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Preparing with Confidence for SEC Rule 13f-2 Reporting on Short-Selling Positions

By: William Graham 


In less than six months the U.S. Securities and Exchange Commission will require institutional investment managers to start reporting short positions in U.S. listed equity securities, under its new Rule 13f-2. However, ambiguities in Rule 13f-2 have left the industry deeply troubled over how to interpret and implement the regulation.


Adding to the uncertainty is the restricted guidance provided to date by the SEC. The regulator is currently the subject of a lawsuit filed at the U.S. Court of Appeals for the Fifth Circuit by three hedge fund trade associations representing an industry most exposed to the new rules.

Non-compliance carries the risk of civil sanctions, fines and reputational damage, so there is a clear need amid the uncertainty for a consensus interpretation to allow investment managers to meet the compliance deadline in January 2025.


Rule 13f-2 is the SEC’s response to calls from Congress in 2010 to increase transparency around short selling of equity securities following the Global Financial Crisis, as well as more recent incidents of volatility and stresses in the markets involving certain equity securities. As we outlined in a previous blog, the regulation establishes thresholds for short positions in U.S. listed equity securities, which require reporting through a Form SHO in the SEC’s EDGAR system once crossed. This new disclosure requirement must be filed within 14 calendar days from the end of the month.


How ambiguities in Rule 13f-2 are interpreted will have a material impact on the required reporting, which will demand large volumes of daily short position data and the potential added complexity of cross-jurisdictional transactions and exemptions. Naturally, such ambiguities carry costs and spawn other implementation considerations. Data vendors, for example, will need to flag which securities are reportable under Rule 13f-2.


One major difference in the implementation of 13f-2 and other global short reporting regimes is that the calculations of monthly average gross short positions for Form SHO reporting should be performed on a settlement date basis, instead of an end-of-day trade basis. Further certainty is required as to exactly what activity should be reflected in Table 2 of the report, which in turn is critical to determining more broadly which types of securities fall under the Rule 13f-2 reporting obligations.

The Endoxa consortium, comprising some of the largest financial institutions, has been working through the ambiguity relating to the interpretation and implementation of SEC Rule 13f-2.


Supported by the counsel of global law firm A&O Shearman, the consortium’s mission is to align on an agreed interpretation of complex regulatory obligations to establish an industry standard, where needed. Endoxa also has the ability to seek clarification from the regulators directly as and when questions need escalation.


Droit’s Position Reporting product is built using the Endoxa rulesets, the consensus views on regulations reached by Endoxa’s executive committee, which it translates into machine readable logic to drive operations. Droit licenses this expertise to additional market participants.

Further, in the absence of an explicit issuer scope from the SEC, as provided for regulation 13F, Endoxa is engaging closely with key data vendors to ensure that appropriate asset attributes are available to accurately assess holdings.


Regulations evolve constantly as points of ambiguity and challenging use cases are addressed, so it is paramount for financial institutions to respond in a timely manner to remain compliant. As the pace and volume of regulatory reporting updates grows, the message from regulators is clear: ensure systems are in place to operationalize and automate compliance.


At Droit, we urge financial institutions to think beyond doing enough to meet regulatory deadlines, by making sure the right rules are in place to drive compliance reporting and other processes. With Endoxa’s consensus approach, they can report with the same level of clarity and confidence as the world’s leading financial institutions on SEC 13f-2 and the wave of other regulations that are set to follow it.

About Droit

 

Droit is a technology firm at the forefront of computational law and regulation within finance and other domains. Founded in 2012, Droit counts many of the largest financial institutions as its clients. Its award-winning, patented platform Adept provides an implementation of regulatory rules reflecting industry consensus. The Adept platform processes tens of millions of inquiries a day, deciding in real-time which interactions are legally permissible across the globe. Adept is used by institutions to evaluate, with sub-millisecond latency, the full regulatory implications of any given interaction within their transactional infrastructure.

 

For more information visit droit.tech. To obtain more information about Droit’s products, please contact sales@droit.tech.

Media Contact:
Streets Consulting
Sarah Durrani
sarah.durrani@streetsconsulting.com
Tel: +44 20 8187 8324