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Agency lending Disclosure requirements (ALD) were established because SEC was concerned that broker-dealers were unable to assess their exposure to the underlying principals, the beneficial owners, in agency lending transactions, but were instead only able to evaluate their exposure to the agent lender itself.
Agency Lending Disclosure provides an industry standard for agent lenders and broker-dealers to exchange underlying principal level detail information related to transactions executed under securities lending agreements (SLA). The initiative established a standard process and infrastructure among industry participants.
Below are the main standards requirements to comply with the rule: · Agent lenders to provide to broker-dealers detailed information on unique principals participating in their agency lending programs. · Broker-dealers to actively accept or reject principals based on an internal credit review process and to communicate their response back to an agent lender · Agent lenders to communicate (at least annually) principal lender details to facilitate a broker-dealer Master File reconciliation · Agent lenders to communicate daily loan contract level information and principal level loan and collateral details to broker-dealers · DTCC to act as a central communications hub, accessible by agent lenders, broker-dealers and authorized vendors for exchanging information
These standards and infrastructure enabled agent lenders and broker-dealers to carry out the following activities: · Agent lenders to restrict allocating loans to principals that have not been explicitly approved by the broker-dealer · Broker-dealers to reconcile loan and collateral data provided by agent lenders · Broker-dealers to monitor principal level credit exposure · Broker-dealers to calculate principal level regulatory capital
Prior to ALD, borrowers received a paper list of underlying principals or beneficial owners from each agent lender. Often, the list was attached to the Securities Lending Agreement (SLA) as a ‘Schedule A.’ The list was not always comprehensive, containing only names (and on occasion not even the full legal name) of principals and no other information. This limited information often did not provide broker-dealers enough detail to be able to definitively perform a credit review of each principal. Lenders were also not required to provide regular updates to that list and periodic reconciliations of approved principals were rare. Additionally, there was no requirement for agent lenders to wait for a broker-dealer’s approval before lending to the broker-dealer from newly added principals.
Under ALD standards, agent lenders are required to send out detailed information for each uniquely identified principal. The detailed information allows a broker-dealer to approve or reject specific principals and to monitor exposure at the individually approved principal level. Broker-dealers are now able to perform the pre-qualification process for each new principal added by an agent lender. Agent lenders have agreed provide broker-dealers with basic information about the principal such as: · name · address of incorporation · business address · industry classification code · unique principal ID (e.g. a tax identification number)
A. Regulatory Capital Historically, broker-dealers based their regulatory capital calculations on exposure to an agent lender in total rather than on their exposure to the actual principals. The loan details as to the underlying principals of each loan were not provided to borrowers as a matter of industry practice, (unless the loan was executed under a disclosed or exclusive arrangement).
To facilitate the required principal level broker-dealer calculations, agent lenders should send broker-dealers loan detail information on a daily basis for each booked loan via the Daily Loan Data file. The file contains data identifying the security borrowed, collateral amount and type, number of shares borrowed, settlement status and activities such as mark to markets with the individual principal loan allocation detail. In addition, agent lenders provide a non-cash collateral data type containing information on the non-cash collateral provided to the agent lender allocated by the agent to each principal lender.
B. Principal Level Books and Records The ALD requirements specify that the daily communication of principal level loan and collateral allocation information (from agent lenders to broker dealers) should be retained as books and records, in lieu of broker-dealers being required to book principal allocation information for each trade. The agent lender Daily Loan Data and Non-Cash Collateral Data File data should be retained for six years.
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