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 (TR)
- 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 the reuse of collateral to only take place with the express knowledge and consent of the providing counterparty. This provision applies to all collateralised obligations, not only to SFTs, each time the receiving counterparty has a right to re-use
In December 2018, the EC finally adopted a series of Delegated and Implementing regulations (RTS & ITS) on TRs regarding: (i) details of the application for registration as a TR; (ii) details of the application for registration and extension of registration as a TR; (iii) provisions on access to data held in TRs; (iv) format and frequency of reports (v) the procedure and forms for exchange of information on sanctions, measures and investigations; (vi) the collection, verification, aggregation, comparison and publication of data on SFTs by TRs; (vii) fees charged by ESMA to TRs; and (viii) details of SFTs to be reported to TRs.
The SFTR applies to:
- Any counterparty to a securities financing operation that is established in the EEA (including all its branches irrespective of where they are located) or established in a third country if the SFT is concluded in the course of the operations of a branch in the EEA of that counterparty.
- 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 instruments falling into scope 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 II/MiFIR 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 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.
January 2014 - Initial proposal for a regulation
Mid-December 2015 - Publication in the Official Journal of the EU
January 2016 - Entry into force of level 1 text (except for provisions subject to phased-in 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
July 2017 - Start of phase in for disclosure requirements for managers of AIFs
December 2018 - Publication by the EC of Delegated and Implementing acts
April 2020 - Start date of the SFT reporting obligation to TRs for Financial counterparties