Shareholder disclosure regulatory changes like SEC Rule 13f-2 are driving more automation

Complying with shareholding disclosure rules for short selling is becoming more complex thanks to regulatory change and challenging data demands.  For example, the requirements for SEC Rule 13f-2 and substantial shareholding update in Taiwan make it difficult for firms to source the data they need internally and to fulfil the obligations manually. Instead, to ensure compliance, firms are looking towards automation.

• Financial firms are struggling with the complexity associated with shareholding disclosure because compliance requirements vary so much by jurisdiction, and require significant amounts of data
  
• Regulatory change – such as the new SEC Rule 13f-2 and a new update in Taiwan – add to the challenges that firms are facing.
• To improve their compliance efficiency and agility around shareholding disclosure, more firms are outsourcing both the required data and the calculations

The new US short selling reporting rule – which has an implementation deadline of 2 January 2025 – is set to pile on additional data complexity for financial firms around shareholding reporting. As a result, the case for automating shareholding reporting has never been stronger.

The US Securities and Exchange Commission (SEC) Rule 13f-2 requires firms that are in scope to report detailed information about short selling positions to the regulator each month – just two weeks after the close of the month – on the new Form SHO if their positions exceed certain thresholds. Financial firms captured by the rule include pension funds, investment advisers, banks, insurance companies, corporations, and broker-dealers. The new reporting requirement is also extraterritorial in nature – financial firms that operate outside of the US will also need to consider if they need to meet the demands of the new rule.

The reporting thresholds are considered to be relatively low for a shareholding disclosure rule. Firms need to report if there is:

• an average monthly gross short position at the close of regular trading hours in the security of at least US$10 million, or
• an average monthly gross short position at the close of regular trading hours as a percentage of shares outstanding in the security of at least 2.5%.

The definition of an equity security includes exchange-traded funds (ETFs), alongside certain derivatives, warrants, options and convertibles that are also considered to be equity securities. In addition, firms will need to apply the new rule to non-US traded securities short positions, taking in to account foreign exchange rates as the dollar value-based thresholds are based in US dollars. These requirements and others make SEC Rule 13f-2 one of the more challenging shareholding disclosure obligations to meet from a data perspective.

Shareholding reporting is already fiendishly complex, in part because firms need to comply with the rules based on where they are trading – such as an exchange in Singapore, Botswana, or Chile – and not where the trader is located.  Around the globe there are 100+ jurisdictions with some form of shareholding reporting, and the requirements can vary significantly from place to place. For example, the rules often demand that a firm aggregate its global position in a security, but the formula for the aggregation differs from rule to rule. For example, in the UK and several other countries, the short ownership monitoring is done at one aggregation level and the long ownership is done at another level. In another example, some jurisdictions require firms to aggregate to the top of the organisation, while others want reporting on individual legal entities.

Regulatory change compounds the challenge that firms seeking to meet shareholding reporting requirements face. For example, Taiwan’s Financial Supervisory Commission is lowering its shareholding disclosure threshold from 10% to 5%, effective 10 May 2024.  Although the regulator announced its intention to do this in August 2023, the alteration was only finalised in January 2024, giving firms little time to adjust their processes. This kind of rapid regulatory change is not uncommon and keeping track of such changes across 100+ jurisdictions is very difficult if using manual processes. 

Given these significant challenges for financial firms in delivering shareholding disclosure compliance, automation is now viewed as essential. Automation enables firms to receive the required calculations quickly and easily, saving time and cost. LSEG partners with multiple 3rd parties which focus on providing automated regulatory-compliant reports on shareholding disclosure. This approach helps to ensure regulatory change is managed seamlessly, with the vendor incorporating rule rewrites automatically, ensuring compliance.

High quality data must underpin shareholding compliance automation – and firms are finding it increasingly difficult to source and maintain the information they need from internal sources. About 100 individual pieces of data are required to perform shareholding disclosure processes, and a single piece of incorrect data can render a calculation invalid. LSEG collects shares and voting rights from over 150 reliable and timely sources, as well as regular filings from over 80,000 listed companies, providing coverage for 110 countries. Robust data governance processes mean that the data delivered to firms around the globe is of the highest quality.

With quality data and robust automation, financial firms that need to provide shareholding disclosures such as short selling positions are able to do so quickly and efficiently.