lending information both more granular and more accessible for market
participants, final Rule 10c-1a will enable investors to utilize data
to gain insights into the underlying security. As investors become more
informed, their investment decisions are expected to improve.
---------------------------------------------------------------------------

    \907\ See Duong, et al. (2017) supra note 812. 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 results imply that, all
things equal, lenders charge higher fees to lend their shares when
they have negative information about a company. See also Kaitlin
Hendrix & Gavin Crabb, Borrowing Fees and Expected Stock Returns
(Nov. 6, 2020), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3726227 (retrieved from SSRN Elsevier
database).
---------------------------------------------------------------------------

    Additionally, an improved view of current lending market conditions
for various securities may help inform beneficial owners in making
better decisions concerning which shares to make available for lending,
potentially leading to more profitable lending. For example, to the
extent that beneficial owners do not currently have a clear means of
determining which securities have high average lending rates Rule 10c-
1a data may alert them about securities with high borrowing costs,
which would enable them to better optimize which shares in their
portfolio to make available for lending.\908\ Furthermore, as a result
of having better access to information about the securities lending
market, financial institutions will be able to improve their collateral
and balance sheet management.\909\
---------------------------------------------------------------------------

    \908\ 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 778. This
additional information may help a beneficial owner that is close to
its program limit optimally choose which shares to make available
for lending.
    \909\ See supra Part IX.B.1 for further discussion of the use of
securities lending by financial institutions for collateral and
balance sheet management.
---------------------------------------------------------------------------

    Second, a clearer understanding of lending market conditions, and
specifically lending market rates, facilitated by the dissemination of
Rule 10c-1a data may benefit broker-dealers by decreasing the search
costs incurred to obtain a locate in order to facilitate a short sale
on behalf of a customer.\910\ The increase in transparency under the
final rule will allow broker-dealers to better ascertain current
prevailing lending rates for security loans with certain
characteristics prior to calling lending programs to get competing
quotes. Broker-dealers tend to find loans for their customers through
the network of lending programs with which they have relationships,
after they have exhausted their own inventory and customer margin
accounts.\911\ Rule 10c-1a data will enable them to determine with
greater ease whether a quote from a lending program is competitive. It
is possible that new broker-dealers may choose to enter the market for
lending services \912\ because of this reduction in cost, which may
further increase competition between broker-dealers.\913\
---------------------------------------------------------------------------

    \910\ Regulation SHO requires a broker-dealer to have reasonable
grounds to believe that a security can be borrowed so that it can be
delivered on the date delivery is due before effecting a short sale
order in any equity security. This ``locate'' must be made and
documented prior to effecting the short sale. See 17 CFR
242.203(b)(1) and (2). See also Key Points about Regulation SHO,
available at https://www.sec.gov/investor/pubs/regsho.htm.
    \911\ See supra note 798 discussing broker-dealers' preferences
for sourcing shares for loans. See also supra Parts IX.B.1 and
IX.B.4 discussing the role of broker-dealers in facilitating
borrowing by customers.
    \912\ See supra Part IX.B.4 for further discussion of the market
for lending services.
    \913\ See infra Part IX.D.2 for further discussion of the
expected effects of the final rule on competition between broker-
dealers.
---------------------------------------------------------------------------

    Third, final Rule 10c-1a will benefit lending programs by providing
a means by which they may improve the performance of their lending.
Rule 10c-1a data will provide lending programs with a source of
securities lending market data that is more comprehensive than existing
commercial data. With these data, the lending programs will have an
improved ability to determine prevailing market conditions as they
compete to lend shares, which may improve their lending performance.
    Fourth, more comprehensive, granular, and accessible securities
lending information may also lead to additional business opportunities
for commercial securities lending data vendors.\914\ In addition to
data products, commercial data vendors also provide analytics to their
customers,\915\ and may be able to support these analytics data
services with the data provided by the final rule. Further, because the
commercial data vendors would be less dependent on their data providers
for data, they may be able to provide analytics to more market
participants. This may result in increased competition for data
analytics services as the barriers to entry for providing analytics
services decline and new entrants compete to provide analytics
services.\916\ While this effect may lower what the data vendors can
charge for analytics services, to the extent that the commercial data
vendors offer their customers other securities lending services, such
as execution services, the final rule may enhance their other business
lines by providing more comprehensive data to support other securities
lending market services. To the extent that there is a demand for
covered persons to contract privately with third party vendors to
assist in reporting under final Rule 10c-1a, this would likely also
lead to additional business opportunities for commercial securities
lending data vendors, as these vendors already have experience with
handling and disseminating securities lending data and could leverage
that experience to offer such services to customers.\917\
---------------------------------------------------------------------------

    \914\ The Commission acknowledges that the final rule may also
result in lost revenue for commercial securities lending data
vendors. See infra Part IX.C.4 for further discussion.
    \915\ See supra Part IX.B.5.
    \916\ See infra Part IX.D.2 for further discussion of the
expected effects of the final rule on competition for securities
lending data analytics services.
    \917\ While covered persons can use third party vendors to help
prepare their reports, such vendors would not be reporting agents
under final Rule 10c-1a. See supra Part VII.B.2.
---------------------------------------------------------------------------

    Ultimately, the improved information access will result in improved
market quality in the security lending market. More informed investment
decisions facilitated by the final rule may improve market stability by
allowing investors to better manage risk. Furthermore, as all
participants in the securities lending market will be able to 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 will improve. This will lead to more efficient prices for
securities loans.\918\ This improved information access may also
improve price discovery in the market for the securities underlying the
security loans, as information about the underlying security will have
a greater opportunity to incorporate into the price of the underlying
security.\919\
---------------------------------------------------------------------------

    \918\ This effect may be concentrated among stocks that are ``on
special'' and have higher borrowing costs, in which there are more
opportunities for an increase in price efficiency to lower fees. See
supra in this part for a discussion on why the Commission expects
the economic effects of the final rule to be concentrated among
hard-to-borrow stocks.
    \919\ See infra Part IX.D.1 for further discussion of the
expected effects of the final rule on price efficiency.
---------------------------------------------------------------------------

    The requirement to report all of the data elements under paragraph
(c) the first time the modification of a ``day-one'' loan (that is,
loans in existence

prior to the final rule's reporting date for covered persons) occurs
will avoid the exclusion of certain loan information during the early
phases of implementation.\920\ This will enhance the extent to which
Rule 10c-1a data improves informational efficiency during the earlier
phases of implementation. In the Wholesale market lending largely
facilitates clearing and settlement, and for commonly lent securities
it is possible that a broker dealer could have a continuous need to
borrow the security. In this case the broker dealer likely would enter
into a loan that is kept open for an extended period of time, but with
frequent size and/or rate modifications to match their ongoing
settlement needs and market conditions.\921\ Therefore, absent such a
requirement, all the terms of such a lending arrangement would not be
fully reportable unless the existing loan is closed out and a new one
is opened. It could take a considerable amount of time for this to
occur and thus the data collected by the Rule would lack the full
context for such loans until they were closed and then re-entered into.
The lack of information about these loans would harm data quality
because it would render the data less complete and would thus limit
market participants' ability to determine conditions in the lending
market and would thus mitigate the benefits described in this section.
Ensuring that these loans are included upon their first modification
improves the quality of the data in the earlier phases of reporting
which would in turn speed up the time when the benefits articulated
will become fully available to market participants.
---------------------------------------------------------------------------

    \920\ Several commenters sought clarification on issues related
to ``day-one'' loans. See supra note 429 and corresponding text for
a discussion of and response to these commenters.
    \921\ For example, FIS data on returned securities suggest that
while the average security returned in the Wholesale market had been
on loan for about a month, some loans were open for up to a year or
more. See also Blackrock Letter, at 9 and supra note 434 and
surrounding text.
---------------------------------------------------------------------------

Potential Limits to Benefits and Sources of Uncertainty
    Commenters mentioned a number of factors that may limit the extent
to which the rule increases transparency in the securities lending
market, and thereby limit the associated benefits as well. However,
despite these potential limitations, the Commission expects that final
Rule 10c-1a will improve the transparency and efficiency of the
securities lending market, which will improve market participants'
access to information and lower their information asymmetry.
    Commenters noted that loan fees are determined by a variety of
factors, some of which are not directly included in Rule 10c-1a
data.\922\ Though the Commission believes that the final rule will
improve market participants' ability to compare loans, the Commission
recognizes that the data provided will not include information about
all of the factors that are relevant to the pricing of securities
loans. As such, two loans may appear to be similar based on the Rule
10c-1a data but may not have the same fees due to factors not recorded
in the data, such as the counterparty risk or the stability of the
portfolio. Some commenters expressed concern that failing to provide
all information relevant to pricing would lead the data to be either
not useful, potentially misleading, or even harmful.\923\
---------------------------------------------------------------------------

    \922\ See, e.g., Citadel Letter, at 9; Overdahl Letter, at 6;
RMA Letter, at 6; MFA Letter 1, at 5; SIFMA Letter 1, at 15. See
also supra note 780 and corresponding text.
    \923\ See, e.g., Citadel Letter, at 9, stating that the
``Commission does not explain why it would be useful for one
investor to know what another investor paid on a loan without
knowing any of the material facts of the other investor's
relationship with its broker-dealer.'' Similarly, see RMA Letter, at
6 (stating that ``there is no reason to believe that securities
lending transactions are fully fungible or that pricing can be
represented in a single 'spot' market price''); see Overdahl Letter,
at 6 (stating that ``the fact that one market participant borrowed a
security at a certain rate is not necessarily informative about the
value of a loan with a different market participant.'').
Furthermore, several commenters expressed concern that such
information could be misleading. See, e.g., MFA Letter 1, at 9
(stating that, since ``rates in the [Customer] Market are based on
many variables specific to a broker-dealer-client contractual
relationship,'' transaction-by-transaction loan data ``may actually
result in a distorted representation of the actual market.''). See
also ISLA Letter, at 2, who similarly state that fee/rebate data
``may create an unrealistic and misleading portrayal of prevailing
rates.'' See also SIFMA Letter 1, at 14, stating that ``intraday
loan-by-loan data can be misleading based on circumstances unique to
certain securities loan transactions.'' See also supra note 732 and
corresponding text for a discussion of the variety of factors that
can affect the pricing of securities loans. Other commenters
expressed their opinion that pricing information would be valuable
to market participants. See, e.g., James J. Angel Letter, at 2-3.
---------------------------------------------------------------------------

    The Commission recognized in the Proposing Releases and continues
to acknowledge that Rule 10c-1a data will not contain all information
needed to perfectly price loans.\924\ However, compared to the baseline
level of information available to market participants, the more
granular, comprehensive, and accessible data provided by the final rule
will improve market participants' abilities to compare loans and
provide numerous benefits to market participants.\925\ The Commission
does not believe that this information will be misleading or harmful
because, as the commenters make clear, it is well understood in this
market that the pricing of loans is determined by many factors.\926\
Knowing this, beneficial owners and end borrowers will be able to use
this information to create, for example, an expected range of borrowing
costs and use these data to facilitate conversations with their lending
agent or broker dealer about why certain loans have prices that they
do, or why a specific loan falls where it does in the distribution of
similar loans. Further, to the extent that the distribution of
borrowing costs provides information that is relevant to stock prices,
this information alone could improve price efficiency in the underlying
securities market.\927\
---------------------------------------------------------------------------

    \924\ See, e.g., Proposing Release, 86 FR 69839, recognizing
that benefits would be somewhat limited by the fact that the data
does not contain ``all information necessary to perfectly compare
the fees on different loans,'' but concluding that ``the proposed
Rule improves the ability to compare loans.''
    \925\ See supra in this part for a discussion of these benefits.
    \926\ See, e.g., the information provided by commenters in supra
note 732.
    \927\ See, e.g., Duong, et al. (2017), who find that information
derived from securities lending data can be used to predict stock
returns.
---------------------------------------------------------------------------

    One commenter questioned the utility of information about borrowing
costs, asserting their belief that the cost to borrow is not as
important to the execution of short sale strategies as whether there
are shares available to borrow.\928\ The Proposing Release acknowledged
that information on shares available is useful to markets.\929\ Rule
10c-1a data will not specifically provide information on shares
available. Market participants seeking such information may need to
contract with current commercial data vendors, if they can, for
estimates of shares available and utilization rates. However, since
borrowing costs are correlated with the ease of locating securities to
borrow, the improved access to fee information provided by the final
rule will provide market participants with increased information
regarding the availability of shares to lend.\930\
---------------------------------------------------------------------------

    \928\ See S3 Partners Letter, at 9 (stating that ``We do not
believe the Commission has explored if the costs to borrow are
material to the execution of a short sale strategy. We believe a
bigger issue may be the lack of shares to borrow, not the cost of
borrowing.''); Other commenters, however, did believe that loan
pricing information would provide useful and meaningful information.
See, e.g., PM Letter 2, at 3; and James J. Angel Letter, at 1.
    \929\ See, e.g., Proposing Release, 86 FR 69834, 69840.
    \930\ See Kolasinski (2013) supra note 736 (writing on the link
between the cost to borrow and availability of shares to lend).

---------------------------------------------------------------------------

    Some commenters expressed concern that the data may be too granular
to be directly usable by market participants,\931\ and at least one
commenter expressed concern that the final rule could increase
information asymmetries if the complexity of the data are such that
only the largest and most sophisticated market participants would be
able to benefit.\932\ The Commission is mindful that the reports
prepared according to the final rule will contain a large volume of
statistical data, and as a result it may be difficult for some market
participants to review and digest the reports. However, by requiring
reporting entities to report transaction-level information in a uniform
manner rather than aggregated data, the final rule will make it
possible for market participants and other interested parties to make
their own determinations about how to group securities or loans when
comparing across loan transactions. Requiring more detailed data will
also help ameliorate potential concerns about overly general
statistics, or about the specific categorization of loans and selection
of aggregated metrics, by allowing market participants and other
interested parties to conduct their own analysis based on alternative
categorizations of the underlying data. Should certain market
participants not have the means to directly analyze the detailed
statistics, third parties, such as commercial securities lending data
vendors, likely will respond to the needs of investors by analyzing the
disclosures and producing more digestible information using the
data.\933\ Additionally, this concern is mitigated somewhat by the
requirement that an RNSA provide information about the distribution of
loan rates at the security level,\934\ which could be more easily used
similar to current data models.
---------------------------------------------------------------------------

    \931\ See, e g., IHS Markit Letter, at 13; RMA Letter, at 18.
    \932\ See IHS Markit Letter, at 14.
    \933\ See supra Part IX.B.5 for a discussion of commercial data
vendors' current offering of securities lending data analytics
services, and above in this part for a discussion of the expected
effects of the final rule on creating new business opportunities for
providers of securities lending data analytics services.
    \934\ See final Rule 10c-1a(g)(5), requiring an RNSA to
disseminate aggregated daily information.
---------------------------------------------------------------------------

    One commenter suggested that the inclusion of short positions data
would lead to double counting and could confuse market
participants.\935\ Short positions are not required to be reported, but
loans from a broker-dealer to an end customer--such as might support a
short position--will be marked in the data as loans to a ``customer (if
the lender is a broker-dealer).'' The Commission does not believe that
the inclusion of such data constitutes double counting because a loan
from a broker-dealer to their customer (e.g., to facilitate a short
sale and where the broker-dealer is the lender) is a distinct economic
activity from a loan that the broker-dealer may engage in as the
borrower (e.g., to meet their own clearing and settlement
obligations).\936\ The Commission does not believe that such data will
lead to confusion because these loans are marked in the data in a way
that allows market participants to separate customer loans from other
loans in their analysis.
---------------------------------------------------------------------------

    \935\ See MFA Letter 3, at 4.
    \936\ See supra Part IX.B.2.
---------------------------------------------------------------------------

    One commenter suggested that including rebate data could lead to
confusion because rebates are often fixed to benchmarks that can change
from day to day, potentially leading to many, perhaps daily,
modifications of the loan needing to be submitted and that the volume
of these data could confuse market participants.\937\ The extent to
which the commenter's concern is realized will be determined by how an
RNSA chooses to structure the reporting of this variable.\938\ For
instance, if an RNSA chooses to allow market participants to report a
spread and a benchmark, then no modifications would be required to be
reported from day to day unless there were a change in the negotiated
spread or benchmark. However, if an RNSA chooses to require market
participants to report the total fee, then market participants would be
required to report changes to the fee if the benchmark changes, which
could require daily revisions.\939\ However, the Commission does not
believe that this will cause confusion. The Commission expects that
market participants know that rebates can change regularly and thus
revisions would not be unexpected. Further, gathering loan modification
data is important to facilitate the accurate computation of statistics
regarding the cost to borrow by an RNSA and other market participants.
---------------------------------------------------------------------------

    \937\ See MFA Letter 3, at 5.
    \938\ See supra Part VII.F.1 for additional discussion of the
reporting of this data.
    \939\ See the last paragraph of Part VII.F.1 and surrounding
text for additional discussion of the latitude granted to an RNSA in
determining the specific format required for the loan cost
information.
---------------------------------------------------------------------------

    At least one commenter suggested that some of the benefits of the
Rule from reducing information asymmetries may be limited as a result
of switching costs.\940\ The Commission acknowledges that the cost of
switching to a new broker-dealer can be high,\941\ and that high
switching costs may make it more difficult for some end borrowers to
easily switch their broker-dealer for one that would offer them better
terms on a loan.\942\ However, at the same time, by increasing end
borrowers' access to comprehensive information about the securities
lending market, final Rule 10c-1a will improve end borrowers' ability
to determine which broker-dealers are offering better loan terms, as
well as to negotiate better terms with broker-dealers. Both of these
will increase the benefits to end borrowers from switching broker-
dealers. Holding switching costs constant,\943\ final Rule 10c-1a could
thus still result in more end borrowers finding it beneficial to switch
to better-performing broker-dealers. Furthermore, as discussed in the
Proposing Release,\944\ even for those borrowers for which switching
broker-dealers would not be cost effective, the data would provide
benchmark statistics that may enable smaller borrowers to select higher
performing broker-dealers initially.
---------------------------------------------------------------------------

    \940\ See, e.g., Citadel Letter, at 8. One commenter suggested
that switching costs between lenders and lending agents could
increase because of the rule; See CSFME Letter 1, at 5. The
Commission acknowledges this possibility and discusses further below
in Part IX.C.4. See also S3 Partners Letter, at 9, stating ``[p]rice
transparency does not change a borrower's need to execute a short
sale strategy with the brokers that they already have existing
agreements with.'' See also supra in this part for a discussion of
studies of the introduction of TRACE and the impact of transparency
on price.
    \941\ See supra Part IX.B.4 for a discussion of costs related to
switching broker-dealers.
    \942\ However, several factors may mitigate high switching
costs. For example, some institutional investors are likely to have
multiple prime brokers, which would facilitate the transfer of
business to better-performing broker-dealers (see supra note 806),
and, for individual investors, transferring between retail brokers
may be less costly, for example, because some retail brokers will
compensate new customers for transfer fees that their outgoing
broker-dealer may charge them. See, e.g., Chad Morris, ACAT Fee:
Account Transfer Fee in 2023, Brokerage-Review.com, available at
https://www.brokerage-review.com/discount-broker/acat-account-transfer-fees.aspx, last visited Aug. 28, 2023 (providing a list of
fees for different brokers). The effect of switching costs on
competition may also depend on the variability of the quality of
broker-dealers' lending services over time. For example, if the
quality of any broker-dealer's lending quality varies significantly
over time, customers of those broker-dealers may find it optimal to
switch between broker-dealers with some frequency, which would
increase their overall switching costs. On the other hand, if the
quality of broker-dealers' lending services is relatively constant
over time, the number of times that a customer would optimally want
to switch between broker-dealers would likely be more limited, and
in this case switching costs may be a relatively small and/or short-
term friction.
    \943\ At least one commenter expressed concern that the proposed
rule may result in increased costs when switching lending agents.
See CSFME Letter 1, at 5.
    \944\ See Proposing Release, 86 FR 69837 n.221.
---------------------------------------------------------------------------

    The benefits of the final rule may be limited if the rule results
in a reduction

in the supply of securities loans. A lower supply of securities loans,
for example, could weaken or even counteract the rule's expected effect
on lowering borrowing costs.\945\ As previously discussed, the
Commission believes that the empirical evidence does not show an
increase in securities lending transparency would result in a decrease
in the supply of securities loans.\946\ However, another possibility
that was pointed out by commenters is that the supply of securities
loans could decrease if compliance costs are passed on to lenders and
beneficial owners, who are then less willing or able to participate in
the securities lending market as a result.\947\ The Commission
recognizes that some market participants, including beneficial owners,
may experience reduced revenue from securities lending as a result of
the rule.\948\ However, the Commission expects that beneficial owners
and lenders will for the most part benefit from the final rule, as a
result of increased information about the securities lending market and
reduced information asymmetry.\949\ This benefit, which could even
encourage more beneficial owners and lenders to enter the securities
lending market, would serve to mitigate an increase in cost and a
subsequent decrease in lending, to the extent that it would occur.
---------------------------------------------------------------------------

    \945\ See supra in this part for discussions of the Commission's
expectation that the final rule will lower borrowing costs for some
securities.
    \946\ See supra in this part for further discussion for this
literature.
    \947\ See, e.g., State Street Letter, at 4, stating that
``greater costs are also likely to create additional dis-incentives
for institutional investors to participate in the securities lending
market, with broadly negative implications for liquidity.''
    \948\ See infra Part IX.C.4 for further discussion of the
expected effect of the final rule on securities lending revenues.
    \949\ See supra in this part for a discussion of the expected
benefits of the final rule from reduced information asymmetry
between beneficial owners and lending programs.
---------------------------------------------------------------------------

    One commenter stated that securities lending data would be less
useful for corporate bonds and asset-backed securities (ABS) because,
due to the ``the greater diversity of bond characteristics, data from
one set of bonds cannot be as easily used as benchmarks for others,''
and as a result ``there is little indication that data from corporate
bond or ABS lending transactions would be sufficiently useful to
justify the reporting costs.'' \950\ As discussed above, the Commission
acknowledges that the data provided will not include information about
all of the factors that are relevant to the pricing of securities
loans. It is possible that this limitation on the benefits may be
higher for certain infrequently loaned securities, such as corporate
bonds. However, the Commission believes that, even for less liquid
lending markets, Rule 10c-1a will still reduce information asymmetries
and improve pricing efficiency by facilitating better benchmarking than
is currently possible, and thus will represent an improvement relative
to the baseline similar to other assets discussed. For example, market
participants will be able to use Rule 10c-1a data to pool information
across similar securities and/or similar time horizons to create their
own bespoke benchmarks for loan terms.
---------------------------------------------------------------------------

    \950\ See RMA Letter, at 16.
---------------------------------------------------------------------------

    The commenter also stated that securities lending data would be
less useful for U.S. Government securities because ``the market for
these products is already fairly transparent,'' and thus ``imposing
reporting obligations would not provide sufficient additional data to
justify the compliance burden.'' \951\ As discussed in the Baseline,
the Commission believes that information asymmetries in the lending
market for U.S. Government securities loans are unlikely to be fully
addressed by the currently available datasets, and thus this market
will ultimately still benefit from an increase in transparency.\952\
---------------------------------------------------------------------------

    \951\ See RMA Letter, at 16.
    \952\ See supra Part IX.B.2 for further discussion of the
Commission's understanding of the current state of transparency in
the market for U.S. Government securities lending. The Commission
also acknowledges that, in addition to the market for U.S.
Government securities lending, there may be other securities lending
markets with higher transparency. However, the Commission believes
the regulatory benefits discussed in this part will still apply, as
will the benefits for data consumers from the additional context
provided by the Rule 10c-1a data, such as information about 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.
---------------------------------------------------------------------------

    While the adoption of final Rule 10c-1a will lead to benefits from
an overall increase in transparency, the Commission acknowledges that,
in some areas, there is uncertainty as to how the information content
of Rule 10c-1a data will compare to that of existing data. The
requirement for an RNSA to disseminate daily information about
aggregate transaction activity and distribution of loan rates will also
provide market participants with information about the securities
lending market.\953\ However, how the aggregate information
disseminated by an RNSA will compare to the information available from
current commercially available datasets, and the range of analyses that
market participants will be able to perform using this information,
will depend on the specific aggregate statistics that an RNSA chooses
to publish.
---------------------------------------------------------------------------

    \953\ See final Rule 10c-1a(g)(5).
---------------------------------------------------------------------------

    The Commission bases its estimates on an RNSA providing daily
information that is at least as informative as comparable statistics
that are currently provided by the commercial datasets. This is
because, consistent with section 19(b) of the Exchange Act, any changes
to an RNSA rules required by final Rule 10c-1a, including its Rule 10c-
1a information collection and dissemination practices, would have to be
filed with the Commission pursuant to section 19(b) and Rule 19b-4
prior to implementation.\954\ Such rules would also be subject to
public comment.\955\ This process offers market participants the
opportunity to provide feedback on the potential specific statistical
form of the aggregated daily information based on, e.g., their
experience using information from commercial datasets. As such, the
daily information provided by an RNSA could be at least as informative
as those statistics provided by current data providers. Therefore, at a
minimum, the Commission expects that the final rule will result in a
positive benefit to market participants in the form of increased
securities lending market transparency. This is because, while the
aggregate information released by an RNSA may be the same or similar to
what is currently provided by commercial datasets, the
comprehensiveness and accessibility of the Rule 10c-1a data is expected
to be better than that of commercial data, such that aggregate
information produced using Rule 10c-1a data can be expected to be
better than that produced using currently available commercial
data.\956\
---------------------------------------------------------------------------

    \954\ See supra Part II.J for further discussion of how the
final rule handles RNSA Rules to administer the collection of
information.
    \955\ 15 U.S.C. 78s(b). See also FINRA, FINRA Rulemaking
Process, available at https://www.finra.org/rules-guidance/rulemaking-process, last visited Aug. 24, 2023.
    \956\ See supra Part IX.B.2 for a discussion of issues related
to the currently available commercial securities lending datasets.
For example, in contrast to commercial datasets, since it is not
based on voluntary submissions, final Rule 10c-1a data will be less
likely to be prone to bias, and thus aggregate information that is
constructed using final Rule 10c-1a data will be less prone to
biases as well.
---------------------------------------------------------------------------

2. Regulatory Benefits
    Final Rule 10c-1a will improve upon current data sources by
providing an RNSA (i.e., FINRA) \957\ 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.\958\ Further, the
improved access and comprehensiveness and reduced bias of the publicly
available data will also accrue to FINRA and the Commission, as well as
any other regulators using these data. This access will benefit
investors by enhancing regulatory tools employed to promote fair and
orderly securities markets. In particular, investors may benefit from
improved surveillance and enforcement uses, market reconstruction uses,
and market research uses.
---------------------------------------------------------------------------

    \957\ Currently, FINRA is the only RNSA. Although the final rule
applies to ``an RNSA,'' this portion of our analysis describes
benefits to and involving FINRA so that we can discuss specific
FINRA Rules and practices that will be affected.
    \958\ See final Rule 10c-1a(e).
---------------------------------------------------------------------------

Surveillance and Enforcement Uses
    The party identities and purpose information \959\ may facilitate
better surveillance by FINRA for regulatory compliance by its members,
and may improve its ability to enforce such regulations. Additionally,
FINRA will be able to notify another regulator as permitted.
---------------------------------------------------------------------------

    \959\ See id.
---------------------------------------------------------------------------

    For example, for FINRA, the information on whether the security is
loaned from a broker-dealer's securities inventory to its customer
\960\ may assist FINRA in determining whether a broker-dealer is
charging lending fees or paying rebates commensurate with the market.
Thus, beneficial owners and end borrowers, who engage in securities
lending transactions, will be better protected against potential unfair
pricing of securities loans 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 final rule can 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 will 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 can 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.
---------------------------------------------------------------------------

    \960\ See 17 CFR 240.10c-1a(e)(2) (``final Rule 10c-1a(e)(2)'').
---------------------------------------------------------------------------

    Additionally, the information on whether the loan is being used to
close out a fail to deliver \961\ is relevant to Rule 204 compliance.
Importantly, being able to estimate the securities lending revenues and
costs of particular participants may help to fine tune disgorgement
estimations. The Commission and FINRA can also use Rule 10c-1a data to
oversee broker-dealer compliance with Exchange Act Rule 15c3-3.\962\
---------------------------------------------------------------------------

    \961\ See final Rule 10c-1a(e)(3).
    \962\ See 17 CFR 240.15c3-3.
---------------------------------------------------------------------------

    The Commission believes that the requirement pursuant to Rule 10c-
1a to identify all parties to securities lending transactions with
LEIs, if such parties have LEIs, will facilitate the Commission and
FINRA's efforts to monitor securities lending.\963\ Reporting of LEIs
by legal entity securities loan participants that have LEIs will help
provide a more precise and consistent means of identification for loan
participants as compared to using loan participant names and, if
available, CRDs, IARD Numbers, or MPIDs.\964\ In that regard, obtaining
an LEI requires that an entity's identity be verified by a third party
upon issuance of the LEI and upon annual renewal of the LEI.\965\
Additionally, LEIs contain ``Level 2'' information about the linkages
between the entities being identified and their parent and child
entities,\966\ which can better enable Commission staff and market
participants to understand the relationships between various firms with
an eye toward potential aggregations of risk. Furthermore, requiring
LEI disclosure for loan participants that have LEIs also will
facilitate the linkage of data reported about securities loans with any
relevant data, such as data on short sales or positions, from other
sources.\967\ However, because the Commission is not requiring loan
participants without LEIs to obtain and report them, the aforementioned
benefits will only arise for reported securities loans in which
participants have LEIs.
---------------------------------------------------------------------------

    \963\ Examples of other regulatory entities and jurisdictions
that use LEIs include the U.S. Commodity Futures Trading Commission
(``CFTC''), Alberta Securities Commission (Canada), European Markets
and Securities Authority, and Monetary Authority of Singapore. See
Global LEI Foundation, Regulatory Use of the LEI (Aug. 21, 2023),
available at https://www.gleif.org/en/lei-solutions/regulatory-use-of-the-lei.
    \964\ More than 2.2 million LEIs have been issued. See Office of
Fin. Res., Legal Entity Identifier, available at https://www.financialresearch.gov/data/legal-entity-identifier/, last
visited Aug. 23, 2023.
    \965\ See Global LEI System, LEIROC.com, available at https://www.leiroc.org/lei.htm, last visited Aug. 23, 2023. Information
associated with the LEI includes the ``official name of the legal
entity as recorded in the official registers[,]'' the entity's
address, country of incorporation, and the ``legal form of the
entity.'' See Financial Stability Board (``FSB''), Options to
Improve Adoption of the LEI, in Particular for Use in Cross-Border
Payments (July 7, 2022), available at https://www.fsb.org/2022/07/options-to-improve-adoption-of-the-lei-in-particular-for-use-in-cross-border-payments/.
    \966\ See Global LEI Foundation, Level 2 Data: Who Owns Whom,
available at https://www.gleif.org/en/lei-data/access-and-use-lei-data/level-2-data-who-owns-whom, last visited Aug. 22, 2023.
    \967\ For example, the European Union's SFTR requires legal
entity parties to securities financing transactions to provide their
own LEIs and the LEIs of their counterparties to trade repositories.
See ESMA Updates Its Statement on the Implementation of LEI
Requirements for Third-Country Issuers Under the SFTR Reporting
Regime (Apr. 13, 2021), available at https://www.esma.europa.eu/press-news/esma-news/esma-updates-its-lei-statement. The EU has
numerous LEI requirements for entities operating in its securities
markets, including, inter alia, for credit and financial
institutions (pursuant to the Capital Requirements Regulation) and
for fund and fund managers (pursuant to the Alternative Investment
Funds Directive). See id. Likewise, as mentioned, the CFTC requires
counterparties identify themselves to the agency with LEIs in
connection with swap trades, including long-and-short equity index
swap trades. See 17 CFR 45.6.
---------------------------------------------------------------------------

    One commenter expressed concern that, to the extent that there is a
wide variance in interpretation of data, the rule could result in
``false positive'' enforcement actions.\968\ Conversely, the Commission
believes that improvements in securities lending data will enhance the
ability of FINRA and the Commission to oversee the securities lending
market and more efficiently detect potential rule violations, such as
those described above. This will result in more targeted actions, which
will benefit market participants by resulting in more efficient
oversight.
---------------------------------------------------------------------------

    \968\ See S3 Partners Letter, at 8.
---------------------------------------------------------------------------

Market Reconstruction Uses
    Final Rule 10c-1a 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 lawmakers,
investors, and the media as well as calls by some for increased
regulation in some areas.\969\ Rule 10c-1a data will 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 comprehensive 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 analyses can help determine if further regulatory
intervention in markets is warranted and can inform the nature of any
intervention.
---------------------------------------------------------------------------

    \969\ See, e.g., Proposing Release, 86 FR 69803 n.11.
---------------------------------------------------------------------------

Market Research Uses
    Greater access and more comprehensive data on the securities
lending market will improve the quality and expand the scope of
research by both academics and regulators, which will better inform the
regulators. In particular, improving the information available for
their policy decisions will 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 will also better inform policy decisions.
3. Direct Compliance Costs
    Final Rule 10c-1a will require various entities to enter into
contracts and develop recording and reporting systems to comply with
the final rule. This section provides estimates of those costs. We note
that the Commission has provided certain estimates for purposes of
compliance with the Paperwork Reduction Act of 1995 (``PRA''), as
further discussed below, in Part X. Those estimates, while useful to
understanding the collection of information burden associated with the
final rules, do not purport to reflect the full economic costs
associated with making the required disclosures.

                                   Table 2--Total Quantified Compliance Costs
----------------------------------------------------------------------------------------------------------------
                                                                              Total initial       Total annual
                                                                 #            industry cost      industry cost
----------------------------------------------------------------------------------------------------------------
Covered Persons and Reporting Agents...................                609   \a\ $522,590,000   \b\ $233,260,000
RNSA...................................................                  1      \c\ 3,880,000      \d\ 2,760,000
----------------------------------------------------------------------------------------------------------------
\a\ $522,590,000 [ap] sum of estimates in infra Table 3 note m and Table 4 note h. The Commission estimates the
  wage rate associated with these burden hours based on salary information for the securities information
  compiled by SIFMA. The estimated wage figure for attorneys, for example, is based on published rates for
  attorneys, modified to account for a 1,800 hour work-year and multiplied by 5.35 to account for bonuses, firm
  size, employee benefits, and overhead yielding an effective hourly rate for 2013 of $380 for attorneys. See
  Securities Industry and Financial Markets Association, Management & Professional Earnings in the Securities
  Industry--2013. These estimates are adjusted for an inflation rate of 29.89% based on the Bureau of Labor
  Statistics data on CPI-U between Sept. 2013 and May 2023. See U.S. Bureau of Labor Statistics, CPI Inflation
  Calculator, available at https://www.bls.gov/data/inflation_calculator.htm. Therefore, the current inflation-
  adjusted effective hourly wage rates are estimated at $494 ($380 x 1.2989) for attorneys, $409 ($315 x 1.2989)
  for compliance managers, $338 ($260 x 1.2989) for senior systems analysts, and $83 ($64 x 1.2989) for
  compliance clerks.
\b\ $233,260,000 = estimate in infra Table 3 note n.
\c\ 10,924 hours x (0.75 x $338/hour + 0.25 x $409/hour) [ap] $3,880,000. See infra note 1196 and note a.
\d\ 7739.5 hours x (0.75 x $338/hour + 0.25 x $409/hour) + 52 hours x $83/hour [ap] $2,760,000. See infra note
  1199 and note a.

    Table 2 shows that the Commission believes that final Rule 10c-1a
will impose a one-time cost of $3.88 million and ongoing expenses of
$2.76 million on FINRA, the only RNSA. An RNSA will incur these costs
to develop systems to take and disseminate data required by the final
rule. These include larger costs associated with creating and
maintaining the infrastructure to enable providing covered persons and
reporting agents to provide an RNSA with Rule 10c-1a information and
entering into written agreements with providing covered persons and
reporting agents, as well as smaller costs associated with providing
such information to the public.\970\ These costs will be somewhat
mitigated by the fact that final Rule 10c-1a requires an RNSA to
disseminate the data ``as soon as practicable,'' \971\ which gives an
RNSA some flexibility to build systems that mitigate costs.
---------------------------------------------------------------------------

    \970\ As discussed in supra Part VII.B.2, covered persons,
including persons that are not RNSA members, that elect not to use a
reporting agent are responsible for providing the Rule 10c-1a
information to an RNSA directly and may do so without becoming RNSA
members. Therefore, these costs may include costs to an RNSA of
establishing connections to persons that are not members of an RNSA.
    \971\ See final Rule 10c-1a(g)(1).
---------------------------------------------------------------------------

    Table 2 also shows that covered persons and reporting agents will,
in aggregate, incur roughly $523 million in initial costs and $233
million annually in ongoing costs to comply with the final rule.\972\
These costs come from costs to develop and maintain systems and from
costs to enter into agreements.\973\ Tables 3 and 4 break these costs
down by those incurred by reporting agents, and by covered persons
based on the decision by covered persons to self-report or use a
reporting agent.
---------------------------------------------------------------------------

    \972\ As discussed in supra Part VII.A, the Commission is
adopting an exception to the general approach that reporting
requirements do not apply to the borrower in a securities lending
transaction, specifying that the borrower is responsible for the
reporting obligation in the instance of a broker or dealer borrowing
fully paid or excess margin securities from a customer; see final
Rule 10c-1a(j)(1). Absent this exception, reporting obligations may
have fallen on broker-dealer customers who may not have timely
access to the required information, and may have less familiarity
with reporting information to an RNSA than their broker or dealer;
see supra note 145.
    \973\ The Commission expects that the costs associated with
developing a reporting system to be lower under the final rule as
compared to the proposed rule as a result of the change from the
proposed rule to impose an end-of-day reporting requirement. As
described by some commenters, an intraday reporting framework would
have required substantial technology development and cost for those
providing covered persons and reporting agents that may have lacked
the capacity to do so. See, e.g., SBAI Letter, at 1, and IHS Markit,
at 13. Removing the intraday reporting requirement removes the need
for those providing covered persons to acquire this capacity, thus
lowering at least their initial burden associated with system design
and configuration. See supra Part IX.B.1 for further discussion.

    Table 3--Quantified Compliance Costs for Systems Development and
          Maintenance Incurred by Lenders and Reporting Agents
------------------------------------------------------------------------
                                           Total initial   Total annual
                                    #      industry cost   industry cost
                                            (millions)      (millions)
------------------------------------------------------------------------
Providing Covered Persons \a\..  \b\ 255     \c\ $272.01     \d\ $122.40
Non-Providing Covered Persons    \f\ 248      \g\ 132.27       \h\ 59.52
 \e\...........................
Reporting Agents \i\...........  \j\ 106      \k\ 113.07       \l\ 51.34
                                ----------------------------------------
    Total......................      609      \m\ 517.34      \n\ 233.26
------------------------------------------------------------------------
\a\ Providing covered persons would provide information directly to an
  RNSA.
\b\ The estimated number of providing covered persons includes 4 broker-
  dealer intermediaries, 217 persons that effect a covered securities
  loan as the lender when an intermediary is not used, and 34 broker-
  dealers borrowing fully paid or excess margin securities. See infra
  Part X.
\c\ 3,000 hours x 255 x (0.75 x $338/hour + 0.25 x $409/hour) [ap]
  $272,010,000. See infra note 1157 and supra Table 2 note a.
\d\ 1,350 hours x 255 x (0.75 x $338/hour + 0.25 x $409/hour) [ap]
  $122,400,000. See infra note 1161 and supra Table 2 note a.
\e\ Non-providing covered persons would use a reporting agent to provide
  information to an RNSA.
\f\ The estimated number of non-providing covered persons would include
  31 non-broker-dealer intermediaries and 217 persons that effect a
  covered securities loan as the lender when an intermediary is not
  used. See infra Part X.
\g\ 1,500 hours x 248 x (0.75 x $338/hour + 0.25 x $409/hour) [ap]
  $132,270,000]. See infra note 1163 and supra Table 2 note a.
\h\ 675 hours x 248 x (0.75 x $338/hour + 0.25 x $409/hour) [ap]
  $59,520,000. See infra note 1167 and supra Table 2 note a.
\i\ Reporting agents would provide information directly to an RNSA.
\j\ The number of reporting agents includes 97 broker-dealers and 9
  clearing agencies. See infra Part X.
\k\ 3,000 hours x 106 x (0.75 x $338/hour + 0.25 x $409/hour) [ap]
  $113,070,000. See infra note 1180 and supra Table 2 note a.
\l\ 1,350 hours x 106 x (0.75 x $338/hour + 0.25 x $409/hour) + 52 hours
  x 106 x $83/hour [ap] $51,340,000. See infra notes 1181 and 1191 supra
  Table 2 note a.
\m\ $517.34 million [ap] sum of estimates in supra notes c, g, and k.
\n\ $233.26 million [ap] sum of estimates in supra notes d, h, and l.

    Table 3 shows that covered persons and reporting agents would incur
an aggregate of roughly $517 million in initial costs and $233 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 covered persons who provide the Rule 10c-1a information to
an RNSA instead of relying on a reporting agent to do so.\974\ It is
possible that some providing covered persons could privately contract
with third party vendors to assist them with their reporting
obligations.\975\ The potential for third party vendors, such as
existing securities lending data vendors, to leverage their existing
experience with collecting and disseminating securities lending data as
well as economics of scale could result in lower compliance costs. If
this is the case, the compliance costs for providing covered persons
could be lower than what is reflected in Table 3.
---------------------------------------------------------------------------

    \974\ In addition, there may be costs for reporting entities
associated with determining whether a loan is a covered securities
loan according to final Rule 10c-1a(j)(2), including whether a
particular security is a reportable security. However, these costs
are likely to be negligible, as many covered persons and reporting
agents, including broker-dealers, are already required to determine
whether a security is reportable to the CAT, TRACE, or RTRS are part
of their compliance with other regulatory obligations. The
Commission believes that many covered persons that do not have the
resources or expertise to determine whether a security is a
reportable security will be likely to use reporting agents, who, as
broker-dealers and/or clearing agencies, will likely have access to
this information. These costs may also include costs to covered
persons that are not members of an RNSA of establishing connections
to an RNSA. See supra note 970. We do not expect significant
additional costs to result from the requirement to report
information once a loan modification occurs after that loan
qualifies for reporting. This is because the primary costs
associated with the rule are those associated with developing and
reconfiguring their current systems to capture the required data
elements. The variable cost of each individual transmission to an
RNSA is expected to be very small. This requirement is not expected
to impact the need for reporting agents to develop and maintain
systems for reporting securities lending information, because
reporting agents will be required to develop these systems to meet
the other provisions of the final rule. Rather, this will simply
require the inclusion of some additional data transfers that occur
largely around the reporting date. Since the cost of individual
transmissions are expected to be small, this aspect of the final
rule is expected to have a small impact on the compliance costs of
the rule.
    \975\ Note that, while covered persons can use third party
vendors to help prepare their reports, such vendors would not be
reporting agents under final Rule 10c-1a. See supra Part VII.B.2.

                        Table 4--Quantified Compliance Costs of Entering Into Agreements
----------------------------------------------------------------------------------------------------------------
                                                                                Total initial   Total annual
                                              #        Agreement  counterparty     industry cost   industry cost
----------------------------------------------------------------------------------------------------------------
Non-Providing Covered Persons \a\........  \b\ 248  Reporting Agent.............  \c\ $3,670,000              $0
Reporting Agents \d\.....................  \d\ 106  Person who Provides 10c-1a     \f\ 1,570,000               0
                                                     Information.
                                           .......  RNSA........................       \g\ 8,800               0
                                          ----------------------------------------------------------------------
    Total................................      354  ............................   \h\ 5,250,000               0
----------------------------------------------------------------------------------------------------------------
\a\ See supra note Table 3 note e.
\b\ See supra note Table 3 note f.
\c\ 30 hours x 248 x $494/hour [ap] $3,670,000. See infra note 1171 and supra Table 2 note a.
\d\ See supra note Table 3 note i.
\e\ See supra note Table 3 note j.
\f\ 30 hours x 106 x $494/hour [ap] $1,570,000. See infra note 1185 and supra Table 2 note a.
\g\ 1 hour x 106 x $83/hour [ap] $8,800. See infra note 1188 and supra Table 2 note a.
\h\ $5,250,000 [ap] sum of estimates in supra notes c, f, and g.

    Table 4 shows that covered persons and reporting agents will incur
an aggregate of $5.25 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 will be
incurred by covered persons that directly employ a reporting agent.
There will not be ongoing costs because, once an agreement is signed,
there will be no need to modify the written agreement or take
additional action after it is executed.
    One commenter expressed concern some of the compliance costs
incurred by lending agents could be passed along to lenders and
beneficial owners, including funds and their shareholders.\976\ The
Commission acknowledges that it is possible that some compliance costs
may be passed along to beneficial owners, for instance, in the form of
higher fees charged for lending services or lower pro-rated lending
revenue.\977\ Compliance costs may also be passed along by broker-
dealers to end borrowers in the form of higher borrowing costs.\978\
Ultimately, the extent to which either beneficial owners or end
borrowers may bear some of the costs of complying with final Rule 10c-
1a will depend on the extent to which covered persons, including
lending agents and broker-dealers, pass on their compliance costs to
their customers and/or split these costs across different types of
customers. However, this effect is expected to be mitigated by the fact
that the projected compliance costs of the final rule as a fraction of
an estimate of the total lending fee revenue generated is likely small
enough to be within the bounds of a positive profit margin.\979\
---------------------------------------------------------------------------

    \976\ See, e.g., ICI Letter 1, at 10 (stating that ``fund
shareholders will absorb part of the substantial costs of Rule 10c-1
. . . these costs ultimately will come directly out of the pockets
of beneficial owners, including funds and their shareholders, to the
detriment of their long-term interests''). See also State Street
Letter, at 5 (stating that the rule ``approach has the practical
effect of imposing all systems-related cost for the new reporting
mandate solely on agent lenders and their clients (i.e.,
institutional investors, such as pension plans and mutual funds)'').
    \977\ See supra Part IX.B.4 for a description of the market for
lending services.
    \978\ This possibility is discussed further in infra Part
IX.C.4.
    \979\ See estimates in infra note 993.
---------------------------------------------------------------------------

    In addition to the above enumerated costs, the estimated 361
reporting entities (i.e., providing covered persons and reporting
agents), as well as subscribers to Rule 10c-1a data, may be required to
pay fees to an RNSA.\980\ The fees that these entities may be required
to pay will depend on a number of factors, including the number of
reporting entities and subscribers, along with how an RNSA will choose
to split any such fees between these different types of entities.
---------------------------------------------------------------------------

    \980\ One commenter stated that the ``the estimated costs are
understood to be incomplete'' in the Proposing Release because ``the
RNSA (i.e., FINRA) is also entitled to recover its costs from market
participants who report securities lending transactions to the
RNSA.'' See CSFME Letter 1, at 4. However, this possibility was
acknowledged by the Commission in the Proposing Release. See
Proposing Release, 86 FR 69843, stating that ``the estimated 409
reporting entities would also be required to pay reporting fees to
the RNSA.''
---------------------------------------------------------------------------

    Some commenters expressed concern that an RNSA would have monopoly
pricing power over the resulting data.\981\ However, any fee that an
RNSA would charge must be consistent with the Exchange Act and rules
thereunder, and are subject to Commission review, notice and public
comment.\982\ Consequently, the Commission believes that an RNSA is
unlikely to exert monopoly pricing in terms of fees for the data, and
that their fees will be reasonably related to costs. As shown in Table
2, the Commission expects an RNSA to incur ongoing costs of $2.76
million per year. If the 361 providing covered persons and reporting
agents were the only entities to subscribe to the data, dividing the
cost incurred by an RNSA by the 361 entities results in an annual fee
per reporting entity of approximately $7,600, or approximately $633 per
month. This cost would decrease to the extent that entities other than
covered persons choose to subscribe to Rule 10c-1a data, which would
allow an RNSA to spread its costs across more entities. At the same
time, this estimate represents a lower bound on the estimated fees
levied by an RNSA as an RNSA likely will need to recoup some of the
initial fixed costs associated with administering the data.\983\
---------------------------------------------------------------------------

    \981\ See, e.g., Bloomberg L.P. Letter, at 4; HMA Letter, at 11.
    \982\ RNSA rule filings are subject to notice, comment and
Commission review pursuant to section 19(b) of the Exchange Act and
Rule 19b-4. An RNSA must demonstrate that proposed fees satisfy the
Exchange Act requirements under section 15A(b), 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.
    \983\ 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
estimates based on the information currently available to the
Commission.
---------------------------------------------------------------------------

    One commenter stated that, by considering proposed Rule 10c-1 ``in
isolation'' from other recent Commission rules, ``the Commission is not
providing a comprehensive picture of the compliance and other direct
costs,'' and that ``these costs will aggregate and will burden market
participants with higher costs when considered jointly.'' \984\ But,
consistent with its long-standing practice, the Commission's economic
analysis in each adopting release considers the incremental benefits
and costs for the specific rule--that is, the benefits and costs
stemming from that rule compared to the baseline. In doing so, the
Commission acknowledges that in some cases resource limitations can
lead to higher compliance costs when the compliance period of the rule
being considered overlaps with the compliance period of other rules. In
determining compliance periods, the Commission considers the benefits
of the rules as well as the costs of delayed compliance periods and
potential overlapping compliance periods.
---------------------------------------------------------------------------

    \984\ See Overdahl Letter, at 15. Another commenter stated that
because ``[t]he resources of market participants are not infinite,''
that commenter ``believe[s that] unnecessary and aggressively timed
regulatory changes will impact costs, complexity, competition and
the ability of smaller market participants to enter into or remain
in the markets.'' ICI Letter 2, at 12. See also AIMA Letter 3, at 4
(recommending that rule adoptions ``should be appropriately
sequenced and their compliance periods appropriately aligned'' so
that ``market participants'' will not face ``unnecessary costs'');
Citadel Letter, at 10 (noting the Commission ``has not assessed the
cumulative impact of its myriad of recent position and activity
disclosure-related proposals on market participants'').
---------------------------------------------------------------------------

    We considered here whether recently adopted rules identified by
commenters that affect market participants subject to the final rule
\985\ have overlapping implementation timeframes with the final rule.
We found, however, that the compliance dates for these rules do not

significantly overlap with the expected industry compliance dates of
final Rule 10c-1a,\986\ and therefore we do not expect significant
effects on compliance costs arising from overlapping compliance
periods. We acknowledge that to the extent such overlap occurs, there
could be costs, but we do not expect these to be significant
costs.\987\
---------------------------------------------------------------------------

    \985\ Specifically, we considered the Amendments to Form N-PX
Adoption, the Settlement Cycle Adoption, the May 2023 SEC Form PF
Amending Release, and the Beneficial Ownership Amending Release. We
expect that few if any entities subject to the May 2023 SEC Form PF
Amending Release will face direct reporting obligations, and thus
incur compliance costs, under final Rule 10c-1a. Form PF is required
for private fund advisers. See supra Part IX.B. We do not expect
private fund advisers to face direct implementation costs under
final Rule 10c-1a, although we acknowledge that their lending
programs and/or broker-dealers may pass along compliance costs to
them. Entities subject to the Amendments to Form N-PX Adoption, the
Settlement Cycle Adoption, or the Beneficial Ownership Amending
Release could have reporting obligations under final Rule 10c-1a;
however we anticipate no or little overlap between the
implementation periods for those rules and this one.
    \986\ See supra Part VIII on the compliance date for this final
rule, and supra notes 726 through 728 for compliance dates of other
recent rules discussed here.
    \987\ See also infra Part IX.D.2 (discussing possible effects of
overlap on competition).
---------------------------------------------------------------------------

    The Commission does not believe that loan participants will incur
costs associated with obtaining and renewing LEIs, because only those
loan participants that have non-lapsed LEIs will be required to report
them. One commenter stated that borrowers should be required to obtain
an LEI if they do not already have one, because the lack of an LEI
would make it more challenging to identify entities.\988\ We agree that
wider LEI adoption and reporting would likely lead to more consistent
and precise identification of legal entities, which could enhance
analysis of the reported information.\989\ We also recognize that any
mandatory LEI reporting requirement for LEI-eligible loan participants
would also generate additional costs for loan participants that do not
currently have them, although such costs would likely be modest.\990\
---------------------------------------------------------------------------

    \988\ See IHS Markit Letter, at 9.
    \989\ We note in this regard the recently enacted Financial Data
Transparency Act of 2022, which directs the Commission and other
financial regulators to establish data standards for collections of
information. See James M. Inhofe National Defense Authorization Act
for Fiscal Year 2023, 117-263, tit. LVIII, 136 Stat. 2395, 3421-39
(2022).
    \990\ A U.S. entity can currently obtain and renew an LEI from
one of eleven LEI operating units. See Global Legal Entity
Identifier Foundation, Get an LEI: Find LEI Issuing Organizations,
available at https://www.gleif.org/en/about-lei/get-an-lei-find-lei-issuing-organizations, last visited Aug. 29, 2023. One LEI operating
unit currently discloses an initial fee of $60 and a renewal fee of
$40. See Bloomberg LEI, Frequently Asked Questions, ``Fees, Payments
& Taxes,'' Bloomberg LEI v. 1.4.71, available at https://lei.bloomberg.com/docs/faq#what-fees-are-involved, last visited Aug.
29, 2023.
---------------------------------------------------------------------------

4. Other Costs
Increase in Borrowing Costs
    The Commission acknowledged in the Proposing Release that increased
compliance costs could lead to some consolidation in the securities
lending market and impose some costs on market participants, including
potentially higher prices associated with reduced competitive
pressures.\991\ However, the Commission believes that this effect by
itself is unlikely to lead to higher overall borrowing costs due to the
fact that the value of securities available to be loaned generally far
exceeds the total value on loan.\992\ For general collateral
securities, which make up the majority of loans, a modest decline in
shares available to lend would not eliminate the slack in the market
and thus would not likely increase fees. For securities ``on special''
with less available supply relative to demand, it is possible that a
decline in shares available to lend could result in higher borrowing
costs for some securities. However, the Commission believes that, to
the extent that it occurs, these fee increases would likely be small
and have minimal downstream economic effects. This minimal effect is
expected for two reasons. First, the projected compliance cost of the
final rule is a relatively small fraction of the likely total lending
fee revenue generated, which makes it likely that most broker-dealers
and lending programs would continue to earn a positive profit margin
after accounting for these costs.\993\ Second, academic research
suggests that very small increases in lending fees are unlikely to
result in significant downstream economic effects.\994\ As a result,
the Commission expects that any increase in borrowing costs that may
result from consolidation among broker-dealers or lending programs
would be minimal, and therefore likely offset by a simultaneous
decrease in borrowing costs due to improved transparency and efficiency
in the securities lending market which, as described above, are
expected to concentrate among stocks that are on special.\995\
---------------------------------------------------------------------------

    \991\ See Proposing Release, 86 FR 69843.
    \992\ See Panel A of Table 1 above in Part IX.B.3, showing that
for most stocks the lending supply significantly outstrips demand
with median utilization rates of approximately 12%.
    \993\ Averaging the fees across all three surveyed days from
Table 8 of the OFR Pilot Survey and then multiplying those fees by
the average dollar value of securities lent across all three days
surveyed produces an estimated $2.7 billion in lending fees
collected in 2015. These fees only account for the Wholesale market,
so multiplying this estimate by two to, conservatively, account for
fees collected in the Customer market yields an estimate of $5.4
billion in lending fees collected annually. See supra, in Part
IX.C.3, the total direct compliance costs associated with the Rule
are approximately $236 million per year. Under a conservative
assumption that 100% of the direct compliance costs will be
transferred to borrowers in the form of higher fees spread equally
across all loans, this would increase lending fees by $236 million/
$5.4 billion ~ 4.7%. For perspective, for U.S. equities the OFR
Pilot Survey reports the average lending fee across the three days
surveyed was approximately 33 basis points (bps). A 4.7% increase in
this lending fee would be an increase of 1.44 basis points. For U.S.
Treasury/Agency securities, the average lending fee reported in the
OFR Pilot Survey was approximately 16 bps. A 4.7% increase in this
lending fee would be 0.70 bps. These numbers are estimates and could
be somewhat higher or lower depending on various assumptions. If
lenders absorb some of the direct compliance costs, the increase in
fees will be smaller; if the total size of shares on loan increases,
the increase would be smaller still. If the increase becomes
concentrated among just a subset of stocks, such as general
collateral stocks, the increase in fees would be larger. Regardless,
these calculations illustrate that the economic magnitude of an
increase in lending fees is likely to be small.
    \994\ Research shows that an exogenous shock to the lending
supply affects loan prices, but that the downstream effects of these
fee changes are modest or non-identifiable. See Dixon, et al.
(2021), supra note 746. See also Steven N. Kaplan, Tobias J.
Moskowitz, & Berk A. Sensoy, The Effects of Stock Lending on
Security Prices: An Experiment, 68 J. Fin. 1891 (2013). The loan fee
effects reported in these studies tend to be multiples of the
potential loan fee effects discussed in this section. Consequently,
the resulting economic impact of any such fee increase would also
likely be correspondingly smaller.
    \995\ See supra Part IX.C.1 discussing the expected effects of
the final rule on lowering borrowing costs for investors, as well as
for a discussion on why the Commission expects the economic effects
of the final rule to be concentrated among hard-to-borrow stocks.
---------------------------------------------------------------------------

Lower Revenues From Securities Lending
    Commenters expressed concern that, to the extent that lenders are
not able to pass on compliance costs to borrowers through increased
fees, the rule could lead to decreased profit from securities lending
for some market participants.\996\ However, the Commission estimates
that, as the projected compliance cost of the final rule is a
relatively small fraction of the likely total lending fee revenue
generated, most market participants will continue to be able to earn a
positive profit margin from securities lending.\997\
---------------------------------------------------------------------------

    \996\ See, e.g., State Street Letter, at 5 (stating that ``there
is, in our view, no practical way for agent lenders to try to
recuperate even a portion of these new costs from borrowers through
changes to existing market pricing conventions. In effect therefore,
the costs associated with the establishment and maintenance of the
reporting system for securities lending transactions envisioned by
the Commission will substantially narrow, if not eliminate, existing
revenue streams for agent lenders and their clients in what is
already a low margin business.''); See also RMA Letter, at 8
(stating that ``for structural reasons, Lending Agents are also
unlikely to be able to fully pass on the costs of implementation to
borrowers,''); CSFME Letter 1, at 4-5 (stating that ``most
beneficial owners participate in securities lending to generate
marginal income. If lenders are forced to bear the final cost of
compliance with Rule 10c-1, they may find their margins so thin that
they can no longer justify their lending activities, pulling their
liquidity from the market.'').
    \997\ See supra note 993 for a description of this estimate.
---------------------------------------------------------------------------

    In addition, as acknowledged in the Proposing Release, a reduction
in information asymmetry may result in reduced revenue for some broker-
dealers and lending programs in at least two ways.\998\ First, a
reduction in securities lending revenues could occur

because end borrowers and beneficial owners will have more information
about the state of the lending market. As a result, 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 some broker-dealers and lending
programs. It is possible that 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.\999\ The loss of revenue will in part
be a transfer to the end borrowers and beneficial owners that switch to
better-performing lending programs and better-performing broker-
dealers, as well as the better-performing lending programs and broker-
dealers that attract additional customers. The Commission is not able
to quantify the potential loss in revenue that could occur for
underperforming broker-dealers and lending programs because the
Commission is not able to quantify the extent to which these broker-
dealers and lending programs' current revenues are driven by asymmetric
information.\1000\
---------------------------------------------------------------------------

    \998\ See Proposing Release, 86 FR 69837.
    \999\ See infra Part IX.D.2 for a discussion of the implications
of the final rule for competition between broker-dealers.
    \1000\ As discussed in supra Part IX.B.3, the observed
dispersion in loan fees may give a rough upper bound on the extent
to which loan fees are driven by asymmetric information, which may
provide some insights into a potential loss in revenue due to the
reduction of asymmetric information. For example, the results from
Table 1 showed that the most that some borrowers pay above the
median market loan price for loans of the same security is around
400%. However, this would be an extreme upper bound, as the vast
majority of borrowers, to the extent they overpay, would overpay
less than 400% above median market prices, the dispersion loan fees
is likely driven by factors other than asymmetric information (see
supra note 789), and it is not necessarily the case that the final
rule will fully eliminate the impact of asymmetric information on
loan fees.
---------------------------------------------------------------------------

    Second, lending programs may also experience reduced profitability
through the lower rates offered by broker-dealers to their
customers.\1001\ If a given lending program has become skilled in
cultivating relationships with broker-dealers currently willing 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.\1002\ While the Commission expects that beneficial
owners will benefit from the final Rule as a result of the reduction in
information asymmetry,\1003\ in some cases lower lending revenues and
potentially increased costs may reduce the revenue earned by some
beneficial owners.\1004\ As acknowledged in the Proposing Release, this
would represent a partial transfer from beneficial owners to the end
borrowers who may receive better terms on average as a result of
decreased information asymmetries.\1005\ Ultimately, the Commission is
not able to quantify the net impact of the rule on beneficial owners'
lending revenues, as the Commission is not able to quantify, among
other items, the extent to which end borrowers may receive better terms
on average as a result of decreased information asymmetries.\1006\
---------------------------------------------------------------------------

    \1001\ See, e.g., ICI Letter 1, at 10 (stating that ``fund
shareholders will absorb part of the substantial costs of Rule 10c-
1. . . these costs ultimately will come directly out of the pockets
of beneficial owners, including funds and their shareholders, to the
detriment of their long-term interests.''). Furthermore, while the
Commission expects the net impact of the final rule on borrowing
costs to be negative, see supra Part IX.C.4 for a discussion of the
possibility that compliance costs may increase borrowing costs.
    \1002\ See id.
    \1003\ See supra Part IX.C.1 for a discussion of how a decrease
in information asymmetries will benefit end borrowers and beneficial
owners.
    \1004\ See supra note 976 and corresponding text for a
discussion of how compliance costs may affect beneficial owners to
the extent that they are passed on to them by lending programs.
    \1005\ See Proposing Release, 86 FR 69837. See supra Part IX.C.1
for a discussion of the expected effects of the final rule on
reducing information asymmetries between end borrowers and broker-
dealers.
    \1006\ See supra note 1000 for further discussion of a potential
rough estimate of the extent to which securities lending prices are
driven by asymmetric information.
---------------------------------------------------------------------------

Lower Revenues for Securities Lending Data Vendors
    Commenters expressed concern that the increase in securities
lending information provided by the rule will also result in costs in
the form of lost revenue for commercial securities lending data
vendors, which could lead some data vendors to pare back their product
offerings.\1007\ The Commission acknowledges that this may occur for a
number of reasons. First, commercial data vendors may pare back their
offerings if demand for their products decreases because their
customers switch to using Rule 10c-1a data. Second, some market
participants who currently contribute data under a give-to-get model
may find it less worthwhile to do so when the rule provides an
alternative source of data. This effect would diminish the quality of
the give-to-get data currently provided by commercial data vendors and
may lead to fewer market participants being willing to purchase the
data. Both of these effects could result in lower revenues. To the
extent that data vendors do pare back their product offerings and/or if
the quality of their data products are diminished, then this could
reduce transparency in the securities lending market in cases where
these datasets contain information that is not collected and
disseminated by the final rule, such as utilization rates and shares
available to lend.
---------------------------------------------------------------------------

    \1007\ See, e.g., Overdahl Letter, at 4.
---------------------------------------------------------------------------

    The Commission believes that a potential mitigating factor that may
reduce or even offset the severity of this loss in revenue will be that
commercial data vendors may offset some of the impact of lowered demand
for their data by enhancing their related data analytics businesses
using Rule 10c-1a data.\1008\ Furthermore, to the extent that customers
value the availability of information about securities available to
lend and utilization rates, the fact that commercial data vendors will
continue to have superior access to this information \1009\ will likely
mitigate or even offset a decrease in demand, as investors would
continue to purchase commercial datasets in order to gain access to
this information. The Commission is unable to quantify the potential
impact of the final rule on securities lending data vendors' revenues
because this would require knowledge of the baseline level of such
revenues, which the Commission does not have access to and about which
commenters did not provide information.
---------------------------------------------------------------------------

    \1008\ See supra Part IX.C.1 for further discussion of the
expected effects of the final rule in creating new business
opportunities for providers of securities lending data analytics
services.
    \1009\ Note, however, that the information about shares
available to lend collected by commercial data vendors is likely
subject to the issues discussed in supra Part IX.B.2, including
self-selection biases and a lack of comprehensiveness.
---------------------------------------------------------------------------

Miscellaneous Costs
    Some commenters expressed concern that the rule requires the
reporting of sensitive information and thus could present a risk to
individuals in the case of a data breach.\1010\ The Commission
recognizes that the final rule collects sensitive information and that
the costs of a data breach could can be substantial.\1011\ These costs
include, but

are not limited to, the following: (1) trading losses that could occur
due to the revelation of private trading strategies or economic
positions which may enable identifying and trading opportunistically
around such strategies, such as facilitating a short squeeze; (2)
business disruptions that could occur if the data breach results in
temporary system down time; (3) data breach response costs as market
participants must devote resources to determining how to respond to the
data breach; and (4) reputational harm to an RNSA. While the potential
costs of a breach, to the extent that one occurs could be severe,
RNSAs, as well as ATSs and SROs, are currently subject to existing
regulations that aim to improve the resiliency and oversight of
securities market technology infrastructure, such as Regulation Systems
Compliance and Integrity (``Regulation SCI'').\1012\ Adherence to
regulations that seek to ensure the resiliency and integrity of
technology systems can reduce the probability of a data breach and
mitigate the costs associated with a breach, should it occur.
---------------------------------------------------------------------------

    \1010\ See, e.g., IIB Letter, at 11; Charles Schwab Letter, at
2.
    \1011\ See, e.g., Proposed Rule, Cybersecurity Risk Management
Rule for Broker-Dealers, Clearing Agencies, Major Security-Based
Swap Participants, the Municipal Securities Rulemaking Board,
National Securities Associations, National Securities Exchanges,
Security-Based Swap Data Repositories, Security-Based Swap Dealers,
and Transfer Agents (``Proposed Cybersecurity Rule''), 88 FR 20212
(Apr. 5, 2023) (``In 2020, the average loss in the financial
services industry was $18.3 million, per company per incident. The
average cost of a financial services data breach was $5.85
million.'') (citing Jennifer Rose Hale, The Soaring Risks of
Financial Services Cybercrime: By the Numbers, Diligent (Apr. 9,
2021).
    \1012\ See 79 FR 72252. See also SEC, Spotlight on Regulation
SCI, available at https://www.sec.gov/spotlight/regulation-sci.
---------------------------------------------------------------------------

    Some commenters expressed concern that the rule could inhibit
innovation in securities lending, such as the potential adoption of
blockchain technology, by diverting resources away from innovation and
towards compliance.\1013\ While such diversion is possible, we expect
that market participants will continue to pursue innovation that
creates a competitive advantage or for which there is a market demand.
One commenter suggested that innovations such as blockchain technology
could obviate the need for transaction reporting systems.\1014\ The
Commission acknowledges this possibility; however, such innovations
would need to overcome the market failures described earlier in this
analysis.\1015\
---------------------------------------------------------------------------

    \1013\ See, e.g., RMA Letter, at 8; ISLA Letter, at 3.
    \1014\ See, e.g., RMA Letter, at 8 (stating that ``financial
technologies like blockchain that could ultimately obviate the need
for special transaction reporting systems and make transactions
viewable on their native ledgers.'').
    \1015\ See supra Part IX.A.2.
---------------------------------------------------------------------------

    One commenter expressed concern that, ``with lenders dependent upon
their agents for reporting to the RNSA, the rule could make it more
difficult for lenders to switch agents.'' \1016\ To the extent that
there would be any bespoke reporting services offered by lending
agents, it is possible that the final rule could increase a lender's
dependence on their lending agent, and thus marginally increase their
costs of switching agents. However, the Commission expects this
increased cost, to the extent it occurs, to be minimal. The Commission
expects that many covered persons, including lending agents, will rely
on reporting agents to provide the Rule 10c-1a information directly to
an RNSA. This would generally result in an unbundling of lending and
reporting services, such that an increased dependence on a lending
agent for their reporting services would be unlikely. To the extent
that a lender requests or requires bespoke reporting services from
their lending agent, that lender could examine such a service among the
package of lending services--including reporting services--that a
prospective agent offers, and decide accordingly while taking into
account the potentially higher costs of switching to a new lending
agent.
---------------------------------------------------------------------------

    \1016\ See CSFME Letter 1, at 5.
---------------------------------------------------------------------------

    To the extent that there are entities that would like to serve as
reporting agents but are not currently registered as broker-
dealers,\1017\ the cost of registering as a broker-dealer may be
another cost associated with the final rule.\1018\ However, the final
rule does not require any entity to serve as a reporting agent, and as
such this cost would only accrue to those entities that make the
business decision to become a reporting agent. It is likely that an
entity that is not currently registered as a broker or dealer will only
make the business decision to become a reporting agent if they believe
that the cost of registering as a broker-dealer is more than offset by
the revenue that they will earn as a reporting agent.
---------------------------------------------------------------------------

    \1017\ One commenter that is not a broker-dealer requested that
the Commission allow non-broker-dealers to become reporting agents
because they already have connections to firms for the reporting of
securities loans. See S3 Partners Letter, at 12.
    \1018\ See final Rule 10c-1a(ii)(A), requiring a reporting agent
to be a broker or dealer.
---------------------------------------------------------------------------

5. Reduced Benefits From Alternative Arrangements
Economically Similar Arrangements
    The Commission recognizes a risk that the comprehensiveness of Rule
10c-1a data, and hence the benefits that accrue due to the
comprehensive nature of the data, could be diminished to the extent
that market participants choose to use arrangements that are
economically similar to securities lending agreements. For example,
market participants may substitute repo for securities lending
agreements.\1019\ This substitution may occur because a fixed term cash
collateralized securities loan is economically very similar to a
repo.\1020\ 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.
---------------------------------------------------------------------------

    \1019\ See supra note 776 for a definition and discussion of
repo contracts.
    \1020\ See supra note 777 for evidence of this from the OFR
Pilot Survey.
---------------------------------------------------------------------------

    The Commission believes that this risk varies across asset classes.
In equities, the Commission 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.\1021\ 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 final Rule 10c-1a leads to improvements in the
functioning of the securities lending market, then the risk of
migration may diminish to the extent that improved efficiency in the
securities lending market diminishes the incentive to transfer activity
to potentially less developed repo markets.
---------------------------------------------------------------------------

    \1021\ The Commission 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 may decline. The
less comprehensive data could reduce the extent to which the Rule
reduces any biases or gaps in the data. For instance, market
participants who use the data to price securities loans will have a
less accurate and potentially biased view of the market, which will
limit the benefits from increased transparency.\1022\ Additionally,
regulators using the data to determine lending market conditions at the
time of, for example, a Reg SHO

violation will 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 will
incur lower compliance costs from the final rule, including one-time
implementation costs if they replace all securities lending with repo.
Further, a significant substitution will reduce the ongoing costs of an
RNSA because an RNSA will not have to collect and process as many
transaction reports.
---------------------------------------------------------------------------

    \1022\ See supra Part IX.C.1 for a discussion of expected
benefits from the final rule related to increasing the transparency
of the securities lending market. One commenter states that the
benefits of the rule are likely to be limited for fixed-income (see
RMA Letter, at 16; see also supra note 950), which, as discussed in
this section, is also the asset class most likely to see
circumvention through the use of repo markets. As discussed in supra
Part IX.C.1, the Commission expects the fixed-income market to
benefit from the final rule. However, to the extent that this asset
class sees lower overall benefits from final Rule 10c-1a, this would
also serve to limit the amount to which the benefits of final Rule
10c-1a would be lowered as a result of circumvention.
---------------------------------------------------------------------------

Cross-Border Application
    One commenter expressed concern that ``an overly broad or ambiguous
reach of Proposed Rule 10c-1 could reduce liquidity and place U.S.
intermediaries . . . at a competitive disadvantage,'' because ``market
participants--particularly those outside of the United States--might
determine to limit or cease trading or interacting with U.S.
intermediaries (or leave the U.S. markets all together) in order to
prevent public disclosure of their transactions.'' \1023\ The
Commission acknowledges some market participants could be incentivized
to restructure their activities to avoid reporting. Specifically, in an
effort to avoid having their lending activities fall within the reach
of section 10(c), participants could relocate overseas any of their
current U.S.-based conduct that constitutes effecting, accepting, or
facilitating a lending transaction. However, the Commission believes
that this risk is low. As pointed out by the same commenter, there are
disincentives for market participants to move lending activity outside
of the U.S. market, including ``the depth and liquidity of the U.S.
market,'' as well as few incentives for ``U.S. asset managers to prefer
non-U.S. lenders that are themselves subject to similar reporting
requirements in their home jurisdictions.'' \1024\
---------------------------------------------------------------------------

    \1023\ See supra note 660, citing HSBC Letter 1.
    \1024\ See supra note 660, citing HSBC Letter 2.
---------------------------------------------------------------------------

C. Impact on Efficiency, Competition, and Capital Formation

1. Efficiency
    In the securities lending market, the availability of Rule 10c-1a
data for market participants will lead to more efficient prices for
securities loans.\1025\ The reduction in asymmetric information in the
market for lending programs and broker-dealers may also make those
markets more efficient.\1026\ Additionally, the Commission believes
that final Rule 10c-1a may have secondary effects that will increase
price efficiency in the underlying securities markets and option
markets.\1027\ Also, the increased ease with which banks and other
financial institutions will be able to manage collateral and balance
sheets as a result of the final rule \1028\ could lead to increased
efficiency in their functioning and in those markets in which they play
a role.
---------------------------------------------------------------------------

    \1025\ See supra Part IX.C.1 for a discussion of how an increase
in transparency in the securities lending market will improve market
efficiency. More efficient prices do not imply that all securities
loans will have the same price. There are many factors that affect
the cost of a securities loan and can lead to a range of prices for
securities loans. See supra note 780 and corresponding text.
    \1026\ See supra Part IX.C.1 for a discussion of the final
rule's expected benefits from reducing asymmetric information in the
securities lending market.
    \1027\ See supra Part IX.C.1 for a discussion of the final
rule's expected benefits for markets related to the securities
lending market, and for a discussion of the final rule's benefits
for the underlying securities market from reducing short selling
costs.
    \1028\ See supra Part IX.C.1 for a discussion of the final
rule's expected benefits from improved financial management for
financial institutions.
---------------------------------------------------------------------------

2. Competition
    The Commission believes that the net impact of final Rule 10c-1a on
competition is difficult to predict, in that some aspects will likely
increase competition and some aspects will likely reduce competition.
Competition will likely be impacted in the markets for broker-dealer
services, lending programs, and securities lending data vendors.
    The Commission believes that one effect from the final rule's
reduction of information asymmetry between end borrowers and broker-
dealers, and between beneficial owners and lending programs, will be to
increase competition between broker-dealers and between lending
programs.\1029\ A reduction in information asymmetry will permit better
monitoring of the performance of these entities by their respective
customers, and will likely force these entities to do more to match the
performance of their competitors, to the extent that they do not
already do so. One commenter stated that the effect of the final rule
on competition between broker-dealers may be attenuated by the presence
of high switching costs.\1030\ The Commission does not believe that
switching costs for most market participants are high enough such that
this is a likely outcome.\1031\
---------------------------------------------------------------------------

    \1029\ See supra Part IX.C.1 for a discussion of the expected
effects of the rule in terms of reducing information asymmetries
between end borrowers and broker-dealers, and between beneficial
owners and lending programs. See also supra note 855 and
corresponding text. The requirement to report information once a
loan modification occurs after that loan qualifies for reporting
will further support the benefits of the final rule, including
reduced information asymmetries and enhanced price competition, by
helping to ensure a level playing field during the earlier phases of
implementation. This provision will prevent lenders that have a
higher number of long-term loans that did not initially qualify for
final Rule 10c-1a reporting from gaining a competitive advantage by
being able to see the loans of other market participants without
disclosing the terms of their own loans. See supra Part IX.C.1.
    \1030\ See Citadel Letter, at 8.
    \1031\ See supra Part IX.C.1 for a discussion of why switching
costs may be limited.
---------------------------------------------------------------------------

    Furthermore, 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, thus enhancing competition among securities lending
platforms.
    Commenters expressed concern that competition in the securities
lending market could decrease if lenders are driven out of the market
because of compliance costs.\1032\ The Commission does not believe that
compliance costs are such that this would be a likely scenario because
the projected compliance costs associated with final Rule 10c-1a are
likely to be a relatively small fraction of total lending fee
revenues.\1033\ At the same time, the reduction in asymmetric
information in the securities lending market that will result from the
final rule may diminish broker-dealer and lending program profits to
the extent that it reduces their current information advantage over
their customers.\1034\ 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.
---------------------------------------------------------------------------

    \1032\ See, e.g., RMA Letter, at 5.
    \1033\ See supra note 993 and corresponding text for an estimate
of compliance costs as a fraction of securities lending revenues.
    \1034\ See supra Part IX.C.4 for further discussion. This was
also acknowledged by the Commission in the Proposing Release; See
Proposing Release, 86 FR 69837, stating that a ``reduction in
information asymmetry could result in reduced revenue for some
broker-dealers and lending programs.''
---------------------------------------------------------------------------

    The Commission also recognizes that, given the significant fixed
costs of implementing the systems required by the final rule for
lending programs to report to an RNSA, some smaller \1035\

lending programs and broker-dealers may consolidate or exit the lending
market. The Commission 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 believes that the market for lending
programs and broker-dealer security borrowing services is already
likely dominated by larger lending programs and broker-dealers that the
Commission does not believe will cease operating as a result of these
fixed costs.\1036\ The Commission recognizes that smaller lending
agents may have unique business models that are not currently offered
by competitors, but the Commission believes a competitor could create
similar business models if demand were adequate.\1037\
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    \1035\ 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 XI.
Rather, smaller is meant to convey the size of these entities in
relation to larger market participants engaged in securities lending
transactions.
    \1036\ 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 to the broker-dealer space to compete
with established broker dealers.
    \1037\ The Commission believes that this effect will be enhanced
under the final rule as compared to the proposed rule. While
proposed Rule 10c-1 only allowed a ``bank, clearing agency, broker,
or dealer'' to act as a lending agent or ``intermediary'' (see
proposed Rule 10c-1(a)(1)(i)(A)), the final rule applies the term
``intermediary'' more broadly to ``any person that effects a covered
securities loan on behalf of the lender'' (see final Rule 10c-
1a(j)(1)(i)). Permitting other types of persons who can act as
lending agents in addition to banks, clearing agencies, brokers, or
dealers will support the ability of new lending agents to enter the
market, promoting competition in the market for lending services.
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    The Commission believes that the dissemination of Rule 10c-1a data
collected under the final rule will change the competitive landscape
for securities lending data 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.\1038\ 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 an RNSA as a result of the final rule will produce an
alternative to existing data vendors' commercial securities lending
data products. Existing data vendors may retain a competitive
advantage, however, as they will likely continue to have access to
information on utilization rates and shares available for lending,
which are not provided by the final rule.
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    \1038\ See supra note 853 and corresponding text. However, the
Commission acknowledges that the final rule may result in some loss
of revenue or product quality for some commercial data vendors. See
supra Part IX.C.4.
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    Some commenters expressed concern that the rule would cause lending
activity to migrate overseas to avoid the reporting obligation under
final Rule 10c-1a, which would make the U.S. securities lending market
less competitive.\1039\ While it is possible that some market
participants could move their activity to other jurisdictions in
attempt to circumvent the reporting obligation of final Rule 10c-1a,
the Commission believes that it is unlikely that this would occur on a
large scale. This is because the final Rule imposes a reporting
obligation on any qualifying loan regardless of whether the person is
located abroad or is a non-U.S. person when the transaction
occurs.\1040\
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    \1039\ See, e.g., HSBC Letter 1, at 5.
    \1040\ See supra Part VII.M for further discussion of the cross-
border applicability of final Rule 10c-1a.
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    In addition, as stated above, some commenters requested the
Commission consider interactions between the economic effects of the
proposed rule and other recent Commission rules, as well as practical
realities such as implementation timelines. One commenter stated that
because ``[t]he resources of market participants are not infinite,''
that commenter ``believe[s that] unnecessary and aggressively timed
regulatory changes will impact costs, complexity, competition and the
ability of smaller market participants to enter into or remain in the
markets.'' \1041\ As discussed above, the Commission acknowledges that
simultaneous compliance periods may in some cases increase costs. This
may be particularly true for smaller entities with more limited
compliance resources. This effect can negatively impact competition
because these entities may be less able to absorb or pass on these
additional costs, making it more difficult for them to remain in
business or compete. However, we determined that the rules highlighted
by commenters either did not impose implementation costs on the same
entities as this final rule and/or had compliance dates that did not
significantly overlap with the expected industry compliance dates of
this final rule, and therefore we do not expect these effects on
competition to be significant.\1042\ We acknowledge that to the extent
such overlap (in scope or timing) occurs, there could be costs which
could affect competition, but we do not expect these costs to be
significant.
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    \1041\ See ICI Letter 2, at 12. See also supra Part IX.B.6 for a
description of related comments.
    \1042\ See also supra Part IX.C.3.
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3. Capital Formation
    The Commission believes that the impact of final Rule 10c-1a will
have mostly positive effects on capital formation. In particular,
improved price discovery in securities markets \1043\ and improved
balance sheet management by financial institutions \1044\ could
facilitate improvements in the provision of capital. In addition, to
the extent that the final rule reduces the costs of short selling it
may facilitate more effective discovery of negative information that in
turn could lead to more efficient allocation of capital.\1045\ However,
to the extent that the Rule increases the cost of short selling for
some stocks in some situations, it could also lead to less efficient
allocation of capital in these instances.\1046\
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    \1043\ See supra Part IX.C.1 for further discussion of the
expected benefits of the final rule from increased transparency in
the securities lending market, including improvements in price
discovery. See also supra Part IX.D.1.
    \1044\ See supra Part IX.C.1 for further discussion of the
expected benefits of the final rule related to improved financial
management for financial institutions.
    \1045\ See supra Part IX.C.1.
    \1046\ See supra Part IX.C.1 discussing instances where the cost
of short selling could increase, consistent with the views of some
commenters.
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D. Alternatives

1. Report Loan Sizes Without a Delay
    The Commission considered an alternative requiring that an RNSA
disseminate loan sizes at the same time as it disseminates all other
loan information (i.e., without a 20-business-day delay). This
alternative would increase the timeliness of securities lending
information available to the public, which could improve market quality
by reducing information asymmetries as well as providing additional
transparency to the securities lending market. However, it could also
harm market quality by providing novel information about short
positions with a greater timeliness than the short selling information
that is currently available.\1047\
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    \1047\ See supra Part IX.B.6 for further discussion of the
timeliness of current sources of short selling information.
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    To the extent that the aggregate cost-to-borrow statistics that an
RNSA publicly disseminates are volume-weighted, these statistics will
provide end borrowers with access to

information about loan prices that incorporates information about loan
sizes even prior to the public dissemination of loan sizes.\1048\
However, disseminating securities loan sizes as well as modifications
of securities loan sizes on the next business day after a loan is
effected or modified would allow market participants to produce their
own custom cost-to-borrow metrics that are most tailored to their
business needs. This would allow market participants to focus on the
aspects of the market that are most relevant to their business needs.
This effect would increase the benefits of final Rule 10c-1a from
increased transparency in the securities lending market.\1049\
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    \1048\ If an RNSA chooses to publish cost to borrow statistics
that are very granular and, for example, provide separate statistics
for Customer and Wholesale loans and/or according to other loan
characteristics, then end borrowers would be able to benchmark their
transactions to these statistics with increased accuracy. To the
extent that an RNSA chooses to publish less granular statistics,
then the end borrower could still benchmark relative to the cost to
borrow statistics provided by an RNSA, but the benchmark would be
noisier.
    \1049\ See supra Part IX.C.1 for further discussion of the
expected benefits of the final rule from increasing the transparency
of the securities lending market.
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    However, the information could also be used to estimate short
selling positions with more accuracy than is possible under the final
rule. A market participant wishing to gain insight into short selling
sentiment could aggregate the sizes of all open loans that are
associated with categories of borrowers that are likely to be short
sellers.\1050\ If information about these loans is available the day
after the loans are effected then, given the settlement cycles for
equity short sales and equity loans,\1051\ this would be equivalent to
three business days after an equity short sale took place. These data
would be considerably timelier than existing short interest data such
as the FINRA data. Additionally, market participants could follow
individual short positions with a three-business-day lag for equity
short positions. This is a capacity that is not possible using existing
data. This could be accomplished by tracking individual loans that are
marked as being to a customer if the lender is a broker dealer. While
the identity of the borrower would not be available to the public,
market participants could discern whether changes in short interest
were due to changes across many positions or few.
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    \1050\ See supra note 895 and corresponding text for more
information about, since activity in the Customer market for
securities loans are tightly linked to short selling positions, the
sum of loans identified in the Rule 10c-1a data as being to ``a
customer (if the person lending securities is a broker or dealer)''
could give a strong indication of aggregate short interest.
    \1051\ See supra note 738 and corresponding text.
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    This additional information that market participants could extract
about short selling could enable copycat investing strategies that seek
to mimic what the short sellers do. This could increase the costs of
establishing a short position, thus making it costlier for short
sellers to profit from their research. If the profitability of research
diminishes, there is the risk that less market research could be
performed and, if this occurs, there could be negative impacts on
market quality and corporate monitoring.\1052\
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    \1052\ See supra Part IX.C.1 for further discussion of the
potential negative consequences of revealing short sellers'
strategies.
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2. Alternative Timeframes for Reporting or Dissemination
    The Commission also considered an alternative requiring different
timeframes for reporting or disseminating the securities lending
transaction information.
    First, the Commission considered requiring covered persons to
provide an RNSA with Rule 10c-1a information earlier than the end of
each business day on which a covered securities loan is affected.\1053\
For example, the Commission could require covered persons to provide an
RNSA with information about a loan within a fixed period after the loan
has been effected, such as 15 minutes. This alternative would increase
the timeliness of securities lending information, potentially
increasing some of the benefits of final Rule 10c-1a, such as
regulators' access to this information for regulatory and surveillance
use.\1054\ Furthermore, if an RNSA were required to make the
information publicly available as soon as practicable after an, e.g.,
15-minute reporting timeframe, this could increase the benefits of the
final rule for transparency in the securities lending market by making
the data available up to one business day sooner than under the final
rule.\1055\ It would, however, likely increase compliance costs to an
RNSA as they would be required to build out systems capable of intraday
dissemination.
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    \1053\ See final Rule 10c-1a(c).
    \1054\ See supra Part IX.C.2 for further discussion of the
regulatory benefits of the final rule.
    \1055\ See supra Part IX.C.1 for further discussion of the
expected benefits of the final rule from increasing transparency in
the securities lending market.
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    At the same time, several commenters pointed out numerous costs
associated with more timely and frequent reporting. For example, some
commenters suggested many loan terms are not finalized until the end of
the day,\1056\ and so a 15 minute reporting requirement increases the
risk that the data provided by the final rule could be less accurate
and more prone to errors that would later have to be corrected, which
would mitigate the usefulness of the final rule. This alternative would
also require greater compliance costs because, as commenters also
pointed out, securities lending systems would need greater adaptations
to comply with a more stringent reporting time horizon.\1057\
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    \1056\ See, e.g., SIFMA AMG Letter, at 4 (stating that ``the
securities lending market is not an `intraday market,' as the terms
are not settled at the exact time a loan `is agreed to by the
parties.' Rather, terms such as collateral type, fees, and even loan
size are worked out between the parties before ultimately being
settled, typically at the end of the business day''); Charles Schwab
Letter, at 2 (stating that ``some loans are not finalized until the
end of the trading day''); BlackRock Letter, at 2 (stating that
``the nature of the securities lending markets poses a number of
logistical hurdles that will make intraday reporting impractical'').
    \1057\ See, e.g., IHS Markit Letter, at 13 (stating that ``most
lenders will not be able to meet the 15-minute requirement without
substantial technology development and cost''); Charles Schwab
Letter, at 2 (stating that ``the proposed 15-minute reporting window
would . . . [create] a significant operational burden on firms'').
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    The Commission could also require covered persons to provide an
RNSA with Rule 10c-1a information later than the end of each business
day on which a covered securities loan is effected, for example, by the
end of the next business day after a covered securities loan is