Better Markets filed a comment letter with the Securities and Exchange Commission in response to the agency’s proposal to require the reporting and public dissemination of information about securities lending transactions. That securities lending market is critical to short selling, a widespread practice that started to draw fresh media attention and regulatory scrutiny after the GameStop trading frenzy in January last year. We support the SEC’s action, implementing Section 984(b) of the Dodd-Frank Act, so that all of these market practices—including short selling, securities lending, and others—are brought out of the shadows and into the light. This rule, and others to follow, will help make our markets more fair, efficient, and transparent.
Why It Matters. The heavy short selling in GameStop and other meme stocks, as well as the short selling in the Archegos blow up, could not have happened without financial firms lending their securities, directly or indirectly, to hedge funds and others so they could short stocks—sell shares that they don’t actually own. All aspects of that process must be subject to more transparency and regulation, and the SEC’s securities lending proposal is an important step in that direction. That’s why we support the proposal, but we will also continue to urge the SEC to develop a host of other market structure , including more timely and comprehensive public reporting of short interest; stronger prohibitions against naked short selling; net short position limits; tougher provisions addressing fails-to-deliver; shortening the settlement cycle; and, finally, full operation of the Consolidated Audit Trail market surveillance system, which has suffered interminable delays in design and implementation.
What We Said. The securities lending proposal is not only good public policy but also mandatory public policy, a statutory requirement from Congress. It will enable both borrowers and lenders to know whether the terms of securities loans are consistent with market conditions and practices. It will also improve the ability of the SEC and other regulators to spot fraud, manipulation, and other unlawful activity that disrupts the markets and ultimately hurts investors. And it will better equip the SEC and other regulators to spot the excessive buildup of risk and other threats to financial stability that are fueled by securities lending and the activities it facilitates, including short selling.
However, we urged the SEC to strengthen the rule by requiring reporting on the use of the collateral posted in connection with lending transactions; by shortening the deadlines for reporting and publicly disseminating the data; and by making sure that functionally equivalent transactions, such as repurchase agreements, do not evade application of the reporting rule by virtue of their labels. Above all, we stress the need for the SEC not to dilute the rule in response to unfounded claims that it will prove too costly or burdensome for those subject to the requirements.
Bottom Line. The SEC’s proposal is an important part of a broad set of reforms necessary to bring all securities trading practices out of the shadows, especially short selling which depends so heavily on the securities lending market. Better Markets urges the SEC to finalize the Proposal without undue delay, to enhance it in key respects, to resist calls to dilute its provisions, and to move forward with comprehensive short-selling reforms.