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The new regulatory challenge is called SFTR: Reporting obligations

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Even though the Securities Financing Transaction Regulation (EU) 2015/2365 (“SFTR”) has been adopted by the European Parliament and the Council in November 2015 and came into force on 12 January 2016, reporting obligations start one year after the formal adoption of the reporting rules by the Commission; they are therefore expected to go live in Q2 of 2020. SFTR catches within its ambit, banks, brokers, insurance companies, pension funds, other financing companies and non-financial companies, managers of AIFMs, UCITS and management companies of UCITS. SFTR aims to expand transparency on the collateralised transactions given the concerns arising out of the use of a collateral for multiple times as part of a chain of transactions for liquidity purposes and reduction of funding costs. It targets to the use of repos, securities or commodities lending and securities or commodities borrowing, a buy – sell / sell – buy back transactions and margin lending transactions (“SFTs”). 

Transparency for reuse is achieved through the reporting obligations imposed on the entities covered by the SFTR to the trade repository. In accordance with Article 15 of the SFTR reuse should take place with the express knowledge and consent of the providing counterparty. In accordance with the Commission’s Q&A back in 2015 the reporting of SFTs will in practice be based on the existing reporting framework for derivative contracts established by the European Market Infrastructure Regulation (EMIR) and will work in a similar way i.e. a counterparty to a SFT will have to report the details of this transaction to a trade repository. The Regulation allows the delegation of the obligation to a third party. A financial counterparty concluding an SFT with a non – financial counterparty shall be responsible to report on behalf of both parties, an AIFM is responsible to report on behalf of an AIF (where the AIF is the counterparty), the management company of a UCIT must report on behalf of a UCIT (where the UCIT is a counterparty). EU branches of non – EU entities are subject to SFTR reporting. Counterparties must in general keep records of any SFT for at least five (5) years following the termination of the transaction. Main information to be reported include the parties to the SFT, the beneficiary of the rights and obligations arising therefrom, the principal amount, type, quality and value of the assets used as collateral and other details specified in the SFTR.

ESMA published a consultation paper relating to its guidelines for reporting under Articles 4 and 12 of the SFTR and invited an open hearing on the same on 15 July 2019.  ESMA will consider the feedback it receives and expects to publish a final report on the Guidelines on Reporting under SFTR in Q4 2019.

While SFTR reporting obligations are just around the corner (starting in 2020), EU firms are still getting used to the reporting responsibilities imposed by EMIR and MiFiD II. The reporting frameworks set by EMIR and MiFiD II do not appear to overlap with the SFTR. However, the process of collecting, extracting and eventually reporting the data may appear to be costly, complex and far reaching.