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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

C. Economic Effects of the Proposed Rule

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

[GRAPHIC] [TIFF OMITTED] TP08DE21.009

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

[GRAPHIC] [TIFF OMITTED] TP08DE21.010

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

[GRAPHIC] [TIFF OMITTED] TP08DE21.011

    Table [4] shows that Lenders and reporting agents would incur an
aggregate of $3.56 million in initial costs and $0 annually in ongoing
costs to enter into agreements for reporting securities lending
information. These include costs associated with drafting, negotiating,
and executing agreements with counterparties, most of which would be
incurred by Lenders that would directly employ a reporting agent, but
there would not be ongoing costs because once an agreement is signed,
there would be no need to modify the written agreement or take
additional action after it is executed.
    In addition to the above enumerated costs, the estimated 409
reporting entities would also be required to pay reporting fees to the
RNSA. The Commission estimates these costs would be reasonably related
to the cost that the RNSA would incur to administer and distribute the
data.\243\ As shown in Table [2], the Commission expects the RNSA to
incur ongoing costs of $2.48 million per year. Consequently, dividing
the cost incurred by the RNSA by the 409 reporting entities to estimate
the fees for the reporting entities results in an annual fee per
reporting entity of approximately $6,000, or approximately $500 per
month. This estimate represents a lower bound on the estimated fees
levied by the RNSA as the RNSA likely would need to recoup some of the
initial fixed costs associated with administering the data.\244\
---------------------------------------------------------------------------

    \243\ SRO rule filings are subject to notice, comment and
Commission review pursuant to Section 19 of the Exchange Act. The
SRO must demonstrate that proposed fees satisfy Exchange Act
requirements, including that such proposed fees equitably allocate
reasonable dues, fees and other charges among members and issuers
and other persons using the SRO's facilities. Further, such proposed
fees cannot not impose any burden on competition not necessary or
appropriate in furtherance of the purposes of the Exchange Act. When
competitive forces do not constrain costs, such as with data
products such as TRACE or the data provided by this Proposal, SROs
can satisfy Exchange Act requirements by demonstrating that fees are
reasonably related to costs. See infra Part V.E.
    \244\ The numbers provided in this section are estimates. To the
extent the Commission has over- or underestimated burden hours or
hourly costs, or the number of entities subject to each reporting
requirement, the actual compliance costs may be higher or lower.
However, the Commission views the estimates provided herein as best
guess estimates based on the information currently available to the
Commission.
---------------------------------------------------------------------------

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

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

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

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

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

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

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

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

D. Impact on Efficiency, Competition, and Capital Formation

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

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

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

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

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

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

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

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

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

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

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

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

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

E. Alternatives

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

consolidate and distribute for a fee. The NMS Plan would set the fee
for competing consolidators as well as for those who purchase and
consolidate the data for internal use.
---------------------------------------------------------------------------

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

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

F. Request for Comment

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

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

VII. Regulatory Flexibility Act Certification

    The Regulatory Flexibility Act (``RFA'') \269\ requires Federal
agencies, in promulgating rules, to consider the impact of those rules
on small businesses. Section 603(a) \270\ of the Administrative
Procedure Act,\271\ as amended by the RFA, generally requires the
Commission to undertake a regulatory flexibility analysis of all
proposed rules, or proposed rule amendments, to determine the impact of
such rulemaking on ``small businesses'' \272\ unless the Commission
certifies that the rule, if adopted, would not have a significant
impact on a substantial number of ``small entities.'' \273\
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    \269\ 5 U.S.C. 601 et seq.
    \270\ Id.
    \271\ 5 U.S.C. 551 et seq.
    \272\ Although Section 601(b) of the RFA defines the term
``small business,'' the statute permits agencies to formulate their
own definitions. The Commission has adopted definitions for the term
small business for the purposes of Commission rulemaking in
accordance with the RFA. Those definitions, as relevant to this
proposed rulemaking, are set forth in Rule 0-10 under the Exchange
Act. Exchange Act Rule 0-10 (``Rule 0-10'').
    \273\ 5 U.S.C. 605(b).
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    As discussed above in the PRA above, first, the Commission
preliminarily believes that the proposed Rule would impact 94 reporting
agents. The Commission estimates that all reporting agents would be
broker-dealers. A broker-dealer is a small entity if it has total
capital (net worth plus subordinated liabilities) of less than $500,000
on the date in the prior fiscal year as of which its audited financial
statements were prepared pursuant to 17 CFR 240.17a-5(d), and it is not
affiliated with any person (other than a natural person) that is not a
small business or small organization.\274\
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    \274\ Exchange Act Rule 0-10(c).
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    Second, the Commission preliminarily believes that the proposed
Rule would impact 278 investment companies that do not employ a lending
agent. For purposes of Commission rulemaking in connection with the
Regulatory Flexibility Act, an investment company is a small entity if,
together with other investment companies in the same group of related
investment companies, it has net assets of $50 million or less as of
the end of its most recent fiscal year.\275\
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    \275\ See 17 CFR 270.0-10(a).
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    Third, the Commission preliminarily believes that the proposed Rule
would impact 37 lending agents, which would include broker-dealers and
banks.\276\ For purposes of Commission rulemaking in connection with
the Regulatory Flexibility Act, lending agents that are not broker-
dealers, such as a bank, would be a small entity if on the last day of
its most recent fiscal year, such

issuer or person had total assets of $5 million or less.\277\
Furthermore, clearing agencies could also be lending agents for
purposes of proposed Rule 10c-1. A clearing agency is a ``small
entity'' if such clearing agency: (i) Compared, cleared, and settled
less than $500 million in securities transactions during the preceding
fiscal year, (ii) had less than $200 million of funds and securities in
its custody or control at all times during the preceding fiscal year
(or at any time that it has been in business, if shorter), and (iii) is
not affiliated with any person (other than a natural person) that is
not a small business or small organization.\278\
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    \276\ For example, some investment companies report using a bank
as a lending agent on Form N-CEN.
    \277\ See 17 CFR 240.0-10(a).
    \278\ See 17 CFR 240.0-10(d).
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    Based on a review of data, the Commission does not believe that any