule filings are subject to notice, comment and 
Commission review pursuant to Section 19 of the Exchange Act. The 
SRO must demonstrate that proposed fees satisfy Exchange Act 
requirements, including that such proposed fees equitably allocate 
reasonable dues, fees and other charges among members and issuers 
and other persons using the SRO's facilities. Further, such proposed 
fees cannot not impose any burden on competition not necessary or 
appropriate in furtherance of the purposes of the Exchange Act. When 
competitive forces do not constrain costs, such as with data 
products such as TRACE or the data provided by this Proposal, SROs 
can satisfy Exchange Act requirements by demonstrating that fees are 
reasonably related to costs. See infra Part V.E.
    \244\ The numbers provided in this section are estimates. To the 
extent the Commission has over- or underestimated burden hours or 
hourly costs, or the number of entities subject to each reporting 
requirement, the actual compliance costs may be higher or lower. 
However, the Commission views the estimates provided herein as best 
guess estimates based on the information currently available to the 
Commission.
---------------------------------------------------------------------------

4. Indirect Costs
    Given the fixed costs associated with establishing and maintaining 
systems to report data, or the costs associated with having another 
entity report data, the Commission preliminarily believes that the 
proposed Rule may cause some smaller lending programs and broker-
dealers to exit the market for lending services, potentially leading to 
slightly more consolidation in the lending program and broker-dealer 
space.\245\
---------------------------------------------------------------------------

    \245\ See infra Part VI.D.2 (discussing possible entry and exit 
from the market for broker-dealer and lending program services).
---------------------------------------------------------------------------

    This may pose indirect costs on these broker-dealers' and lending 
programs' customers. Such costs would include the cost of switching to 
a new broker-dealer or lending program, the loss of potentially more 
suitable options for such services if the exiting entity was highly 
specialized, and potentially higher prices associated with reduced 
competitive pressures.
    In the discussion of competition in Part VI.D.2, the Commission 
further discusses the possibility of exit by broker-dealers and lending 
programs from the securities lending market, along with a mitigating 
factor which the Commission preliminarily believes would reduce the 
chance of such exits.
5. Risk of Circumvention Through Repurchase Agreements
    The Commission recognizes a risk that the comprehensiveness of the 
data, and hence the benefits that accrue due to the comprehensive 
nature of the data, would be diminished if the proposal induces market 
participants to substitute repurchase agreements (``repo'') for 
securities lending agreements.\246\ This substitution may

[[Page 69844]]

occur because a cash collateralized securities loan is economically 
very similar to a repo. While the Commission is unaware of short sales 
of equities currently being facilitated by repo contracts, the 
Commission understands that in fixed income it is fairly common for 
entities wishing to short sell a bond to facilitate that transaction 
with a repo instead of a securities loan.
---------------------------------------------------------------------------

    \246\ In a repurchase agreement, one party sells an asset, 
usually a Treasury security or other fixed income security, to 
another party with an agreement to repurchase the asset at a later 
date at a slightly higher price. Repo contracts are a common form of 
short-term corporate financing. In a repo, the party selling the 
security is similar to the lender in a securities lending agreement; 
the party purchasing the security is similar to a borrower in cash 
collateralized securities lending. In both cases, the transaction is 
facilitated by cash transferring from the purchaser (borrower) to 
the seller (lender). In a securities loan, the cash is in the form 
of collateral while in a repo transaction the cash is payment for 
the security. In both cases, the purchaser or borrower becomes the 
legal owner of the security. To unwind the repurchase agreement or 
securities loan, cash transfers back to the purchaser in terms of 
the repurchase cost for a repo or in the form of returned collateral 
in a securities loan. Repos and securities loans differ in that 
repos typically are primarily used for short-term financing while 
securities loans typically are used to gain access to the security 
itself. Also loans generally allow the lender to recall the security 
on demand while repos do not. Additionally, the cash received by the 
seller of a repo is often not re-invested but is used to finance the 
operations of a company whereas the cash received in a securities 
loan is generally re-invested in low risk fixed income securities 
for the life of the loan. See e.g. Gary Gorton & Andrew Metrick, 
``Securitized Banking and the Run on Repo,'' 104 J. Fin. Econ. 425 
(2012).
---------------------------------------------------------------------------

    The Commission preliminarily believes that this risk varies across 
asset classes. In equities, the Commission preliminarily believes that 
the current risk of such migration may be minimal because of the lack 
of a well-developed repo market for equities. However, this risk may 
increase if the market for equity repos becomes more developed in the 
future.\247\ Among fixed income securities the risk is substantially 
greater due to a well-developed repo market for fixed income securities 
and the established practice of using both securities loans and repo 
transactions to facilitate short sales of fixed income securities. In 
all asset classes, if the Proposal leads to improvements in the 
functioning of the securities lending market, then the risk of 
migration may diminish as improved efficiency in the securities lending 
market may diminish the incentive to transfer activity to the 
relatively less developed equity repo market.
---------------------------------------------------------------------------

    \247\ The Commission preliminarily views it as unlikely that the 
equity repo market will develop to a similar extent as the fixed 
income repo market in the near future. Repos are primarily used for 
short term finance and due to the volatility of equities relative to 
fixed income securities, equities are a significantly riskier 
collateral type, limiting their appeal as ``collateral'' for short 
term finance.
---------------------------------------------------------------------------

    Should this substitution affect a significant volume of securities 
lending, certain benefits and costs discussed above would decline. The 
less comprehensive data could reduce the extent to which the proposal 
reduces any bias in the data. For instance, market participants who use 
the data to price securities loans would have a less accurate and 
potentially biased view of the market, which would limit the 
improvements to efficiency. Additionally, regulators using the data to 
determine lending market conditions at the time of, for example, a Reg 
SHO violation would be using less precise data--limiting the benefits 
of Reg SHO enforcement. On the other hand, such substitution could 
reduce compliance costs for some. Obviously, those substituting into 
repo would incur lower compliance costs from the proposed Rule, 
including one-time implementation costs if they replaced all securities 
lending with repo. Further, a significant substitution would reduce the 
ongoing costs of the RNSA because the RNSA would not have to collect 
and process as many transaction reports.

D. Impact on Efficiency, Competition, and Capital Formation

1. Efficiency
    In the securities lending market, the availability of new 10c-1 
information for market participants would lead to more efficient prices 
for securities loans.\248\ The reduction in asymmetric information in 
the market for lending programs and broker-dealers may also make those 
markets more efficient.\249\ Additionally, the Commission preliminary 
believes that the proposal may have secondary effects that could 
increase price efficiency in the stock and options market.\250\ Also, 
the increased ease with which banks and other financial institutions 
would be able to manage collateral and balance sheets as a result of 
the proposed Rule could lead to increased efficiency in their 
functioning and in those markets in which they play a role.
---------------------------------------------------------------------------

    \248\ See supra Part VI.C.1.(b).
    \249\ See supra Part VI.C.1.(a).
    \250\ See supra Part VI.C.1.(c).
---------------------------------------------------------------------------

2. Competition
    The Commission preliminarily believes that the net impact of the 
proposal on competition is difficult to predict, in that some aspects 
would likely increase competition and some aspects would likely reduce 
competition. The markets in which competition would likely be impacted 
are the markets for broker-dealer services, lending programs and 
securities lending data vendors.
    The Commission preliminarily believes that the increased access to 
securities lending information would increase competition between 
lending programs, and between broker-dealers. The new 10c-1 information 
would allow all participants in the securities lending markets to 
observe data that could serve as benchmarks for performance of both 
lending programs and broker-dealers when they act on behalf of their 
respective customers in the market.\251\ This would permit better 
monitoring of the performance of these entities by their respective 
customers, and would likely force these entities to do more to match 
the performance of their competitors, to the extent that they do not 
already do so.
---------------------------------------------------------------------------

    \251\ See supra Part VI.C.1.(b).
---------------------------------------------------------------------------

    Also, the increased ability for broker-dealers to monitor 
conditions in the lending market may encourage new broker-dealers to 
enter the market, further increasing competition for broker-dealer 
services. This same argument may be true for platforms that engage in 
securities lending. Improved data may allow for better evaluation of 
the performance of such platforms and may also lower barriers to entry 
for new platforms--enhancing competition among securities lending 
platforms.
    At the same time, the reduction in asymmetric information in the 
securities lending market that would result from the proposed Rule 
would diminish broker-dealer and lending program profits to the extent 
that it reduces their current information advantage over their 
customers.\252\ To this end, some broker-dealers and lending programs 
whose profitability primarily depends on economic inefficiencies 
associated with asymmetric information may exit the market for 
facilitating securities loans.
---------------------------------------------------------------------------

    \252\ See supra Part VI.C.1.(a).
---------------------------------------------------------------------------

    The Commission also preliminarily believes that given the 
significant fixed costs of implementing the systems required by the 
proposed Rule for lending programs to report to an RNSA, smaller \253\ 
lending programs and broker-dealers may be forced to consolidate or 
exit the lending market. The Commission preliminarily believes that a 
mitigating factor leading to less consolidation is that the current 
relationship and network structure of lending programs and broker 
dealers already favors larger lending programs and broker-dealers who 
have the resources to maintain relationships with more and larger 
securities lending counterparties. Consequently, the Commission 
preliminarily believes that the market for lending programs and broker-
dealer security borrowing

[[Page 69845]]

services is already likely dominated by larger lending programs and 
broker-dealers that the Commission does not believe would cease 
operating as a result of these fixed costs.\254\
---------------------------------------------------------------------------

    \253\ The term ``smaller'' in the Economic Analysis does not 
mean that these are ``small businesses'' or ``small entities'' for 
purposes of the Regulatory Flexibility Act. See infra Part VII. 
Rather, smaller is meant to convey the size of these entities in 
relation to larger market participants engaged in securities lending 
transactions.
    \254\ An additional mitigating factor in the case of broker-
dealers is that the Commission views it as likely that smaller 
broker-dealers currently contract with larger broker-dealers to help 
facilitate securities loans for their customers, and thus, may be 
able to easily contract with these larger broker-dealers to also act 
as a reporting agent on their behalf. This dynamic may limit the 
potential for new entrants the broker-dealer space to compete with 
established broker dealers.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the new information 
provided in the Rule would change the competitive landscape for 
analytics services by increasing opportunities for enhancing products 
and services that depend on securities lending data and lowering 
barriers to entry concerning who can provide those services. Increased 
competition in this space will likely lead to more options for 
consumers of analytics services, lower prices, and improved analytics 
services. The new information available through the RNSA as a result of 
this proposal would produce an alternative to the existing data vendor 
products. The Commission preliminarily believes that it would be hard 
for a vendor to offer value with data not derived from the proposed new 
information, since data not based on proposed new information would be 
unlikely to be as comprehensive.\255\
---------------------------------------------------------------------------

    \255\ See supra Part VI.B.2
---------------------------------------------------------------------------

3. Capital Formation
    The Commission preliminarily believes that the impact of the 
proposal on capital formation would be small, but positive. In 
particular, improved price discovery in securities markets \256\ and 
improved balance sheet management by financial institutions \257\ could 
facilitate improvements in the provision of capital. In addition, the 
proposed Rule would reduce the costs of short selling. To the extent 
that this effect would enhance short selling activity, it may 
facilitate more effective discovery of negative information that in 
turn could lead to more efficient allocation of capital.
---------------------------------------------------------------------------

    \256\ See supra Parts VI.C.1.(b), VI.C.1.(c).
    \257\ See supra Part VI.C.1.(d).
---------------------------------------------------------------------------

E. Alternatives

1. Broker-Dealer Reporting
    The Commission could require only broker-dealers, rather than all 
participants, to report securities lending transactions to the RNSA. 
The Commission preliminarily believes that this alternative would be 
less costly overall than the proposal. Specifically, non-broker-dealer 
Lenders would not incur any of the costs of reporting. As a result, 
fewer entities would incur costs. Further, most broker-dealers already 
have connections to FINRA so the overall implementation costs 
associated with connecting to FINRA would be lower.
    In addition, because most broker dealers currently have 
relationships with FINRA, the Commission preliminarily believes that 
this alternative could be implemented sooner, allowing the market and 
market participants to internalize the benefits of securities lending 
transparency sooner.
    However, the reported transaction data would not provide a 
comprehensive view into the securities lending market. Even though 
broker-dealer activity makes up a significant majority of securities 
lending transactions, the alternative would exclude other significant 
players such as lending programs. Thus, the alternative would obscure a 
large swath of the Wholesale Market, making it more difficult for 
lending institutions, for example, to benefit from securities lending 
transparency because the included data would provide a less relevant 
benchmark.
    Requiring only broker dealers to report data could also create a 
competitive advantage for non-broker dealer entities that engage in 
securities lending. Such entities would not be required to report their 
transactions and thus would have lower costs. They would also be in a 
position to attract business from entities seeking to keep their 
transactions out of the public view, further tilting the economic 
landscape in their favor. This effect both could create an uneven 
playing field for entities engaged in the securities lending market and 
could also further dilute the value of the data provided by the 
proposed Rule, diminishing the benefits of the rule.
2. Publicly Releasing the Information in 10c-1(d)
    As an alternative to the proposal, the Commission could consider 
publicly disclosing the information in 10c-1(d), namely available 
identifiers for each party to the transaction, whether the security is 
loaned from a broker's or dealer's securities inventory to a customer 
of such broker or dealer, and if known whether the loan is being used 
to close out a fail to deliver.
    Information on who the parties to the transaction are and whether a 
broker or dealer is lending to its own customer could refine the 
context around the data elements in 10c-1(b) and (c), which are 
proposed to be public. Such refinement would be likely to alter trading 
strategies, which could have both positive and negative effects on 
market quality. For example, this information could allow the market to 
identify the positions of large short sellers. Empirical studies 
support the idea that short sellers are informed, suggesting that 
additional information about short selling could help investors better 
value securities.\258\ Professional traders, might seek to profit by 
developing trading strategies based on signals from the identities of 
those borrowing securities, particularly those borrowing a high volume. 
In addition, the information could be used to reduce the search costs 
in the securities lending market.
---------------------------------------------------------------------------

    \258\ See, e.g., Joseph E. Engleberg, Adam V. Reed & Matthew C. 
Ringgenberg, How are Shorts Informed?: Short Sellers, News, and 
Information Processing, 105 J. Fin. Econ. 260-78 (2012); David E. 
Rapach, Matthew C. Ringgenberg & Guofu Zhou, Short Interest and 
Aggregate Stock Returns, 121 J. Fin. Econ. 46-65 (2016). However, 
one academic study finds that prices react to short sales even when 
short sales are not transparent to the market. See Michael J. 
Aitken, Alex Frino, Michael S. McCorry & Peter L. Swan, Short Sales 
Are Almost Instantaneously Bad News: Evidence from the Australian 
Stock Exchange, 53(6) J. Fin. 2205-2223 (Dec. 1998).
---------------------------------------------------------------------------

    However, the information on whether the security loan is being used 
to close out a fail to deliver may be of little use to anyone other 
than regulators. At this time, the Commission is unaware of potential 
non-regulatory uses of such information that would be beneficial to the 
market.
    The alternative would result in higher costs to the RNSA, to those 
who access the data, and to participants in the securities lending 
market. The RNSA would incur higher costs to release the greater volume 
of data and those who access the data would incur higher costs to 
import and process the data. Trading strategies incorporating the 
identities of borrowers and lenders could negatively impact those 
borrowers and lenders in ways that could ultimately degrade price 
efficiency. In particular, identifying large short sellers could 
facilitate ``copycat strategies'' that seek to profit by copying the 
activity of others believed to have better information or by trading 
ahead of them.\259\ If it facilitates such trading strategies, 
releasing the identities of short sellers could act as a constraint on 
fundamental short selling, reducing the incentives to conduct 
fundamental research.\260\ Less fundamental research

[[Page 69846]]

could potentially result in over- or under-pricing, because prices 
would not incorporate information short sellers would have otherwise 
collected and traded on. Revealing the identities of participants and 
when they are borrowing to close failures to deliver in the securities 
lending market could also result in pressure on lenders to recall loans 
or negative campaigns against short sellers.
---------------------------------------------------------------------------

    \259\ See Congressional Study, ``Short Sale Position and 
Transaction Reporting,'' at available at https://www.sec.gov/files/short-sale-position-and-transaction-reporting%2C0.pdf at 52 and 53.
    \260\ See Sanford J. Grossman & Joseph E. Stiglitz, On the 
Impossibility of Informationally Efficient Markets, 70(2) Am. Econ. 
Rev. 393-408 (1980).
---------------------------------------------------------------------------

3. Additional Information in the Reported or Disseminated Information
    The Commission could consider alternatives that would add 
additional fields to the reported information or to require the RNSA to 
compute derived fields for public dissemination. For example, the 
Commission could require the RNSA to calculate and disseminate the 
utilization rate calculated from the shares on loan and the shares 
available to loan. The utilization rate is a commonly used measure for 
determining the availability of shares to borrow, which could be useful 
for market participants in complying with the locate requirement of 
regulation SHO and for broker-dealer back offices in planning their 
borrowing activity. However, because shares on loan and shares 
available are an end-of-day measure, to the alternative would not 
provide benefits from real time utilization rates. Further, individual 
users may prefer to calculate utilization rates themselves with bespoke 
adjustments. The calculation would require additional processing 
resources of the RNSA. While the alternative would require the RNSA to 
calculate and disseminate utilization rate, the proposal does not 
preclude the RNSA from doing so if users demand the measure.
    The Commission could add required data elements to 10c-1(e) to 
indicate the extent to which volume of shares available to lend that 
comes from sources that are less accessible to acquire or that could be 
restricted. Securities, such as securities owned by broker-dealer 
customers who have agreed to participate in a fully paid lending 
program, and the securities in broker-dealers' margin customers' 
accounts, may be readily available to the broker-dealer managing the 
accounts, but may not be available for others. Further, because 
beneficial owners that engage in securities lending consistent with the 
SEC staff's current guidance may restrict the portion of their 
portfolios that can be on loan at any point in time,\261\ they, or 
their lending agents, may report more shares available to lend than 
they could lend out all at once, particularly when they are far from 
their limit. Therefore, these two additional fields can facilitate 
estimating refined measures of the utilization rate that exclude shares 
that market participants might not be able to reach. As such, these 
alternative measures could improve the accuracy of the data provided by 
10c-1(e). On the other hand, these additional fields would increase the 
complexity and the costs of reporting, processing and disseminating the 
securities lending information.
---------------------------------------------------------------------------

    \261\ See supra note 109.
---------------------------------------------------------------------------

    The Commission could also include in 10c-1(d) information on 
whether, if the lender is a broker or dealer, the securities are 
borrowed from customers who have agreed to participate in fully paid 
lending programs or from securities owned in its margin customers' 
accounts. Such information would improve the efficiency of surveillance 
of, for example, compliance with Rule 15c3-3(b)(3) related to providing 
the lender collateral to secure the loans of securities when broker-
dealers lend shares from fully paid or excess margin securities from 
customers. As such, this information would help protect investors. 
Including this data would likely increase initial costs associated with 
the rule for broker-dealers as it would require expanding systems 
beyond the current proposal to capture the data. However, the 
Commission preliminarily believes that broker-dealers likely already 
have ready access to this data, thus the Commission does not expect 
that including such data would significantly affect broker-dealer 
operations after the initial set-up costs.
    The Commission could also require entities to report in their 
lending transactions whether a given loan was transacted on their own 
behalf, or on behalf of a customer. That is, is the loan transacted on 
a principal or agent basis? This alternative would allow FINRA and the 
Commission to oversee compliance with various regulations. This data 
could allow examiners at the Commission and FINRA to review 
transactions that occur by an entity on a principal and agent basis to 
look for systematically different terms between the two different types 
of transactions by the same broker dealer. Such differences may flag to 
regulators that broker-dealers are not fulfilling their obligations and 
may be in violation of existing rules. Requiring such data would add 
complexity and additional cost to the rule. However, these costs may be 
minimal for broker-dealers, who are FINRA members, as the Commission 
understands that FINRA members already collect much of this 
information.\262\ However, the Commission is unaware of any regulation 
or rule requiring non-FINRA members to collect this information, 
consequently this alternative may significantly increase costs for non-
FINRA members who would be required to build out systems to collect and 
report such information.
---------------------------------------------------------------------------

    \262\ See, e.g., FINRA Rule 4314.
---------------------------------------------------------------------------

4. Alternative Timeframes for Reporting or Dissemination
    The Commission could consider alternative delays for reporting or 
disseminating the securities lending transaction information. For 
example, the Commission could require reporting timeframes of less than 
fifteen minutes as well as more than fifteen minutes. The Commission 
also could require reporting transactions at the end of the day only. 
Further, the Commission could require the RNSA to delay the 
dissemination of transaction reports instead of disseminating as soon 
as practicable.
    Because trades cannot be disseminated until after they are 
reported, alternative reporting timeframes reflect different tradeoffs 
between the value of disseminating security loan terms close to the 
time of a trade and the cost of reporting trades at shorter time 
horizons. Alternatives requiring reporting timeframes of less than 15 
minutes may be more costly to implement. Currently, 15 minute reporting 
is used in various settings. For instance, TRACE requires reporting 
trades at the 15 minute time horizon, and some of the data vendors 
release data at 15 minute intervals. These facts suggest that the 
industry has experience with reporting information to regulators and 
data vendors at 15 minute horizons. Consequently, the Commission 
preliminarily expects that deviating from this time horizon to require 
a shorter timeframe may significantly increase costs associated with 
complying with the rule. In contrast, alternatives allowing a longer 
time to report would also delay the dissemination, which could reduce 
the price discovery and price efficiency benefits associated with an 
increase in transparency if securities lending transactions occur 
frequently enough. Additionally, the Commission preliminarily believes 
that longer reporting horizons would likely not decrease the cost 
substantially due to the automated nature of the securities lending 
transactions and the need to build out systems regardless.
    Alternative dissemination timeframes reflect different tradeoffs 
between price

[[Page 69847]]

discovery and price efficiency benefits on one hand and harmful 
information leakage on the other, as well as the cost of reporting at a 
faster or slower horizon. An alternative dissemination timeline could 
require a later dissemination time for large trades. However, 
intermediaries in the securities lending market do not generally take 
on risk the way dealers do in other markets where dealers have argued 
for delays, such as the corporate bond market.\263\ For instance, 
intermediaries in the corporate bond market frequently hold large 
inventories and buy, sell, and facilitate trades out of their own 
inventory--assuming significant inventory risk in the process. This is 
not true in the securities lending market where broker-dealers are more 
likely to facilitate transactions between lending programs and end 
borrowers.
---------------------------------------------------------------------------

    \263\ In the corporate fixed income market, some participants 
argued for the delay in the dissemination of information on large 
trades. Specifically, they argue that immediate dissemination 
coupled with 15-minute reporting times harms institutional investors 
because dealers are either less willing to trade with them or 
dealers charge them higher markups to offset the costs of offsetting 
large transactions See, e.g., comments from JPMorgan & Co. on the 
Fixed Income Market Structure Advisory Committee (FIMSAC), available 
at https://www.sec.gov/comments/265-30/26530-3974442-167144.pdf. The 
Commission notes that we are unaware of any empirical data in 
support of these arguments.
---------------------------------------------------------------------------

    The current Proposal requires the RNSA to disseminate transaction-
level information as soon as practicable. Alternatively, the Commission 
could limit the proposal by requiring the RNSA to aggregate the 
transaction-level information prior to disseminating. Specifically, the 
RNSA could aggregate the data in items identified in 10c-1(b) and (c) 
and make it public at the end of the day it is reported. Given the need 
to build out systems regardless and the automated nature of securities 
lending transactions, the Commission preliminarily believes that this 
alternative would likely be nearly as costly to implement as the 
current proposal for entities reporting data to the RNSA. It would, 
however, likely lower costs to the RNSA as they would not be required 
to build out systems capable of intraday dissemination. Additionally, 
daily aggregate data would not provide the same price discovery 
benefits as the current proposal. Specifically, market participants 
could not use intraday trends in the securities lending market to make 
investment decisions. Also, without a comprehensive transaction tape, 
it would be more difficult for market participants to study and 
understand pricing dynamics in the securities lending market. The 
alternative would also make it more difficult for end investors to 
determine if the terms that their broker-dealer offers are consistent 
with current market prices--rendering it more difficult for investors 
to evaluate the performance of their broker-dealer. Similarly, without 
transaction data beneficial owners would be hampered in their ability 
to determine whether the terms for loans secured by their lending 
agents were consistent with market conditions for loans with similar 
characteristics--rendering it more difficult for beneficial owners to 
evaluate the performance of their lending agents--reducing the benefits 
of improved competition. The lack of a lending tape may also hinder 
broker-dealers from determining if the terms being offered by a lending 
agent for a loan are consistent with market conditions for similar 
loans. The diminished transparency of this alternative relative to the 
Proposal may also lead to less improvement in the efficiency of the 
securities lending market leading to fewer short selling benefits 
described above in Part IV.C.1.(c) This alternative would also hamper 
research into the securities lending market by academics, regulators, 
and other market participants as they would be prevented from 
performing intraday and event study analysis on the securities lending 
market.
    The Commission could also require alternative time frames for 
reporting the data required in paragraph (e) of the proposed rule 
regarding shares on loan and shares available to the RNSA. The 
Commission preliminarily believes that time horizons longer than what 
is required in the current proposal would diminish the usefulness of 
the data by making it less timely. Additionally, due to the automated 
nature of the industry, the Commission preliminarily does not believe 
that longer reporting horizons would significantly decrease the cost of 
compliance. Moreover the Commission could require reporting at time 
horizons that are shorter than what is currently required in the 
proposal. Such data may be somewhat more timely, but the Commission 
preliminarily believes that shorter requirements would be a deviation 
from current industry standard and thus may significantly increase the 
cost of implementation.
    Finally, the Commission could require the RNSA to distribute the 
collected data required in paragraph (c) at different horizons, such as 
by the following morning instead of by the end of the following day. 
This alternative would allow market participants to benefit from the 
data a business day earlier than currently proposed. Given the 
automated nature of the data, this alternative may not be significantly 
costlier than the current proposal, although it would not allow the 
RNSA to process the data during regular business hours potentially 
limiting the amount of data validation the RNSA could perform prior to 
distributing the data.
5. Allow an RNSA To Charge Fees To Distribute the Data
    The Commission could consider allowing the RNSA to charge fees to 
access the securities lending data, similar to the model currently 
employed with TRACE data.
    The effect on costs of this alternative would follow from allowing 
the RNSA an additional way to obtain revenue from providing new 10c-1 
information. This additional revenue could help pay for costs to 
collect and disseminate the data. It may also allow the RNSA to reduce 
the reporting fees it would charge under the proposed Rule.
    As discussed in Part VI.C.3, the Commission preliminarily believes 
that fees levied by the RNSA would be reasonably related to cost.\264\ 
Thus, the estimates provided in that section could be either entirely 
applied to entities purchasing data, or they could be split between 
providers and purchasers of data. In the case that fees were applied 
primarily to subscribers of data, and if all 409 entities providing 
data were the only entities to subscribe to the data, then as discussed 
in Part VI.C.3, estimated annual fees to subscribe to the data would be 
approximately $6,000 per year. This estimate would go down if the RNSA 
chose to split the fees between data subscribers and data providers. It 
would also go down if more than the 409 estimated entities providing 
data chose to subscribe the data. This estimate is similar to the fees 
currently charged for a TRACE enterprise license. As discussed in part 
VI.C.1, TRACE has been successful in mitigating inefficiencies in the 
corporate bond market. Consequently, given the experience with TRACE 
and the expectation that most of the entities likely in a position to 
effect the securities lending market or to use information from the 
securities lending market to affect other markets would subscribe to 
the data even if there was a cost to subscribing, the Commission 
preliminarily believes that allowing the RNSA to charge for data would 
likely still result in significant benefits to the securities lending 
market.
---------------------------------------------------------------------------

    \264\ See infra note 243.
---------------------------------------------------------------------------

    This alternative would also reduce benefits relative to the 
proposed Rule, in

[[Page 69848]]

that charging for access to the new 10c-1 information may reduce the 
number of market participants who access it, to the extent that any 
market participant would find such fees cost-prohibitive. A reduction 
in access to the data may reduce many of the benefits that would 
otherwise accrue to the proposed Rule, such as increased price 
discovery and security market efficiency. The Commission preliminarily 
believes that many of the market participants providing data to the 
RNSA under the proposed Rule would also be consumers of the data; for 
these market participants it is unclear how much difference this shift 
in fees would make.
6. Longer Holding Period Requirement
    The Commission could also require the RNSA to retain and make 
publicly available the data for a period longer than the 5 years 
specified--e.g., 10 or 20 years. This alternative would ensure that the 
data are available to regulators and market participants at longer 
horizons. For instance, if regulators or market participants wanted to 
evaluate how the lending market reacts to different market events, such 
as across the business cycle, then five years of data may not be 
sufficient. The average business cycle is 3-5 years, and so to study 
the dynamics of the lending market across the business cycle would 
require at least 10 years, if not more, of data. Additionally, because 
there is likely persistence in conditions in the securities lending 
market a five year time horizon may not be sufficient for certain 
statistical analyses.\265\ Improved understanding of the dynamics of 
the securities lending market across various market conditions may 
benefit both regulators and investors by providing more precise 
information with which to make regulatory and investment decisions--
enhancing many of the benefits described in Parts VI.C.1 and VI.C.2. 
For example, longer term data may enable superior statistical analysis 
by market participants of the dynamics of the securities lending market 
in various environments, which in turn may lead to better investment 
decisions and thus improved market performance. Additionally, the 
Commission could use longer term data to provide more precise estimates 
of damages in, for example Reg SHO violations or violations of Exchange 
Act rule 15c3-3 (Customer Protection Rule), to calculate disgorgement.
---------------------------------------------------------------------------

    \265\ Persistence in conditions implies that observations are 
not independent. When this is the case even relatively large 
datasets may lack statistical power for some modeling applications, 
such as factor models. The solution in such cases is to 
significantly increase the sample size.
---------------------------------------------------------------------------

    The Commission preliminarily believes that the alternative would 
impose additional costs on the RNSA not required by the current 
proposal in terms of storing and maintaining historical data. However, 
since the current proposal already requires the RNSA to build systems 
to collect and disseminate 5-years of data, these costs would likely be 
relatively small because the Commission understands that the cost of 
storing data is relatively small compared to the cost of producing and 
maintaining the systems needed to collect, process, and disseminate the 
data.
    While the current proposal allows FINRA to destroy the data after 
5-years, the Commission preliminarily believes that it is unlikely that 
FINRA would do so. This is because the cost of retaining the data is 
likely relatively small and may have commercial value. For instance, 
while the proposal requires the most recent 5-years of data to be made 
publicly available free of charge, there is no requirement to make data 
beyond 5-years available to the public free of charge. Consequently an 
RNSA could determine to offset some of the cost of implementing the 
proposal through fees levied on historical data. If this is the case, 
and the RNSA chooses to keep the historical data under the current 
proposal, then the cost difference to an RNSA between the current 
proposal and this alternative would likely be minimal given that this 
alternative would require the RNSA to comply with a requirement that 
they may already choose to do on their own.
7. Report to the Commission Rather Than to an RNSA
    The Commission could propose to have Lenders disclose the 10c-1 
information directly to the Commission--for example, through EDGAR, 
rather than to an RNSA. Such an alternative could alter who incurs 
costs and would likely increase overall costs relative to the proposal 
because, for example, many entities who possess reporting capabilities 
to an RNSA, e.g., members of FINRA, would need to establish comparable 
reporting relationships with the Commission. In particular, many 
broker-dealers already have connectivity to FINRA systems that support 
the kind of intraday submission process required for providing new 10c-
1 information.\266\ Establishing similar connectivity with EDGAR may 
require additional effort for Lenders compared to the proposal. 
Finally, FINRA has expertise creating repositories similar to that 
called for in the proposal, suggesting that the proposal would likely 
be more efficient than the alternative.
---------------------------------------------------------------------------

    \266\ For example, FINRA's TRACE system.
---------------------------------------------------------------------------

    The Commission is uncertain of how the benefits of this alternative 
would compare to the benefits of the proposal. While the alternative 
would not alter the content of the data in the proposal, the 
accessibility and timeliness depend on how the Commission would develop 
the functionality for distributing the data. In particular, we cannot 
at this time assess whether the alternative would result in more or 
less timely or accessible data or if the differences would be 
meaningful. For example, data obtained from the Commission could be 
less accessible if the Commission could not develop functionality 
allowing market participants to access the data with the same ease as 
the RNSA could do given the RNSA has more experience collecting and 
disseminating similar data (e.g., TRACE).
    Additionally, the regulatory benefits of the alternative relative 
to the proposal would depend on whether the Commission chooses to grant 
SROs direct access to the confidential data. If the Commission chose to 
do so, then the regulatory benefits of this alternative would be the 
same as the current proposal. If the Commission chose not to grant SROs 
access to the confidential data, then the regulatory benefits would 
decline significantly as many of the regulatory benefits, such as 
improved monitoring of broker-dealers for compliance with various legal 
requirements, require access to the confidential data. Thus, the 
regulatory benefits of the rule would be severely diminished.
8. Report Through an NMS Plan
    Because the nature of securities lending data is similar to the 
transaction data governed by the NMS data plans, such as the CT 
Plan,\267\ the Commission could propose to require a new NMS Plan to 
set up a reporting and dissemination process that mirrors the CT Plan. 
Specifically, reporting entities could report the data to a Transaction 
Reporting Facility operated by an SRO. The data would then be purchased 
by competing consolidators \268\ to

[[Page 69849]]

consolidate and distribute for a fee. The NMS Plan would set the fee 
for competing consolidators as well as for those who purchase and 
consolidate the data for internal use.
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    \267\ Joint Industry Plan; Order Approving, as Modified, a 
National Market System Plan Regarding Consolidated Equity Market 
Data, Exchange Act Rel. No. 92586, 86 FR 44142 (Aug. 11, 2021) 
available at: https://www.sec.gov/rules/sro/nms/2021/34-92586.pdf, 
appeal filed, Nasdaq Stock Market LLC v. SEC, No. 21-1167 (D.C. Cir. 
Aug. 9, 2021).
    \268\ A competing consolidator is a ``securities information 
processor required to be registered pursuant to [17 CFR] 242.614 
(Rule 614) or a national securities exchange or national securities 
association that receives information with respect to quotations for 
and transactions in NMS stocks and generates a consolidated market 
data product for dissemination to any person.'' 17 CFR 
242.600(b)(16).
---------------------------------------------------------------------------

    This alternative could provide for the public dissemination of 
securities lending transaction information without the reliance on the 
RNSA alone. It could also leverage the processes of the NMS Plan, but 
would require compliance costs by one or more SROs who choose to set up 
and operate a Transaction Reporting Facility. Fees for reporting 
transactions could offset such compliance costs. While we can't be sure 
how these fees would compare to the fees paid under the proposal, the 
alternative provides for the opportunity for a reporting facility that 
could be more efficient than that of an RNSA.
    This alternative is more likely than the proposal to improve the 
competitiveness of the market for securities lending data in ways that 
could be less costly to incumbents than the proposal would be. 
Specifically, the alternative would not result in a situation in which 
existing data vendors had to compete with an RNSA that had superior 
data access. Instead, the current data vendors, who all have experience 
collecting and disseminating such information, could compete as 
competing consolidators for equity lending data and have the same 
access to the supply of consolidated data as any other competing 
consolidator, including an RNSA or SRO. It would also reduce the 
barriers to entry in selling securities lending data because all new 
entrants would have access to the same data for consolidation and 
distribution.
    While the alternative is unlikely to affect the content or 
timeliness of securities lending data relative to the proposal, the 
improvements in access to securities lending data under this 
alternative could be less than the improvements to access under the 
proposal. As in the proposal, the data vendors would not be as 
dependent on market participants providing data, consequently these 
market participants could not exert power over the data vendors to 
limit access. However, under this alternative, both the new NMS Plan 
and the competing consolidators under that Plan would be able to charge 
for access to the data, whereas under the proposal, the RNSA is not 
permitted to charge for access. Thus, the cost of data access under the 
alternative would be greater. This could mean some market participants, 
who could potentially have access to data under the proposal, could 
determine it was not cost-effective for them to purchase securities 
lending data under the alternative.

F. Request for Comment

    The Commission is sensitive to the potential economic effects, 
including costs and benefits, of the proposed Rule. The Commission has 
identified certain costs and benefits associated with the proposal and 
requests comment on all aspects of its preliminary economic analysis, 
including with respect to the specific questions below. The Commission 
encourages commenters to identify, discuss, analyze, and supply 
relevant data, information, or statistics regarding any such costs or 
benefits.
    76. Do you agree with the Commission's assessment of the market 
failures? Are there additional market failures or other economic 
justifications related to these issues that are not described in this 
release?
    77. Do you believe the Commission has sufficiently described the 
baseline for its economic analysis concerning the securities lending 
market, its characteristics and structure? Are there additional 
relevant market features or participants that are not discussed in the 
baseline which relate to this release? If so, please describe. Do you 
agree with the Commission's description of the competitive landscape of 
the securities lending market? Please explain.
    78. Do you agree that the securities lending market is opaque? If 
not, what sources of insight into the securities lending market 
activity do you believe provide transparency in the lending market? How 
do those sources compare to the transparency that would be provided by 
the proposed Rule?
    79. Do you agree with the Commission's assessment of the causes and 
effects of opacity in the securities lending market? Why or why not? 
What are the consequences of the current level of opacity in the 
securities lending market? Please provide details. Does opacity in the 
lending market inhibit some market participants from engaging in 
fundamental research? Why or why not? To what extent does the opacity 
in the lending market contribute to the wide variation in rebate rates 
or lending fees? Do you agree that the opacity results in high search 
costs or other costs in the securities lending market? Do you agree 
that this inhibits the securities lending market's efficiency? Why or 
why not?
    80. Do you believe the Commission has adequately described the 
baseline for the market for securities lending data and analytics? Are 
there elements of this market that are relevant to the proposed Rule 
that are not discussed in the release? If so, please describe what 
information you believe is missing. Do you agree that the data 
provision services are an outgrowth of other businesses such as the 
analytics business? Please explain.
    81. Do you agree with the Commission's assessment that the proposed 
Rule will improve transparency of the securities lending market? Why, 
or why not? Do you agree that the proposed Rule would increase 
transparency by providing information about the securities lending 
market that is more complete than current information? Do you agree 
that the increased completeness would improve the accuracy of 
information on securities lending? Do you agree that the proposed Rule 
would result in information that is more accessible than current 
information? Do you agree that the proposed Rule would result in loan-
level information that is at least as timely as current information? 
Would the information on shares on loan and shares available be more or 
less timely than current information? Please explain.
    82. Do you agree with the Commission's assessment of the economic 
effects of the proposed rule, including the effects from improvements 
to transparency, the regulatory benefits, the compliance costs, and the 
indirect effects? Why or why not? If not, please provide the details 
that you believe are missing.
    83. Do you agree that the proposed Rule will ameliorate information 
asymmetry in the securities lending market? Do you agree that this 
effect is sufficient to make security loan terms more competitive that 
they currently are? Would the public information in the proposed Rule 
have an impact on the risk of market instability? Would the public 
information in the proposed Rule have an impact on the efficiency of 
the securities lending market or the underlying market? Please explain.
    84. How do the lending markets in equities differ significantly 
from lending markets for other securities? Do these markets have 
problems similar to those documented in the baseline for stocks? Please 
explain and provide data and analysis, if available. How would the 
economic effects of the proposed Rule differ across the different types 
of securities covered? Please explain.
    85. Do you believe that the Commission has accurately quantified 
the compliance costs that the proposed Rule imposes on various market

[[Page 69850]]

participants? If not, please provide alternative estimates. Are there 
any sources of compliance costs not included in the Commission's 
estimates? If so, please describe the activity that generates the cost 
and provide estimates.
    86. Do you agree with the Commission's characterization of the 
effects of the proposed Rule on the commercial providers of security 
lending data? If not, please provide the details you believe are 
missing.
    87. Do you agree with the Commission's assessment of both the risk 
and the economic effects associated with potential substitution of 
repurchase agreements for securities lending? Why or why not? Is there 
anything missing from the Commission's analysis of this issue that 
should be considered? Please provide details. How does the counterparty 
risk and other differences between securities lending and repo affect 
this risk?
    88. Do you agree with the Commission's assessment of the likely 
impacts on efficiency, competition and capital formation? Why or why 
not? Do commenters agree that the proposed Rule would improve 
competition? Please explain.
    89. Do you agree with the Commission's assessment of the effects of 
the alternative whereby only broker-dealers would be required to report 
to the RNSA? Why or why not? How would the alternative compare to the 
proposed Rule--would it be any more or less information or would it be 
any more or less biased? Please explain.
    90. Do you agree with the Commission's assessment of the effects of 
the alternative whereby some data would be made public that the 
proposed Rule indicates would only be accessible by the RNSA and the 
Commission? Why or why not? Are there any data elements that the 
proposed Rule does not make public that should be made public? If so, 
please identify the specific data elements and articulate their 
benefits and costs relative to the proposed Rule.
    91. Do you agree with the Commission's assessment of the effects of 
the alternative whereby additional data may be required to be reported 
to the RNSA? Why or why not? Should the Commission include any other 
additional data elements? Are there any additional data elements that 
could feasibly measure counterparty risk that could help explain 
variations in lending fees and rebate rates? Are there other factors 
that could help compare lending fees and rebate rates that could be 
including in Rule 10c-1? If so, what data elements and what are the 
costs and benefits of including those data elements relative to the 
proposed Rule?
    92. Do you agree with the Commission's assessment of the effects of 
the alternative discussing different reporting or dissemination 
timeframes? Why or why not? Do securities lending transactions occur 
often enough during the day for intraday reporting to be beneficial? 
Would a shorter or longer time for reporting be more beneficial or less 
costly? Please explain.
    93. Do you agree with the Commission's assessment of the effects of 
the alternative whereby the RNSA could charge to distribute the data 
delivered on the RNSA website? Why or why not? Based on other data sold 
by an RNSA, would the ability to sell the data materially reduce the 
costs to those who report the information?
    94. Do you agree with the Commission's assessment of the effects of 
the alternative requiring the RNSA to keep and publicly disseminate the 
data for a longer time horizon? Why or why not? Are there additional 
benefits or costs to this approach not considered in this economic 
analysis? Please explain and provide details.
    95. Do you agree with the Commission's assessment of the effects of 
the alternative whereby reporting would be to the Commission rather 
than to an RNSA? Why or why not? How many entities who would have to 
report under the proposed Rule do not current file reports with the 
Commission and would, therefore, have to establish connections? Would 
reporting to the Commission significantly affect the regulatory 
benefits or any other benefits? Please explain.
    96. Do you agree with the Commission's assessment of the effects of 
the alternative whereby reporting would take place through an NMS plan? 
Why or why not? Would reporting through an NMS Plan be any more or less 
efficient than the proposed Rule? Would reporting through an NMS Plan 
create a more or less competitive environment for the sale of 
securities lending data than the proposed Rule? Please explain.
    97. Are there any other reasonable alternatives that the Commission 
should consider? If so, how would the potential costs and benefits of 
the alternative compare to the Proposed Rule? Please provide 
quantification, if possible.

VII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \269\ requires Federal 
agencies, in promulgating rules, to consider the impact of those rules 
on small businesses. Section 603(a) \270\ of the Administrative 
Procedure Act,\271\ as amended by the RFA, generally requires the 
Commission to undertake a regulatory flexibility analysis of all 
proposed rules, or proposed rule amendments, to determine the impact of 
such rulemaking on ``small businesses'' \272\ unless the Commission 
certifies that the rule, if adopted, would not have a significant 
impact on a substantial number of ``small entities.'' \273\
---------------------------------------------------------------------------

    \269\ 5 U.S.C. 601 et seq.
    \270\ Id.
    \271\ 5 U.S.C. 551 et seq.
    \272\ Although Section 601(b) of the RFA defines the term 
``small business,'' the statute permits agencies to formulate their 
own definitions. The Commission has adopted definitions for the term 
small business for the purposes of Commission rulemaking in 
accordance with the RFA. Those definitions, as relevant to this 
proposed rulemaking, are set forth in Rule 0-10 under the Exchange 
Act. Exchange Act Rule 0-10 (``Rule 0-10'').
    \273\ 5 U.S.C. 605(b).
---------------------------------------------------------------------------

    As discussed above in the PRA above, first, the Commission 
preliminarily believes that the proposed Rule would impact 94 reporting 
agents. The Commission estimates that all reporting agents would be 
broker-dealers. A broker-dealer is a small entity if it has total 
capital (net worth plus subordinated liabilities) of less than $500,000 
on the date in the prior fiscal year as of which its audited financial 
statements were prepared pursuant to 17 CFR 240.17a-5(d), and it is not 
affiliated with any person (other than a natural person) that is not a 
small business or small organization.\274\
---------------------------------------------------------------------------

    \274\ Exchange Act Rule 0-10(c).
---------------------------------------------------------------------------

    Second, the Commission preliminarily believes that the proposed 
Rule would impact 278 investment companies that do not employ a lending 
agent. For purposes of Commission rulemaking in connection with the 
Regulatory Flexibility Act, an investment company is a small entity if, 
together with other investment companies in the same group of related 
investment companies, it has net assets of $50 million or less as of 
the end of its most recent fiscal year.\275\
---------------------------------------------------------------------------

    \275\ See 17 CFR 270.0-10(a).
---------------------------------------------------------------------------

    Third, the Commission preliminarily believes that the proposed Rule 
would impact 37 lending agents, which would include broker-dealers and 
banks.\276\ For purposes of Commission rulemaking in connection with 
the Regulatory Flexibility Act, lending agents that are not broker-
dealers, such as a bank, would be a small entity if on the last day of 
its most recent fiscal year, such

[[Page 69851]]

issuer or person had total assets of $5 million or less.\277\ 
Furthermore, clearing agencies could also be lending agents for 
purposes of proposed Rule 10c-1. A clearing agency is a ``small 
entity'' if such clearing agency: (i) Compared, cleared, and settled 
less than $500 million in securities transactions during the preceding 
fiscal year, (ii) had less than $200 million of funds and securities in 
its custody or control at all times during the preceding fiscal year 
(or at any time that it has been in business, if shorter), and (iii) is 
not affiliated with any person (other than a natural person) that is 
not a small business or small organization.\278\
---------------------------------------------------------------------------

    \276\ For example, some investment companies report using a bank 
as a lending agent on Form N-CEN.
    \277\ See 17 CFR 240.0-10(a).
    \278\ See 17 CFR 240.0-10(d).
---------------------------------------------------------------------------

    Based on a review of data, the Commission does not believe that any 
of the persons impacted by the proposed Rule are small entities under 
the above definitions.\279\ It is possible that in the future a small 
entity may become impacted by the Rule. Based on experience with 
persons who participate in this market, however, the Commission 
preliminarily believes that this scenario will be unlikely since firms 
that enter the market are unlikely to meet the criteria to be a small 
entity.
---------------------------------------------------------------------------

    \279\ See supra Parts V and VI.
---------------------------------------------------------------------------

    For the foregoing reason, the Commission certifies that proposed 
Rule 10c-1 would not have a significant economic impact on a 
substantial number of small entities for purposes of the RFA. The 
Commission encourages written comments regarding this certification, 
and requests that commenters describe the nature of any impact on small 
entities and provide empirical data to illustrate the extent of the 
impact.

VIII. Consideration of Impact on the Economy

    For purposes of the Small Business Regulatory Enforcement Fairness 
Act of 1996, the Commission is also requesting information regarding 
the potential impact of the proposed amendments on the economy on an 
annual basis. In particular, comments should address whether the 
proposed changes, if adopted, would have a $100,000,000 annual effect 
on the economy, cause a major increase in costs or prices, or have a 
significant adverse effect on competition, investment, or innovations. 
Commenters are requested to provide empirical data and other factual 
support for their views to the extent possible.

IX. Statutory Authority

    Proposed Rule 10c-1 is being proposed pursuant to Sections 3, 
10(b), 10(c), 15(c), 15(h), 15A, 17(a), 23(a) of the Securities 
Exchange Act of 1934, 15 U.S.C. 78c, 78j(b), 78j(c), 78k-1, 78o(c), 
78o(g), 78o-3, 78q(a), and 78w(a), and Public Law 111-203, 984(b), 124 
Stat. 1376 (2010).

List of Subjects in 17 CFR Parts 240

    Administrative practice and procedure, Reporting and recordkeeping 
requirements, Securities.

Text of Rule Amendments

    For the reasons set out in the preamble, the Commission is 
proposing to amend title 17, chapter II of the Code of the Federal 
Regulations as follows.

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

0
1. The general authority citation for part 240 continues to read, and 
sectional authority for Sec.  240.10c-1 is added to read, as follows:

    Authority:  15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 
77eee, 77ggg, 77nnn, 77sss, 77ttt, 78c, 78c-3, 78c-5, 78d, 78e, 78f, 
78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78n-1, 78o, 78o-4, 
78o-10, 78p, 78q, 78q-1, 78s, 78u-5, 78w, 78x, 78dd, 78ll, 78mm, 
80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11, and 7201 et 
seq., and 8302; 7 U.S.C. 2(c)(2)(E); 12 U.S.C. 5221(e)(3); 18 U.S.C. 
1350; Pub. L. 111-203, 939A, 124 Stat. 1376 (2010); and Pub. L. 112-
106, sec. 503 and 602, 126 Stat. 326 (2012), unless otherwise noted.
* * * * *
    Section 240.10c-1 also issued under 15 U.S.C. 78j(c), and Pub, 
L. 111-203, 984(b), 124 Stat. 1376 (2010).
* * * * *
0
2. Add Sec.  240.10c-1 to read as follows:


Sec.  240.10c-1  Securities lending transparency.

    (a) Reporting. (1) Any person that loans a security on behalf of 
itself or another person shall provide to a registered national 
securities association (RNSA) the information in paragraphs (b) through 
(e) of this section (Rule 10c-1 information), in the format and manner 
required by the rules of an RNSA; provided however,
    (i)(A) A bank, clearing agency, broker, or dealer that acts as an 
intermediary to a loan of securities (lending agent) on behalf of a 
person that owns the loaned securities (beneficial owner) shall:
    (1) Provide the 10c-1 information to an RNSA on behalf of the 
beneficial owner within the time periods specified by Rule 10c-1; or
    (2) Enter into a written agreement that meets the requirements of 
paragraph (a)(1)(ii)(A) of this section.
    (B) A beneficial owner is not required to provide the Rule 10c-1 
information to an RNSA if a lending agent acts as an intermediary to 
the loan of securities on behalf of the beneficial owner.
    (ii)(A) A person required to provide Rule 10c-1 information under 
paragraph (a) of this section, including a lending agent, may enter 
into a written agreement with a broker or dealer that agrees to provide 
the Rule 10c-1 information to an RNSA (reporting agent) within the time 
periods specified in Rule 10c-1.
    (B) A reporting agent is required to provide the Rule 10c-1 
information to an RNSA if it has entered into a written agreement under 
paragraph (a)(1)(ii)(A) of this section and is provided timely access 
to the Rule 10c-1 information.
    (C) Any person that enters into a written agreement under paragraph 
(a)(1)(ii) of this section with a reporting agent is not required to 
provide the Rule 10c-1 information to an RNSA if the reporting agent is 
provided timely access to the Rule 10c-1 information.
    (2) Any reporting agent that enters into a written agreement under 
paragraph (a)(1)(ii)(A) of this section shall:
    (i) Establish, maintain, and enforce reasonably designed written 
policies and procedures to provide Rule 10c-1 information to an RNSA on 
behalf of another person in the manner, format, and time consistent 
with Rule 10c-1;
    (ii) Enter into a written agreement with an RNSA that permits the 
reporting agent to provide Rule 10c-1 information to the RNSA on behalf 
of another person;
    (iii) Provide the RNSA a list of each person and lending agent on 
whose behalf the reporting agent is providing Rule 10c-1 information to 
the RNSA and provides the RNSA an updated list of such persons by the 
end of the day on the day such list changes; and
    (iv) Preserve for a period of not less than three years, the first 
two years in an easily accessible place:
    (A) The Rule 10c-1 information obtained by the reporting agent from 
any person pursuant to paragraph (a)(1)(ii) of this section, including 
the time of receipt, and the corresponding Rule 10c-1 information 
provided by the reporting agent to the RNSA, including the time of 
transmission to the RNSA; and
    (B) The written agreements under paragraphs (a)(1)(ii)(A) and 
(a)(2)(ii) of this section.
    (b) Transaction data elements. If required by paragraph (a) of this 
section,

[[Page 69852]]

a person shall provide the following information to an RNSA within 15 
minutes after each loan is effected, and the RNSA shall assign each 
loan a unique transaction identifier and make such information public 
as soon as practicable:
    (1) The legal name of the security issuer, and the Legal Entity 
Identifier (LEI) of the issuer, if the issuer has an active LEI;
    (2) The ticker symbol, ISIN, CUSIP, or FIGI of the security, if 
assigned, or other identifier;
    (3) The date the loan was effected;
    (4) The time the loan was effected;
    (5) For a loan effected on a platform or venue, the name of the 
platform or venue where effected;
    (6) The amount of the security loaned;
    (7) For a loan not collateralized by cash, the securities lending 
fee or rate, or any other fee or charges;
    (8) The type of collateral used to secure the loan of securities;
    (9) For a loan collateralized by cash, the rebate rate or any other 
fee or charges;
    (10) The percentage of collateral to value of loaned securities 
required to secure such loan;
    (11) The termination date of the loan, if applicable; and
    (12) Whether the borrower is a broker or dealer, a customer (if the 
person lending securities is a broker or dealer), a clearing agency, a 
bank, a custodian, or other person.
    (c) Loan modification data elements. If required by paragraph (a) 
of this section, a person shall provide the following information to an 
RNSA within 15 minutes after each loan is modified if the modification 
results in a change to information required to be provided to an RNSA 
under paragraph (b) of this section, and the RNSA shall make such 
information public as soon as practicable:
    (1) The date and time of the modification;
    (2) A description of the modification; and
    (3) The unique transaction identifier assigned to the original 
loan.
    (d) Confidential data elements. If required by paragraph (a), a 
person shall provide the following information to an RNSA within 15 
minutes after each loan is effected, however, the RNSA shall keep such 
information confidential, subject to the provisions of applicable law:
    (1) The legal name of each party to the transaction, CRD or IARD 
Number, if the party has a CRD or IARD Number, market participant 
identification (``MPID''), if the party has an MPID, and the LEI of 
each party to the transaction, if the party has an active LEI, and 
whether such person is the lender, the borrower, or an intermediary 
between the lender and the borrower (if known);
    (2) If the person lending securities is a broker or dealer and the 
borrower is its customer, whether the security is loaned from a 
broker's or dealer's securities inventory to a customer of such broker 
or dealer; and
    (3) If known, whether the loan is being used to close out a fail to 
deliver pursuant to 242.204 of this chapter (Rule 204 of Regulation 
SHO) or to close out a fail to deliver outside of Regulation SHO.
    (e) Securities available to loan and securities on loan. The 
following information shall be provided to an RNSA by the end of each 
business day that a person included in paragraphs (e)(1) or (2) of this 
section either was required to provide information to an RNSA under 
paragraph (a) of this section or had an open securities loan about 
which it was required provide information to an RNSA under paragraph 
(a) of this section:
    (1) A lending agent shall provide the following information 
directly to an RNSA or to a reporting agent who shall provide such 
information and the identity of the person on whose behalf it is 
providing the information to an RNSA:
    (i) The legal name of the security issuer, and the LEI of the 
issuer, if the issuer has an active LEI;
    (ii) The ticker symbol, ISIN, CUSIP, or FIGI of the security, if 
assigned, or other identifier;
    (iii) The total amount of each security that is not subject to 
legal or other restrictions that prevent it from being lent 
(``available to lend''):
    (A) If the lending agent is a broker or dealer, the total amount of 
each security available to lend by the broker or dealer, including the 
securities owned by the broker or dealer, the securities owned by its 
customers who have agreed to participate in a fully paid lending 
program, and the securities in its margin customers' accounts;
    (B) If the lending agent is not a broker or dealer, the total 
amount of each security available to the lending agent to lend, 
including any securities owned by the lending agent;
    (iv) The total amount of each security on loan that has been 
contractually booked and settled (``security on loan''):
    (A) If the lending agent is a broker or dealer, the total amount of 
each security on loan by the broker or dealer, including the securities 
owned by the broker or dealer, the securities owned by its customers 
who have agreed to participate in a fully paid lending program, and the 
securities in its margin customers' accounts;
    (B) If the lending agent is not a broker or dealer, the total 
amount of each security on loan where the lending agent acted as an 
intermediary on behalf of a beneficial owner and securities owned by 
the lending agent.
    (2) Any person that does not employ a lending agent shall provide 
the following information directly to an RNSA or to a reporting agent 
who shall provide such information and the identity of the person on 
whose behalf it is providing the information to the RNSA:
    (i) The legal name of the security issuer, and the LEI of the 
issuer, if the issuer has an active LEI;
    (ii) The ticker symbol, ISIN, CUSIP, or FIGI of the security, if 
assigned, or other identifier;
    (iii) The total amount of each specific security that is owned by 
the person and available to lend;
    (iv) The total amount of each specific security on loan owned by 
the person.
    (3) For each security about which the RNSA receives information 
pursuant to paragraphs (e)(1) or (2) of this section, the RNSA shall 
make available to the public only aggregated information for that 
security, including information required by (e)(1)(i) and (ii) and 
(e)(2)(i) and (ii) of this section. All identifying information about 
lending agents, reporting agents, and other persons using reporting 
agents, shall not be made publicly available, and the RNSA shall keep 
such information confidential, subject to the provisions of applicable 
law. For information that is required to be made publicly available, 
the RNSA shall make it available as soon as practicable, but not later 
than the next business day.
    (f) RNSA rules. The RNSA shall implement rules regarding the format 
and manner to administer the collection of information in paragraphs 
(b) through (e) of this section and distribute such information in 
accordance with rules approved by the Commission pursuant to section 
19(b) of the Exchange Act and Rule 19b-4 thereunder.
    (g) Data retention and availability. The RNSA shall:
    (1) Retain the information collected pursuant to paragraphs (b) 
through (e) of this section in a convenient and usable standard 
electronic data format that is machine readable and text searchable 
without any manual intervention for a period of five years;
    (2) Make the information collected pursuant to paragraph 
(a)(2)(iii) and paragraphs (b) through (e) of this section available to 
the Commission or other persons as the Commission may

[[Page 69853]]

designate by order upon a demonstrated regulatory need;
    (3) Provide the information collected under paragraphs (b) and (c) 
of this section and the aggregate of the information provided pursuant 
to paragraph (e) of this section available to the public in the same 
manner such information is maintained pursuant to paragraph (g)(1) of 
this section on the RNSA's website or similar means of electronic 
distribution, without charge and without use restrictions, for at least 
a five-year period; and
    (4) Establish, maintain, and enforce reasonably designed written 
policies and procedures to maintain the security and confidentiality of 
confidential information required by paragraphs (d) and (e)(3).
    (h) RNSA fees. The RNSA may establish and collect reasonable fees, 
pursuant to rules that are effective pursuant to section 19(b) of the 
Exchange Act and Rule 19b-4 thereunder, from each person who provides 
any data set forth in paragraphs (b) through (e) of this section 
directly to the RNSA.

    By the Commission.

    Dated: November 18, 2021.
J. Matthew DeLesDernier,
Assistant Secretary.``
[FR Doc. 2021-25739 Filed 12-7-21; 8:45 am]
BILLING CODE 8011-01-P

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