|Title transfer collateral arrangement, emission allowances and SFTR - difficult coexistence|
|Tuesday, 28 June 2016 05:00|
The practical issue, maybe obvious, but I would like to know for certain: do SFTR apply to title transfer collateral arrangements in emission allowances?
In general, Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (SFTR) applies to commodities and securities (see the SFTs' definition) and I used to think emission allowances are neither of them.
I have found support in the article The SFTR – new EU rules for securities financing transactions and collateral where it is explicitly mentioned (p. 3) that emission allowances are not commodities in the meaning used in the SFTR.
However, in the ESMA's Discussion Paper on the draft RTS and ITS under SFTR of 11 March 2016 emission allowances are included in Table 13 dealing with the "Commodities classification" (page 171).
Although the said Table is used for the purposes of the reporting SFTs to trade repositories, but I suppose there are no reasonable grounds to differentiate in that regard between Article 4 (where the reporting obligation is regulated) and Article 15 (on the reuse of financial instruments received under a collateral arrangement).
Emission allowances are also not securities, securities are financial instruments and emission allowances will become financial instruments as from 3 January 2018 only (i.e. when the MiFID II enters into force).
In conclusion, I think it would be risky to exclude emission allowances from the scope of new requirements prescribed in the SFTR.
It would entail, in particular, that title transfer collateral arrangements (TTCA) using emission allowances need to meet new requirements in Article 15 of the SFTR (see box) as from 13 July 2016.
Reporting of the SFTs to trade repositories will start later on, as the regulatory standards are in the drafting stage right now.
Hence, the SFTs' reporting in this case is not an urgent issue, which can't be equally concluded as regards the text of Article 15 of the SFTR (on the requirements for reuse of financial instruments received under a collateral arrangement).
To be clear, I think there are no ambiguities after the MiFID II entry into force, but what about the period from 13 July 2016 till 3 January 2018?
Is it completely riskless to conclude, in the aforementioned time span, title transfer collateral arrangement in emission allowances ignoring the existence of Article 15 of the SFTR?
If the regulators explicitly referred to this issue, it would give more comfort given drastic penalties envisioned for the SFTR's non-compliance.