[Federal Register Volume 86, Number 233 (Wednesday, December 8, 2021)]
[Proposed Rules]
[Pages 69802-69853]
[FR Doc No: 2021-25739]

Vol. 86

Wednesday,

No. 233

December 8, 2021

Part III

Securities and Exchange Commission

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17 CFR Part 240

Reporting of Securities Loans; Proposed Rule

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

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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 240

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

Reporting of Securities Loans

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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

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

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

Electronic Comments

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

Paper Comments

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

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

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

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

Table of Contents

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

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

I. Executive Summary

A. Introduction

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

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

A. Market Structure

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

B. Transaction Reporting

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

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

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

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

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

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

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

III. Discussion of Proposed Rule

A. Reporting

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Rule would require the party intermediating the loan (i.e., the lending
agent) to also be responsible for providing the material terms of the
loan to the RNSA. Specifically, lending agents are directly involved
with the loan of securities on behalf of a beneficial owner. In such a
circumstance, the beneficial owner is passive. For purposes of proposed
Rule 10c-1, a beneficial owner that makes available the securities in
its portfolio for a lending agent to lend on its behalf is not directly
involved with the lending of its securities. Rather, it is the active
steps taken by the lending agent that directly results in a loan of
securities. For example, a customer of a broker-dealer that
participates in their broker-dealer's fully paid lending program might
lack the ability to provide 10c-1 information to the RNSA.\80\
Additionally, the beneficial owner may lack access to some of the 10c-1
information, such as the identifying information of the borrower.
Similarly, an institutional investor that uses a lending agent to
manage its securities lending program might not know within 15 minutes
that the lending agent has loaned securities from the institutional
investor's portfolio, or details on the specific borrower, negotiated
fees, or rebate rates.\81\
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    \80\ See Exchange Act Rule 15c3-3(b)(3). 17 CFR 240.15c3-
3(b)(3).
    \81\ For additional discussion of how lending agents manage the
portfolios of the beneficial owners that they lend shares on behalf
of, see infra Part VI.B.4.b) (discussing how lending programs
generally pool shares across accounts with which they have lending
agreements to create a common pool of shares available to lend).
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    Accordingly, under proposed Rule 10c-1(a)(1)(i)(B) the beneficial
owner would not be required to provide the 10c-1 information to an RNSA
for any loan of securities intermediated by a lending agent. The
Commission preliminarily believes that responsibility for failing to
provide 10c-1 information to an RNSA should be on the lending agent and
not the beneficial owners because the lending agent is directly
responsible for the loan of securities. Furthermore, placing
responsibility on beneficial owners who do not have access to all the
necessary information to provide information to the RNSA might have a
chilling effect on persons being willing to loan securities, which
could negatively impact the securities market generally.
(b) Reporting Agent Provides Information to an RNSA
    The Commission preliminarily believes it is appropriate that a
Lender, including a lending agent, be able to enter into a written
agreement with a broker-dealer acting as a reporting agent to permit
the reporting agent to provide the 10c-1 information to an RNSA on
behalf of the Lender because such an arrangement will ease burdens on
Lenders, including lending agents, that do not have or do not want to
establish connectivity to the RNSA. In order to employ a reporting
agent to report the 10c-1 information to the RNSA on behalf of the
Lender, proposed Rule 10c-1 would require the Lender and reporting
agent to enter into a written agreement. Such written agreements under
proposed Rule 10c-1(a)(1)(ii)(A) would memorialize and provide proof of
the contractual obligations for the reporting agent to provide the 10c-
1 information to an RNSA. Proposed Rule 10c-1(a)(1)(ii)(B) would
require the reporting agent to provide the 10c-1 information to an RNSA
if the reporting agent has entered into a written agreement to provide
the 10c-1 information to an RNSA pursuant to Rule 10c-1(a)(1)(ii)(A)
and such reporting agent is provided timely access to such 10c-1
information. The Commission preliminarily believes that it is
appropriate for a reporting agent to be responsible for providing
information to the RNSA if it contractually agrees to provide such
information to the RNSA and it has timely access to such information.
In such an instance, the person who enters into the written agreement
with the reporting agent is not required to provide the 10c-1
information to the RNSA. If, however, the reporting agent is unable to
provide 10c-1 information to the RNSA because it lacks timely access to
it, the person who enters into the written agreement with the reporting
agent is responsible for providing such information to the RNSA.\82\
For purposes of proposed Rule 10c-1 ``timely access'' would mean that
the reporting agent has access to the 10c-1 information with sufficient
time to provide such information to the RNSA within the fifteen minutes
after the securities loan is effected or the terms of the loan are
modified. This paragraph of proposed Rule 10c-1 is designed to ensure
that persons provide the 10c-1 information to a reporting agent so that
the reporting agent can provide the information to an RNSA within the
required timeframe. The Commission preliminarily believes that clearly
delineating who is responsible for providing the 10c-1 information to
the RNSA would aid in compliance with proposed Rule 10c-1 because each
party will have a clear understanding of its obligations when it enters
into a reporting agreement. Namely, the person or lending agent would
have an obligation to provide access to the 10c-1 information to the
reporting agent in a timely manner; and the reporting agent would have
an obligation to provide the 10c-1 information to the RNSA.
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    \82\ For example, if a reporting agent establishes an automated
system that pulls 10c-1 information directly from the records
management system of a beneficial owner but the beneficial owner
disables the connectivity to the automated system for any reason,
the reporting agent would not have access to the 10c-1 information.
As a result, the beneficial owner would be required to provide 10c-1
information to an RNSA under paragraph (a)(1)(ii)(C) of proposed
Rule 10c-1.
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    Furthermore, proposed Rule 10c-1(a)(2)(ii) would require that the
reporting agent enter into a written agreement with the RNSA. Such
written agreement must explicitly permit the reporting agent to provide
10c-1 information on behalf of Lenders. Additionally, proposed Rule
10c-1(a)(2)(iii) would require the reporting agent to provide the RNSA
with a list of each beneficial owner or lending agent on whose behalf
the reporting agent is providing 10c-1 information and to update the
list by the end of the day when the list changes. By requiring a
written agreement between the reporting agents and the RNSA, the
proposed Rule would require that the parties create documentation
regarding the agreement to provide 10c-1 information, which would
further provide evidence of the commitment by the reporting agent to
provide 10c-1 information to the RNSA. Additionally, requiring the
reporting agent to provide the identities of each person and lending
agent on whose behalf the reporting agent is providing 10c-1
information to the RNSA provides the Commission with the ability to
obtain the identities of such Lenders and broker-dealers (as discussed
below) from the RNSA, which would aid the Commission with its oversight
of the Lenders that have entered into agreements with reporting agents,
including with their compliance with the proposed Rule.
    Under the proposed Rule, only a broker-dealer could serve as a
reporting agent. The Commission preliminarily believes that limiting
who can act as a reporting agent to broker-dealers, which are regulated
directly by the Commission, is in the public interest and would protect
investors because it would aid the Commission in overseeing compliance
with proposed Rule 10c-1. Specifically, by limiting reporting agents to
broker-dealers the Commission could directly oversee the reporting
agent's compliance with the requirement to provide 10c-1

information to the RNSA. Additionally, requiring that reporting agents
be broker-dealers provides the RNSA, as well as other self-regulatory
organizations (``SROs''), with the ability to oversee the activity of
its members that perform a reporting agent function. If reporting
agents were to include other entities the Commission might lack an
efficient way to oversee how the entity is complying with its
responsibility to provide 10c-1 information to an RNSA under proposed
Rule 10c-1.
    Proposed Rule 10c-1(a)(2)(i) would require any reporting agent that
enters into a written agreement to provide information on behalf of
another person to establish, maintain, and enforce reasonably designed
written policies and procedures to provide 10c-1 information to an RNSA
in the manner, format, and time consistent with Rule 10c-1.
Accordingly, a broker-dealer could not act as a reporting agent unless
the broker-dealer establishes, maintains, and enforces such written
policies and procedures. The requirement for a reporting agent to have
such written policies and procedures would provide regulators with a
means to examine and enforce a reporting agent's compliance with
proposed Rule 10c-1.
    Proposed Rule 10c-1(a)(2)(iv) would also require that the reporting
agent maintain certain information for a period of three years, the
first two years in an easily accessible place. The information required
to be maintained would include the 10c-1 information provided by the
beneficial owner or the lending agent to the reporting agent, including
the time of receipt, as well as the 10c-1 information that the
reporting agent sent to the RNSA, and time of transmission.
Additionally, the reporting agent would have to retain the written
agreements between the reporting agents and beneficial owners, lending
agents, and the RNSA. The recordkeeping requirements are designed to
help facilitate the Commission's oversight of reporting agents and
review the reporting agents' compliance with the requirement to provide
the 10c-1 information to the RNSA.
(c) Beneficial Owner Provides Information to an RNSA
    As discussed above, proposed Rule 10c-1(a)(1)(i)(B) and
(a)(1)(ii)(C) provide that if a lending agent or reporting agent is
responsible for providing information required by Rule 10c-1 to an RNSA
pursuant to paragraphs (a)(1)(i) or (ii), the beneficial owner is not
required to provide the 10c-1 information to the RNSA. Accordingly, if
a beneficial owner does not employ a lending agent or enter into a
written agreement with a reporting agent, the beneficial owner would be
responsible for complying with the requirements of proposed Rule 10c-
1(a) to provide 10c-1 information to the RNSA. The Commission
preliminarily believes that only large beneficial owners run their own
lending programs without the assistance of a lending agent because
securities lending is a low-margin business and portfolios need to be
of a sufficient size for a securities lending program to be
economically feasible.\83\ Furthermore, to the extent a beneficial
owner is not using a lending agent, the Commission preliminarily
believes that it would likely enter into a written agreement with a
reporting agent.
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    \83\ See supra note 37.
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(d) Examples of Who Is Responsible for Providing Information to an RNSA
    To provide clarity regarding who is responsible for providing 10c-1
information to an RNSA the Commission offers the following examples:
    A. Beneficial Owner and Lending Agent: A beneficial owner is
represented by a lending agent that is a bank. The lending agent
intermediates the loan of securities to a broker-dealer (the borrower)
on behalf of the beneficial owner. In this scenario, the lending agent
would be responsible for providing the 10c-1 information to the RNSA.
If, however, the beneficial owner uses a person to intermediate the
securities lending transaction that is not a bank, clearing agency, or
broker-dealer the beneficial owner would be responsible for providing
the 10c-1 information to the RNSA.
    B. Beneficial Owner and Clearing Agency: As noted above, some
clearing agencies have established programs to intermediate the loan of
securities on behalf of beneficial owners. In such a scenario, the
clearing agency would be a lending agent and, similar to example A,
would be responsible for providing the 10c-1 information to the RNSA. A
clearing agency not acting as a lending agent would not have a
responsibility to provide 10c-1 information to an RNSA. For example, if
the clearing agent cleared a securities lending transaction but did not
act as an intermediary on behalf of a beneficial owner for the loan of
securities, the clearing agency would not be responsible for providing
the 10c-1 information to an RNSA.
    C. Lending Agent and Reporting Agent: Same scenario as example A,
however, this time the lending agent has entered into a written
agreement with a reporting agent, which happens to be the same broker-
dealer that borrowed the shares in example A. In this scenario, the
reporting agent- even though it is the broker-dealer that borrowed the
securities--would be responsible for providing the 10c-1 information to
the RNSA.
    D. Onward Lending: Same scenario as example A, however, the broker-
dealer that borrowed the securities in example A loans the borrowed
securities to a hedge fund. In this scenario, the broker-dealer would
be responsible for providing the 10c-1 information to the RNSA
regarding the securities lending transaction between the broker-dealer
and the hedge fund because the broker-dealer is lending the securities
that it borrowed. In this instance, the broker-dealer is loaning the
securities on behalf of itself. The obligations to provide information
as described in example A for the first lending transaction would
remain unchanged.
    E. No Lending Agent or Reporting Agent: If a beneficial owner does
not employ a lending agent or reporting agent, and loans its
securities, the beneficial owner would be responsible for providing the
10c-1 information to the RNSA.
    F. Reporting Agent Fails to Provide 10c-1 Information to the RNSA
on Behalf of a Person or Lending Agent: A lending agent enters into a
written agreement with a reporting agent to provide 10c-1 information
to an RNSA. The lending agent provides the reporting agent with timely
access to the 10c-1 information, but the reporting agent fails to
provide such information to the RNSA. The reporting agent would have
violated proposed Rule 10c-1 because it would have been responsible for
providing 10c-1 information to the RNSA. However, if the reporting
agent was not provided with timely access to the 10c-1 information by
the lending agent, the lending agent would have been responsible for
providing the 10c-1 information to the RNSA.
    G. Fully Paid Securities Lending Program: If a broker-dealer lends
a customer's securities that are fully paid, the broker-dealer would be
responsible for providing the 10c-1 information to the RNSA. In this
instance, the broker-dealer, acting as the lending agent, is loaning
the securities on behalf of its customer.
    While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
    15. Should proposed Rule 10c-1 permit reporting agents to be
entities other than broker-dealers? If yes, what other persons should
be added to the list of persons with whom a Lender can

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

B. Information To Be Provided to an RNSA

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

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

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

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

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

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

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

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

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

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

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

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

    As discussed in Part II.A, loans of securities can be
collateralized in different ways and the structure of the payments
depends on the type of collateral used. The data elements in proposed
Rule paragraphs (b)(7) through (b)(10) would capture compensation
arrangements regardless of the collateral used.\92\ Accordingly, to
provide context, paragraph (b)(8) would require information about the
type of collateral used to secure the loan to be provided to the RNSA.
For this data element, the asset class of the collateral would be
provided, but the Commission is not including a list of asset classes
in order to provide the RNSA with the discretion to determine a
thorough list.\93\ To facilitate a deeper understanding of the
collateral posted, paragraph (b)(10) would require that the percentage
of collateral to value of loaned securities required to secure such
loan be provided to the RNSA. Paragraph (b)(7) would require that, for
a loan not collateralized by cash, the securities lending fee or rate,
or any other fee or charges be provided to the RNSA. In contrast, for
loans that are collateralized by cash, paragraph (b)(9) would require
that the rebate rate or any other fees or charges be provided to the
RNSA.
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    \92\ Certain of these data elements may not apply to every loan.
For example, a Lender would not be able to provide data pursuant to
paragraph (b)(9) if the loan is not collateralized by cash. The
Commission is proposing to include each of these data elements in
proposed Rule 10c-1 to capture pricing and collateral information
for every loan, but the RNSA may provide Lenders with instructions
about how to provide information when a data element is not
applicable to a specific loan.
    \93\ For example, an RNSA could look to the 9 categories of
collateral from the OFR Pilot Survey. These 9 categories were: (1)
U.S. Treasury Securities; (2) U.S. Government Agency Securities; (3)
Municipal Debt Securities; (4) Non-U.S. Sovereign or Multinational
Agency Debt Securities; (5) Corporate Bonds; (6) Private Structured
Debt Securities; (7) Equity Securities; (8) Cash as securities; and
(9) Others. See Off. of Fin. Research, Securities Lending Pilot Data
Collection, at 12 (Sep. 2015), available at https://www.financialresearch.gov/data/files/SecLending_Data_Collection_Instructions.pdf (``Securities Lending
Pilot Data Collection'').
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    Paragraph (b)(11) would require that the termination date of the
loan be provided to the RNSA, if applicable. As discussed above in Part
II.A, it is typical market practice for securities loans to be open-
ended, and, therefore, the securities may be recalled upon notice given
by the Lender. In contrast, some loans are for a specific term. The
Commission preliminarily believes that this information will provide
market participants with an understanding of the potential future
demand and supply of securities.\94\
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    \94\ For further discussion about how proposed Rule 10c-1 may
affect the supply and demand of securities, see infra Part VI.
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    Finally, paragraph (b)(12) requires that the borrower type for each
transaction be provided. The Commission preliminarily believes that
this data element will be useful to provide context for evaluating the
other data elements. For example, borrowers of securities that are
broker-dealers may determine that loans of securities to other broker-
dealers are a more appropriate benchmark than all loans of securities.
This data element, therefore, may enhance the transparency provided by
the other data elements.
    While the Commission welcomes any public input on this topic, the
Commission asks commenters to consider the following questions:
    24. What other data elements, if any, should be included to
increase the transparency of securities lending?
    25. Would any of the listed data elements not be informative to the
public or to regulators? If not, why not? Should any of the data
elements be removed or modified? If so, why?
    26. Should all of the data elements in paragraph (b) be made public
at the loan-level as proposed? As an alternative, should some be made
public in the aggregate or only made available to regulators? Would
providing aggregates of 10c-1 information provide the same or greater
benefits than loan-level information as proposed? Please discuss how
your response relates to the statutory objective of increasing
transparency.
    27. Are there sufficient data elements to allow for the
identification of loans of securities and permit the creation of a
unique transaction identifier by the RNSA or should additional or
different data elements be required for this purpose?
    28. Other than LEI, are there other issuer identifiers such as the
EDGAR Central Index Key (commonly abbreviated as ``CIK'') that could be
provided should the issuer have one? If yes, should the other
identifier be required in addition to LEI or in the alternative?
    29. Are any of the data elements redundant such that an RNSA can
determine the information without being provided that particular data
element?

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

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