Congress ordered the SEC to boost disclosures of securities lending in the 2010 Dodd-Frank law, but the agency didn’t act until this year’s meme-stock frenzy.
Ariel Zambelich/The Wall Street Journal
The Securities and Exchange Commission is moving to bring greater transparency to the securities-lending market, where short-selling hedge funds borrow shares to bet against companies’ stocks.
A new rule proposed by the SEC on Thursday would require firms that lend securities to report data on each loan to an oversight body such as the Financial Industry Regulatory Authority within 15 minutes of making the loan. Data on the loans would be made public.
In short selling, a trader who wants to bet against a company borrows shares of its stock, then sells them and buys them back later. That can allow them to profit if the stock’s price declines in the meantime. Lenders of the shares can be brokerages or asset managers, which lend securities as an additional source of revenue.
There is currently little public information about volumes and rates in the securities lending market, though private vendors collect and sell some lending data.
Potentially, a rise in demand for borrowing a particular stock could indicate that short sellers are increasingly interested in betting against that stock.
Georgetown University finance professor James Angel said the SEC’s proposal still wouldn’t provide real-time insights into the actions of short sellers. That’s because there is typically a delay of two business days between when short sellers place their bets against companies and when the brokerages serving those short sellers need to borrow shares to underpin those bets, according to Mr. Angel.
Still, he said the SEC’s proposal could benefit investors by allowing the firms that manage their savings, such as pension funds or exchange-traded funds, to earn more money when lending securities.
“This is long overdue,” he said. “This is a great step towards transparency and equality in the stock-loan market.”
Congress ordered the SEC to increase disclosures of securities lending in the 2010 Dodd-Frank financial overhaul law. The agency didn’t act until this year’s meme-stock frenzy brought fresh scrutiny of short selling. Individual investors banded together on social media to pump up stocks like GameStop that had attracted heavy interest from short sellers.
The Wall Street Journal reported in February that the SEC was considering such a step, following the trading frenzy in
and other so-called meme stocks.
In a statement, SEC Chairman
said the agency’s five commissioners—which include three Democrats and two Republicans—had unanimously agreed to release the proposal for public comment. The rule must still be finalized by the SEC, after the regulator reviews feedback from Wall Street and members of the public.
“In today’s fast-moving financial markets, it’s important that market participants have access to fair, accurate, and timely information,” Mr. Gensler said. “I believe this proposal would bring securities lending out of the dark.”
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Appeared in the November 19, 2021, print edition as ‘SEC Seeks Stock Lending Disclosure.’