The US SEC is now allowing broker-dealers to use a wider range of stocks—specifically, baskets of large American companies from the Russell 1000 and S&P 500 Indices—as collateral when borrowing securities from large institutional investors.
Previously, firms could only use safer, traditional assets like cash, US government bonds, or bank guarantees as collateral. Under this new rule, they can now also use diversified portfolios of major stocks. This change gives broker-dealers more flexibility in how they raise funds and manage trades.
New Collateral Category Targets Securities Lending Markets
Previously, Rule 15c3-3 under the Exchange Act confined acceptable collateral to a narrow set of instruments. Broker-dealers that borrowed equity securities from institutional clients to cover failed transactions or short sales had limited flexibility in collateralizing those loans.
The new order introduces “Eligible Equity Collateral,” defined as a diversified basket of long customer margin securities or broker-dealer proprietary account securities drawn from the Russell 1000 and S&P 500 indices.
Unleveraged ETFs (exchange-traded funds) tracking those indices also qualify.
Strict Conditions Govern Who Can Participate
Access to this collateral arrangement is restricted to “Qualified Institutional Securities Lenders.” To qualify:
- A lender must be a qualified institutional buyer as defined under Rule 144A of the Securities Act of 1933, or
- Own at least $100 million in securities on a discretionary basis, or
- Operate through an agent bank with at least $100 million in outstanding securities loans.
Broker-dealers must over-collateralize loans by 1% for securities denominated in major currencies, including the Euro, British pound, Swiss franc, Canadian dollar, and Japanese yen, and by 5% for all others.
All pledged collateral must be held at a bank or registered broker-dealer.
Both parties must agree to concentration and diversification standards. Collateral is marked to market daily, and a five-business-day grace period applies if a security or lender ceases to meet eligibility criteria.
The Commission also signaled coordinated guidance for market participants by issuing alongside the order, a staff interpretive letter to:
- The Securities Industry and Financial Markets Association (SIFMA) and
- The International Securities Lending Association (ISLA)
The Commission selected Russell 1000 and S&P 500 securities based on their liquidity, low volatility, market depth, and the scale of their issuers.
“This order, along with a staff interpretive letter to SIFMA & ISLA, aims to improve liquidity and strengthen risk management in securities lending markets,” the regulator explained.
Whether securities lending market participants adopt the new framework at scale will become clearer in the months ahead.
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