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Data on borrowed stocks will for the first time be made public in the US under new rules adopted by financial regulators, though the measures stopped short of Wall Street’s worst fears.
The five members of the US Securities and Exchange Commission on Friday voted three to two to require lenders of securities to report new loans, and modifications to existing ones, by the end of each trading day, in a move that will shine new light on one of the murkier corners of the financial markets.
Such lending is essential to the practice of short selling, or betting that the price of an asset will fall. Short sales are best known for their use by hedge funds, which borrow stocks and bonds to sell before buying them back and returning them to lenders at what they hope will be a lower price. Lenders are often long-term owners of securities, such as fund managers, who take a fee for the deals.
Gary Gensler, chair of the SEC, said that the new regime would “bring greater transparency and efficiency to this important part of the capital markets”. The action was the latest in what has proven to be the agency’s most active rulemaking period since the aftermath of the 2008 financial crisis.
The SEC first proposed the securities lending disclosure rule in 2021. Gensler noted that changes to the initial proposal were made in response to public comments.
The final rule dropped initial plans for publishing deal details within 15 minutes of trades being struck. Data will instead be published the next morning and individual loan amounts will only be published 20 business days after the deal was reported.
The original plans had prompted strong pushback from Wall Street. Hedge funds worried that the near real-time data would allow rivals to front-run them. Those required to report loans — usually lenders of securities — warned that many securities loans are bespoke, making it hard to fit the details to reporting requirements under a tight timetable.
“Currently, only a limited number of market participants receive a portrait of the securities lending markets, and even that portrait is incomplete. Congress — and our mission — mandate we do more,” Gensler said.
Some $1.8tn of securities are lent annually in the US, according to the Treasury’s Financial Stability Oversight Council. Greater disclosures of short selling deals were called for in the Dodd-Frank financial reform law that followed the 2008 financial crisis, but were not developed by the SEC until its 2021 proposal.
Jack Inglis, head of the Alternative Investment Management Association, described the final rule as “disappointing” and said the disclosures were “another regulatory intervention that will not aid efficiency but likely impede short selling activity, disincentivise fundamental research and thus harm markets.”
The SEC’s two Republican members voted against the rule. Commissioners Hester Peirce and Mark Uyeda questioned the rulemaking process, including the short initial consultation period, and the speed of the implementation timetable.