On October 13, 2023, the SEC adopted new Rule 10c-1a under the Securities Exchange Act of 1934, which will require the reporting of certain details regarding securities lending transactions to a registered national securities association (RNSA). Currently, FINRA is the only RNSA.
New Rule 10c-1a will require any “covered person” to provide specified information about “covered securities loans” to an RNSA within a certain time period and in accordance with the format and manner required by rules that the RNSA will adopt. The new rule will also require the RNSA to make publicly available certain information it receives about securities loans and to keep confidential certain other information it receives. Reportable information to be made public will include identifying information about the security subject to the loan and its issuer; the date and time of the loan; the name of the platform or venue where the loan is affected; the amount of securities on loan; the type of collateral used to secure the loan; rates, fees, charges and rebates for the loan; the loan’s termination date; and the type of entity that is the borrower of the security (i.e., if the borrower is a broker, dealer, customer, clearing agency, bank, custodian or other person). Reportable information that the RNSA must keep confidential will include the legal names of the parties to the covered securities loan; if the lender is a broker or dealer and the borrower is its customer, whether the security on loan came from the lender’s inventory; and if known, whether the loan will be used to close out a fail to deliver under Regulation SHO or to close out a fail to deliver outside of Regulation SHO. The rule will also require covered persons to report certain information to RNSAs about modifications to outstanding covered securities loans.
For purposes of the new reporting requirements, Rule 10c-1a defines a covered person as (1) any person that agrees to a covered securities loan on behalf of a lender (i.e., an intermediary), other than a clearing agency; (2) any person that agrees to a covered securities loan as the lender when an intermediary is not used; or (3) a broker or dealer when borrowing fully paid or excess margin securities. The rule defines a covered securities loan as any transaction in which one person, either on that person’s own behalf or on behalf of one or more other persons, lends a “reportable security” to another person. The rule excludes from the definition of covered securities loans positions at a registered clearing agency resulting from central counterparty services or central depository services and the use of margin securities by a broker or dealer unless the broker or dealer lends the securities to another person. Finally, to identify whether a particular securities loan is a covered securities loan, Rule 10c-1a defines a reportable security as any security for which information is reported or required to be reported to the consolidated audit trail in accordance with existing reporting regimes such as the Consolidated Audit Trail National Market System Plan, FINRA’s TRACE reporting system or the Municipal Securities Rulemaking Board’s Real-Time Transaction Reporting System.
Rule 10c-1a will require that a covered person provide the requisite information about a covered securities loan to an RNSA by the end of the day on which the loan is made or modified, and that the RNSA assign a unique identifier to each covered securities loan and make the requisite information about the loan public no later than the morning of the next business day.
Rule 10c-1a will become effective on January 2, 2024. The adopting release for the rule specifies that (1) RNSAs must propose rules to implement Rule 10c-1a within four months of the effective date of Rule 10c-1a; (2) those RNSA rules must be effective no later than 12 months after the effective date of Rule 10c-1a; (3) covered persons must begin reporting information required by Rule 10c-1a to RNSAs starting on the first business day 24 months after the effective date of Rule 10c-1a (i.e., the reporting date); and (4) RNSAs must begin publicly reporting required information about covered securities loans within 90 calendar days of the reporting date.