SEC Rule 13f-2: A Better Way Forward Through Consensus

By Stuart Billingham

Two panel discussions hosted by Droit and Goldman Sachs last month concentrated on how and why a group of leading financial institutions have taken a consensus approach to interpreting the new regulation for reporting short positions in U.S. listed securities.

The U.S. Securities and Exchange Commission’s new Rule 13f-2 is the source of considerable disquiet for the industry, since ambiguities in the text have created uncertainty over how to comply in key areas. The panel event, held at Goldman Sachs’ headquarters in New York, took place ahead of the scheduled January 2, 2025 start for the new reporting requirement.

The event’s attendees heard how Rule 13f-2 is a live case study of the work of the Endoxa consortium, a group formed by six financial institutions to reach a consensus on interpreting and complying with the complexities of diverse regulatory texts across the globe. Consensus-seeking is a significant break from past practices, where financial institutions traditionally worked alone on interpreting new rules, resulting in widespread inconsistencies in regulatory reporting, the panelists noted.

Amid the uncertainty surrounding key aspects of Rule 13f-2, Endoxa found common ground on the interpretation of which securities are in scope under the reporting requirement. It also tackled the reach of the regulation outside the U.S., and on the settlement date approach to calculating monthly average gross short positions. Reporting requirements for submissions in Form SHO to the SEC’s EDGAR system were also mentioned, a topic we covered in a separate blog posted earlier this year.

Seeking Consensus Breaks From Past Practices

Endoxa’s members include six of the most sophisticated banks, supported by their respective counsel. When necessary, Endoxa seeks to engage with regulators for clarifications on the rules.

Endoxa has tackled Rule 13 f-2 with a level of detail that was not achievable at forums organized by industry bodies such as the Securities Industry and Financial Markets Association (SIFMA), the Financial Information Forum and Investment Companies Institute, one panelist observed.

Another panelist remarked that while SEC staff may issue guidance in a frequently asked questions (FAQ) format, this will likely prove insufficient to enable market participants to confidently interpret every aspect of the new rule. The value of Endoxa’s work lies in the breadth of the perspectives of its member firms, resolving ambiguity through a consensus interpretation.

Endoxa’s entire approach is pragmatic, proactive, and conducted in good faith, seeking neither to challenge nor undermine regulators. Being non-confrontational is the best way to engage with regulators such as the SEC, panelists observed, adding that the collective expertise creates a powerful voice on concerns about the application of rules.

Mutualization Gains

By mutualizing costs and resources, Endoxa members gain global perspectives on interpreting regulations, a diversity of views and a breadth of expertise that they would not be able to achieve on their own. One member of the consortium spoke of how the consensus gave them considerable comfort in defending decision-making behind regulatory report submissions.

Considering the substantial increase in volume and granular detail required in the new regulatory disclosure, Endoxa’s consensus approach to rule interpretation brings greater certainty in terms of data management, event attendees heard.

The rule sets, codified by Droit as the technology partner of Endoxa, reference digital source texts underpinning consensus. Such transparency and traceability brings confidence since it provides the necessary explanations for internal stakeholders to understand decision-making by colleagues in the front office, one panelist explained.

Endoxa’s deliberations have a broader reach than informing compliance implementation by the six members of the consortium, attendees at the event heard. Droit, for example, translates the Endoxa rule sets into legible logic models that drive decision-making for its Position Reporting product. Complemented by aosphere Rulefinder guidance, this logic model is licensed to other market participants as an off-the-shelf compliance package.

Impact on Systems, Data Management and Data Vendors

Another critical element of Rule 13f-2 is which securities are in scope for regulatory reporting. This is particularly important given the sophistication of products available in the market and the complex investment strategies employed by investment managers.

Panelists observed that best effort preparations informed by Endoxa cannot, however, address two other areas of uncertainty surrounding the new reporting rule: its implementation in light of November’s U.S. Presidential election and the outcome of a lawsuit filed by three hedge fund trade associations.

Concerning compliance with SEC Rule 13f-2, Endoxa informs best practice reporting that is complete and accurate so that financial institutions can be confident they are prepared for the rapidly approaching start date for reporting short positions in U.S. securities.

Endoxa’s consensus approach may have applications beyond position reporting in the future, such as reporting on exchange traded derivatives or collateral as well as informing solutions to assist in buyside decision-making early in the trade lifecycle, attendees learned.