In 2011, the Financial Stability Board (FSB) began its work on “shadow banking” i.e. financing provided other than by credit institutions. The FSB identified securities financing transactions (SFTs) as sources of financing that could be provided in parallel to traditional banking, but required better regulation.
Broadly speaking SFTs are transactions where securities are used to borrow cash or other securities. They include securities lending, repurchase agreements (repos), and similarly collateralised operations consisting of a transfer of ownership.
In January 2014, the European Commission (EC) published its proposal to regulate the reporting and transparency of SFTs. The ensuing Securities Financing Transactions Regulation (SFTR) is part of the EU’s implementation of the global effort made to regulate shadow banking.
In its proposal, the EC focused on transparency requirements, notably:
- SFTs must be reported to an EU-approved trade repository
- Management companies of UCITS and AIFs must inform investors of their use of SFTs, as well as other financing structures, in timely reports
- The SFTR contains a provision that requires collateral to be credited to the receiving counterparty’s securities account prior to its re-use by that counterparty. This provision applies to all collateralised obligations, not only to SFTs, each time the receiving counterparty has a right to re-use
The SFTR applies to:
- Any counterparty to a securities financing operation
- Trade repositories, that need to be authorised under given conditions
- UCITS investment companies and AIFMs in relation to the obligation to publish their use of SFTs in their half-yearly and annual reports
- Any counterparty engaged in the re-use of financial collateral, where that counterparty is domiciled in an EU member state or, under certain conditions, where a counterparty is domiciled outside the EU
Entry into force will be phased in.
Industry implications of the SFTR
Once fully in force, all securities loans, repos, reverse stock loans, buy and sell back and similar operations will need to be declared to an EU trade repository. This is in addition to any requirement to declare transactions that occur under EMIR and MiFID and is part of a general move to increase transparency in capital markets.
Costs linked to the new disclosure requirements for buy-side are not to be underestimated and may influence their use of SFTs.
SFTs’ counterparties have had to review their existing contracts to meet the requirements of Article 15 (a provision that entered into force in January 2017) which concern transparency of the re-use of collateral.
BNP Paribas Securities Services’ view
Overall, we welcome this initiative as it brings greater transparency as well as much-needed traceability of securities re-use (both SFTs and securities transfers). The obligation to debit and credit securities accounts can be read in conjunction with other legislation related to asset protection, such as the Financial Collateral Directive and the Settlement Finality Directive.
However, the requirement to report transactions to a trade repository could lead to duplication of reporting for certain transactions that also need to be reported under MiFID and EMIR.
ESMA’s final report was published in April 2017. The level 2 measures have not yet been published. These will be essential in the definition of data to be reported to trade repositories. It is vital that the specifics of different types of SFTs are properly taken into consideration in these measures. As at Q1 2018, the publication of the final Regulatory Technical Standards (RTS) (the Level 2 measures) on reporting are still pending.
January 2014 - Initial proposal for a Regulation
Mid-december 2015 - Publication in the Official Journal
January 2016 - Entry into force of Level 1 text (except for provisions subject to phasedin implementation)
July 2016 - Entry into force of transparency requirements on re-use of collateral
January 2017 - Start date for disclosure to end investors on use of SFTs by UCITS funds and AIFs
April 2017 - ESMA final advice to the EC on the Regulatory Technical Standards on reporting of SFTs to TRs
Q1 2018 - Final RTS on reporting to TRs pending publication by the EC
Q4 2018 - Start of the phasing-in of reporting to TRs
Download the regulatory memo:
How insurers can make the most of their liquid assets