SEC's Move Towards Enhanced Short Selling Transparency

US financial regulators are poised to implement new rules this week, necessitating swift disclosure of securities borrowing transactions, a move aimed at enhancing transparency in the market. Short sellers and other market participants, often hedge funds betting on declining security values, typically borrow stocks and bonds for their transactions, returning them to the owners later. Lenders of these securities generate income through borrowing fees. Data cited by insurance regulators indicates that around $1.8 trillion worth of securities are loaned annually in the US.

The US Securities and Exchange Commission (SEC) is scheduled to vote on this disclosure rule on Friday. Initially proposed in November 2021, the rule would mandate that securities lenders report each loan within 15 minutes of the transaction. Details about the loans, excluding the identities of the involved parties, would be made publicly available.

These proposed regulations mark the latest development in what has become the SEC's most active period of rulemaking since the aftermath of the 2008 financial crisis. Earlier this week, the SEC adopted rules reducing the reporting time for significant stakes accumulated in companies from 10 days to five days.

The suggestion is facing resistance from investors and banks concerned about meeting reporting requirements, with investors worried that it could reveal their positions. The five-member SEC can choose to either accept the proposed rules as they are or make alterations. Some in the market are advocating for an end-of-day reporting requirement instead of the initially proposed 15-minute window.