Aug. 16, 2022
The securities lending market has a complete lack of clarity. In its current form, there is a dearth of information regarding whom is lending what to whom, which makes it very difficult to ascertain what is truly going on in our financial markets. If we are to hold ourselves as the pinnacle of financial markets, then we should be able to have markets with transparency. If the U.S. capital markets are truly fair and free, then so should be the information about what goes on inside of them. Given that lending markets account for trillions of dollars of securities, then it only stands to reason that it would be to the benefit of all good faith financial actors if there was increased transparency in said markets. There is nothing inherently malicious or untruthful about security lending, thus there should be nothing to be gained from hiding information about it. However, as the process currently stands, there is far too much time for institutions and other lenders to maneuver in and out of positions on a whim. By decreasing the reporting time limit to 15 minutes, actions like this would become much more difficult. This would benefit the average investor as they are not the ones typically involved in such transactions and could stand to benefit from having a deeper understanding of the mechanisms that take place behind closed doors. Additional transparency will also benefit regulators, as it will make it easier and faster to find groups acting with ill intentions. Transaction by transaction reporting is also important. It limits the ability of an entity to obfuscate their actions in aggregate, which would make this rule significantly less effective at promoting transparency. By having access to each and every transaction, regulators and investors have a detailed picture of what is actually taking place. This is important and distinct from only knowing the big picture, as there is no room for obfuscating exactly what is taking place by offsetting positions with other positions. Having access to this information is essential for having a true understanding of our financial markets. Security lending can help facilitate short selling --which is not inherently malicious. However, having access to detailed security lending data would help illuminate which, if any, securities are being subjected to unusual lending patterns. Having access to this data would help investors and regulators alike in spotting securities which might be experiencing predatory short selling. This information is important because it is illegal to operate short and distort campaigns. Given that we are in an era in which retail investors are a valuable, crowd-sourced form of a regulatory body, it would be to their benefit to have access to more information regarding security lending. Likewise, this would benefit actual regulators, as there would be more eyes on more data, which would mean a more efficient overall process of enforcement --where necessary. Security lending, left unchecked, can create serious economic issues and endanger the broader economy. For instance, if "Retail investor A" lends a "Security X" to "Institution A", then "Institution A" lends "Security X" to "Institution B", who in turn lends "Security X" to "Institution C". In this instance, there is a chain of obligations from one lender to another. If any piece of that chain were to experience a liquidation event then each and every other borrower would be obliged to "Security X". If Institution C gets a margin call then "Retail Investor A", "Institution A", and "Institution B" are all obliged a single share of "Security X". As it currently stands this could be taking place to the nth degree. It is not difficult to see how a security lending chain can create multiple obligations to a single share, which could in turn cause cascading liquidations or general instability in the financial markets. The proposed rule would help to prevent these situations from arising in the first place. By having access to more information regarding lending, we can all easily see that a security has been lent multiple times. This not only benefits retail investors, but also institutions because it could help mitigate risk. Overall, this rule will benefit retail investors and regulators, but will also help maintain investor confidence in the direction that our markets are headed. Furthermore, it should help to promote stability by reducing the likelihood of a single security being lent to and from multiple counterparties. Finally, it will promote transparency and aid with making informed, accurate decisions based on complete and up to date information. There is no great loss to imposing stricter security lending reporting rules --at least not to anyone who is already acting in good faith. Thank you.