New EU rules on securities financing transactions

New EU rules on securities financing transactions

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.

What is the SFTR?

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.

Which transactions are affected?

The SFTR affects the following SFTs:

  • repos, including reverse repos and buy-sell backs—repos are a means of securing cash loans with securities as collateral
  • securities lending, which involve shares or bonds being lent against cash collateral
  • commodities lending, which involve commodities being lent against cash
  • margin loans in connection with the purchase, sale, carrying or trading of securities, but excluding any other cash loan secured by securities

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.

Which entities are affected?

The following entities are affected:

  • any EU entity, including its non-EU branches
  • a non-EU entity if the SFT is entered into by an EU branch of that entity
  • undertakings for the collective investment in transferable securities (UCITS) and their management companies
  • alternative investment fund managers (AIFMs) authorised or registered under the Alternative Investment Fund Manager Directive 2011/61/EU (AIFMD), irrespective of where the AIFM’s fund is established
  • for reuse of collateral:
    • any EU collateral receiver (including its non-EU branches) and

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About the author:

Meet Emma:

1.Banking and finance lawyer with experience in derivatives, debt capital markets, securitisation and structured finance in London and Paris

2.Likes ballet, playing the harp and holidays

3.Thinks the law is always changing!

Emma trained and qualified at Allen & Overy LLP and worked in their derivatives and structured finance teams in London and Paris.  She then joined the foreign exchange prime brokerage legal team at Deutsche Bank before spending 4 ½ years with Crédit Agricole CIB advising the fixed income and derivatives desk.