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As part of the EU initiative on shadow banking, the Securities Financing Transactions Regulation (SFTR) aims to improve transparency in the securities financing transactions market. Robert Daniell, senior counsel, William Sykes, partner and Audra Wamsteker, senior solicitor and professional support lawyer at Macfarlanes LLP, outline the key requirements of the SFTR and the obligations imposed on those affected.
The Securities Financing Transactions Regulation (EU) 2015/2365 is an EU regulation that creates transparency for regulators and investors concerning securities financing transactions (SFTs), and requires disclosures of risks associated with providing collateral.
The build-up of leverage in SFTs has been a primary concern of regulators as one form of SFT, ie repurchase transactions (repos), and has been a key constituent in the ‘shadow banking’ system that has grown in size to rival that of the traditional banking system. The SFT reporting requirement in particular is intended to give regulators better understanding of the scope of the SFT market and its users.
The SFTR affects the following SFTs:
The transparency obligations under the SFTR also apply to total return swaps (TRSs).
Reuse of custodied collateral by recipients (often called rehypothecation), and title transfer financial collateral will also require risk disclosures.
Both counterparties must report each SFT to a trade repository within one business day of trading and keep transaction records for five years after termination of the SFT. A non-financial counterparty (NFC) trading with a financial counterparty (FC) is exempted from the reporting obligation if the NFC doesn’t exceed more than two of following:
Further, the parties to an SFT can delegate one party to report for both, and we expect dealers will agree to report for clients, as commonly occurs for derivatives.
UCITS funds and AIFMs must disclose their use of SFTs and TRSs in prospectuses and periodic reports to investors. The required disclosures in each document are specified in an annex to the SFTR.
For any reuse right on custody collateral and for title transfer collateral, the recipient must obtain from the collateral provider written consent and disclose to the provider the credit and other risks caused by reuse and title transfer. As well as SFTs using financial collateral, passing securities under collateral agreements that rely on transfer of title, such as the English law International Swaps and Derivatives Association (ISDA) Credit Support Annex, are affected.
A number of industry bodies including ISDA and the International Capital Markets Association (ICMA) are working together to publish a standard risk disclosure document to assist users of collateral in this.
Entities must have policies for reporting to regulators any breaches of the reporting and reuse obligations.
Obligations that will apply in future are:
The reporting obligation implementation is not yet fixed. ESMA must submit draft reporting Regulatory Technical Standards (RTS) by 12 January 2017, and a few months after submission the finalised RTS should come into force (the date of coming into force, the ‘RTS date’). The time reporting then starts:
All SFTs entered into from the relevant reporting start date must be reported by the entity to which the reporting start date applies. As a retrospective reporting obligation, within 190 days of the reporting start date the affected entity must report any SFTs existing at the reporting start date that:
Interviewed by Susan Ghaiwal.
The views of our Legal Analysis interviewees are not necessarily those of the proprietor.
First published on LexisPSL Banking & Finance. Click here for a free trial.
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Emma is head of the Banking and Finance team and the Finance Group at LexisNexis®UK.
Emma has wide-ranging experience in derivatives and capital markets with a particular emphasis on credit derivatives and structured products. Emma qualified as a solicitor with Allen & Overy LLP, working in the derivatives and structured finance teams in both their London and Paris offices before gaining experience with Deutsche Bank AG (advising the foreign exchange prime brokerage desk) and Crédit Agricole CIB (advising the fixed income and derivatives desk) before joining LexisNexis®.
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