Regulation on transparency of securities financing transactions and of reuse (SFTR)

 


 

 

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) is part of a globally coordinated effort to reduce financial stability risks arising from shadow banking activities and bring transparency to securities financing transactions (SFTs) markets.

 

The two main components of SFTR are:

 

- a transparency obligation towards investors on the reuse of collateral, and

 

- a transaction reporting requirement.

 

 

Rules on the reuse of financial instruments received under a collateral arrangement

 

 

 

Recitals 21 - 25 of the SFTR

 

(21) Reuse of collateral provides liquidity and enables counterparties to reduce funding costs. However, it tends to create complex collateral chains between traditional banking and shadow banking, giving rise to financial stability risks. The lack of transparency on the extent to which financial instruments provided as collateral have been reused and the respective risks in the case of bankruptcy can undermine confidence in counterparties and magnify risks to financial stability.

 

(22) In order to increase transparency of reuse, minimum information requirements should be imposed. Reuse should take place only with the express knowledge and consent of the providing counterparty. The exercise of a right to reuse should therefore be reflected in the securities account of the providing counterparty unless that account is governed by the law of a third country which provides for other appropriate means to reflect the reuse.

 

(23) Although the scope of the rules concerning reuse in this Regulation is wider than that of Directive 2002/47/EC of the European Parliament and of the Council (13), this Regulation does not amend the scope of that Directive but should, rather, be read in addition to that Directive. The conditions subject to which counterparties have a right to reuse and to exercise that right should not in any way diminish the protection afforded to a title transfer financial collateral arrangement under Directive 2002/47/EC. Against that background, any infringement of the transparency requirements of reuse should not affect national law concerning the validity or effect of a transaction.

 

(24) This Regulation establishes strict information rules for counterparties on reuse which should not prejudice the application of sectorial rules adapted to specific actors, structures and situations. Therefore, the rules on reuse provided for in this Regulation should apply, for example, to collective investment undertakings and depositories or clients of investment firms only insofar as no more stringent rules on reuse are provided for in the legal framework for collective investment undertakings or for safeguarding of client assets constituting a lex specialis and taking precedence over the rules contained in this Regulation. In particular, this Regulation should be without prejudice to any rule under Union law or national law restricting the ability of counterparties to engage in reuse of financial instruments that are provided as collateral by counterparties or persons other than counterparties. The application of the reuse requirements should be deferred to six months after the date of entry into force of this Regulation in order to provide counterparties with sufficient time to adapt their outstanding collateral arrangements, including master agreements, and to ensure that new collateral arrangements comply with this Regulation.

 

(25) In order to promote international consistency of terminology, the use of the term 'reuse' in this Regulation is in line with the FSB Policy Framework. This should not, however, lead to inconsistency within the Union acquis and, in particular, should be without prejudice to the meaning of the term 'reuse' employed in Directives 2009/65/EC and 2011/61/EU.

 

CHAPTER V of the SFTR

TRANSPARENCY OF REUSE

 

Article 15

Reuse of financial instruments received under a collateral arrangement

 

1. Any right of counterparties to reuse financial instruments received as collateral shall be subject to at least both of the following conditions:

 

(a) the providing counterparty has been duly informed in writing by the receiving counterparty of the risks and consequences that may be involved in one of the following:

 

(i) granting consent to a right of use of collateral provided under a security collateral arrangement in accordance with Article 5 of Directive 2002/47/EC;

 

(ii) concluding a title transfer collateral arrangement;

 

(b) the providing counterparty has granted its prior express consent, as evidenced by a signature, in writing or in a legally equivalent manner, of the providing counterparty to a security collateral arrangement, the terms of which provide a right of use in accordance with Article 5 of Directive 2002/47/EC, or has expressly agreed to provide collateral by way of a title transfer collateral arrangement.

 

With regard to point (a) of the first subparagraph, the providing counterparty shall at least be informed in writing of the risks and consequences that may arise in the event of the default of the receiving counterparty.

 

2. Any exercise by counterparties of their right to reuse shall be subject to at least both of the following conditions:

 

(a) reuse is undertaken in accordance with the terms specified in the collateral arrangement referred to in point (b) of paragraph 1;

 

(b) the financial instruments received under a collateral arrangement are transferred from the account of the providing counterparty.

 

By way of derogation from point (b) of the first subparagraph, where a counterparty to a collateral arrangement is established in a third country and the account of the counterparty providing the collateral is maintained in and subject to the law of a third country, the reuse shall be evidenced either by a transfer from the account of the providing counterparty or by other appropriate means.

 

3. This Article is without prejudice to stricter sectoral legislation, in particular to Directives 2009/65/EC and 2014/65/EU, and to national law that aims to ensure a higher level of protection for providing counterparties.

 

4. This Article shall not affect national law concerning the validity or effect of a transaction.

 

 

 

SFTR reporting and data collection

 

 

The new rules on transparency provide for the reporting of details regarding Securities Financing Transactions (SFTs) concluded by all market participants, whether they are financial or non-financial entities, including the composition of the collateral, whether the collateral is available for reuse or has been reused, the substitution of collateral at the end of the day and the haircuts applied.

 

 

Article 4(1) of the SFTR

 

Reporting obligation and safeguarding in respect of SFTs

 

1. Counterparties to SFTs shall report the details of any SFT they have concluded, as well as any modification or termination thereof, to a trade repository registered in accordance with Article 5 or recognised in accordance with Article 19. Those details shall be reported no later than the working day following the conclusion, modification or termination of the transaction.

 

The reporting obligation laid down in the first subparagraph shall apply to SFTs which:

(a) were concluded before the relevant date of application referred to in point (a) of Article 33(2) and remain outstanding on that date, if:

(i) the remaining maturity of those SFTs on that date exceeds 180 days; or

(ii) those SFTs have an open maturity and remain outstanding 180 days after that date;

 

(b) are concluded on or after the relevant date of application referred to in point (a) of Article 33(2).

 

The SFTs referred to in point (a) of the second subparagraph shall be reported within 190 days of the relevant date of application referred to in point (a) of Article 33(2).

 

Compliance with the SFTR reporting obligation is intended to require only limited updates to the systems already developed under EMIR.

 

The EU legislators have also clearly indicated their intention to minimise additional operational costs for market participants by building on pre-existing infrastructures, and operational processes and formats which have been introduced with regard to reporting derivative contracts to trade repositories (Steven Maijoor, ESMA's Chair, ISLA's 25th Annual Securities Finance and Collateral Management Conference, 22 June 2016 ESMA/2016/989).

 

Technical standards for reporting under SFTR are currently in the drafting stage, but ESMA, to the extent feasible, is mandated to minimise overlaps and avoid inconsistencies between the technical standards adopted pursuant to SFTR and those adopted pursuant to EMIR.

 

The aforementioned ESMA's document of 22 June 2016 (ESMA/2016/989) comprises further interesting remarks on the interdependencies between reporting regimes under MIFID II/MiFIR, EMIR and SFTR and timelines envisioned (p. 4, 5):

 

"Although MIFID II and MIFIR have different objectives compared with SFTR and EMIR, to the extent feasible ESMA is working on ensuring the standardisation of rules and requirements under these three reporting regimes. In this respect, ESMA has proposed the use of the ISO 20022 standard for SFT reporting.

 

To be clear, this doesn't mean that all the data fields reported under SFTR, EMIR and MiFID would be exactly the same, which would put into question why three reporting regimes were envisaged in the first place. But where the same type of information is required, it should be as standardised as possible. ESMA expects that this would allow the relevant stakeholders to reuse components across the three pieces of legislation and to leverage on existing processes and systems.

[...]

The current timeline for SFTR is that it will kick off in the second half of 2018. This should allow the reporting parties to develop or adapt the relevant reporting systems in place following the implementation of the MIFID II and MiFIR reporting requirements. The timeline of the EMIR review is in the hands of the Commission, and in light of the recent messages by Commissioner Hill, it would seem unlikely that it would collide with the commencement of reporting under SFTR.

 

To conclude, the financial crisis demonstrated the need for regulators to be able to monitor the evolution of SFT markets, the availability of collateral, and innovations such as new forms of collateral, and new types of trades."

 

The SFTR reporting obligation starts in 2018.

 

 


  

 

 

MiFID II framework for SFTRs

 

 

 

Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits, Article 5(1), (2)

 

Article 5
Use of client financial instruments


1.   Member States shall not allow investment firms to enter into arrangements for securities financing transactions in respect of financial instruments held by them on behalf of a client, or otherwise use such financial instruments for their own account or the account of any other person or client of the firm, unless both of the following conditions are met:


(a) the client has given his prior express consent to the use of the instruments on specified terms, as clearly evidenced in writing and affirmatively executed by signature or equivalent, and


(b) the use of that client's financial instruments is restricted to the specified terms to which the client consents.

 

2.   Member States shall not allow investment firms to enter into arrangements for securities financing transactions in respect of financial instruments which are held on behalf of a client in an omnibus account maintained by a third party, or otherwise use financial instruments held in such an account for their own account or for the account of any other person unless, in addition to the conditions set out in paragraph 1, at least one of the following conditions is met:

 

(a) each client whose financial instruments are held together in an omnibus account must have given prior express consent in accordance with point (a) of paragraph 1;

 

(b) the investment firm must have in place systems and controls which ensure that only financial instruments belonging to clients who have given prior express consent in accordance with point (a) of paragraph 1 are so used.

 

The records of the investment firm shall include details of the client on whose instructions the use of the financial instruments has been effected, as well as the number of financial instruments used belonging to each client who has given his consent, so as to enable the correct allocation of any loss.

 

 

 

Documentation

 

 

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) 

 

Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits, Article 5(1), (2)

 

Final Report, Technical standards under SFTR and certain amendments to EMIR, 31 March 2017, ESMA70-708036281-82

 

Consultation Paper, ESMA's technical advice to the Commission on fees for TRs under SFTR and on certain amendments to the fees under EMIR, 19 December 2016, ESMA/2016/1672

 

Report on securities financing transactions and leverage in the EU Report prepared under the mandate in Article 29(3) SFTR, 4 October 2016, ESMA/2016/1415

 

Consultation Paper Draft RTS and ITS under SFTR and amendments to related EMIR RTS, 30 September 2016, ESMA/2016/1409 

 

Discussion Paper Draft RTS and ITS under SFTR, 11 March 2016, ESMA/2016/356

 

 

Links

 

 

The SFTR – new EU rules for securities financing transactions and collateral

  

Financial Collateral Directive (Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements) 

 

Steven Maijoor, ESMA's Chair, ISLA's 25th Annual Securities Finance and Collateral Management Conference, 22 June 2016 ESMA/2016/989

 

 

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Last Updated on Tuesday, 06 June 2017 22:20
 

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