With Rule 13f-2 going live in only six months, firms need to get moving now with their implementation regardless of any potential future delay, according to David Emero, Head of Regulatory Reporting Product Strategy at n-Tier.
The Securities and Exchange Commission (SEC) adopted new Rule 13f-2 and related Form SHO and an amendment to the national market system plan (NMS Plan) governing the consolidated audit trail (CAT) to “provide greater transparency of short sale-related data”.
Under Rule 13f-2, institutional investment managers that meet or exceed certain prescribed reporting thresholds will report on Form SHO certain short position and short activity data for equity securities. The Commission will thereafter aggregate and publish certain data collected from Form SHO.
Under the amendment to the NMS Plan governing CAT, CAT reporting firms will indicate whether an order is a short sale effected by a market maker in connection with bona fide market making activities.
According to Emero, since the SEC approved Rule 13f-2 last October, the commission has faced increased resistance from investment managers over its “arbitrary and capricious rules.”
Emero commented that in general, firms have numerous regulatory changes coming due, creating significant pressure and widespread issues with respect to resourcing and prioritization.
“The strain felt from this combined with the inherent complexity of the new regulations makes navigating SEC rules a significant challenge for firms,” he said.
With recent regulatory movements leaning toward increasingly complex data requirements, Rule 13f-2 will likely not fit neatly into most firms’ existing position reporting workflows ahead of the January 2025 compliance deadline, he said.
“At a fundamental level, most existing position reporting regimes are based on trade date positions while 13f-2 is based on settlement date short positions,” Emero explained.
“With this, firms may need to reconsider the systems and locations within their infrastructure from which position data is sourced, shifting from front office trading and risk systems to back office and settlement systems,” he said.
Additionally, Emero said, 13f-1 required a simple quarterly report based on one day’s long positions, while 13f-2 requires the monitoring of aggregated short positions against daily thresholds and reporting of the change in short position for each settlement day of the month.
Therefore, any firm that was previously using an ad-hoc manual process for its quarterly 13f-1 report will need to implement a repeatable and efficient process that they can execute daily, he said.
Emero further said that Rule 13f-2 compliance require complex data management processes.
Short positions must be aggregated together across all the firm owned and controlled accounts (both proprietary accounts and customer discretionary accounts) held in all global entities under common control (subsidiaries, parents, etc.) at a large multinational investment bank or asset manager, that can require evaluating and aggregating positions across millions of accounts held in numerous legal entities, which may use different back-office systems and infrastructure, he explained.
Additionally, according to Emero, Rule 13f-2 reportable thresholds are complex and determined by the value and/or size of aggregated short positions ($10MM/$500K value or 2.5% of outstanding shares based on the issuer’s SEC reporting classification).
“Given the 13f-2 reportable threshold is as little as $500K, it will likely impact many firms that previously were not subject to 13f-1, which had a combined threshold of $100MM across all positions,” he noted.
Emero said that 13f-2 requires an abundance of security static reference data (e.g., outstanding shares, SEC issuer classification) and end-of-day prices to calculate the aggregated short position value and ownership percentage each day, determine the appropriate threshold to apply, and prepare the Form SHO filing itself (which requires the issuer’s legal name and LEI, and the security’s CUSIP and FIGI).
“All this said, many firms don’t have ready access to the breadth of security reference data required for 13f-2,” he stressed.
According to Emero, regulators are becoming increasingly stringent in reporting data review.
He said that global regulators, especially those in the US, have become much more sophisticated in their ability to analyze and correlate data streams that firms are reporting across disparate regulations, such as Consolidated Audit Trail, Electronic BlueSheets, Best Execution reports, 10B-10 client confirmations, Large Options Position Reporting, etc.
“Recent fines have reached hundreds of millions of dollars against firms that have allowed their surveillance processes to leverage incomplete or inaccurate data, and regulators have demonstrated little tolerance or empathy for firms not having robust controls and supervisory systems in place,” he said.
“Regulators will also expect firms to have active monitoring and supervisory programs for 13f-2, even if they don’t reach reportable position levels,” he added.
