The Managed Funds Association (MFA) has called on the Financial Industry Regulatory Authority (FINRA) to limit its proposed securities loan reporting rules to the scope mandated by the US Securities and Exchange Commission (SEC).

In a comment letter submitted last week, MFA argued that the expanded reporting framework proposed by FINRA would impose excessive risks on market participants.

The SEC's Securities Lending Rule requires FINRA to establish new rules for securities loan reporting. However, MFA contends that the proposed FINRA rules exceed the SEC's mandate and could negatively impact market stability and investor protection.

MFA is currently challenging the Securities Lending Rule in court, asserting that the SEC failed to adequately consider the interconnected nature of its rule-making. The lawsuit claims that the transparency mandated by the SEC's rule could undermine market liquidity and efficiency by exposing detailed individual transaction data, which might harm investors.

According to MFA, securities lending, which facilitates short selling, plays a critical role in market functionality, by supporting price discovery, boosting liquidity, enhancing market efficiency, and providing vital income to institutional investors such as pensions and endowments. MFA argues that the SEC's requirement for granular transaction reporting will adversely affect investors who engage in short selling.

MFA sees the proposed FINRA rules as going beyond the SEC’s requirements, including additional demands for the publication of confidential loan data and modifications, which the MFA believes could reveal the identities and strategies of short sellers, potentially deterring market participation and degrading market quality.

“The FINRA securities loan reporting proposal threatens to harm markets and investors by discouraging short selling and increasing volatility through herding behaviour," said Bryan Corbett, MFA President and CEO. "The integrity of US capital markets, which drive economic growth and benefit all Americans, should not be compromised by a proposal that exposes confidential trading information.”