Regulation (EU) 2015/2365 of the European Parliament and of the Council on transparency of securities financing transactions and of reuse and amending Regulation 648/2012 (SFTR) is one of a number of measures aimed at improving the transparency and monitoring of the securities financing transactions market.
The SFTR implements recommendations following the Financial Stability Board (FSB) review of the shadow banking sector after the financial crisis. The Regulation applied in part from 12 January 2016 (although many of its requirements are subject to transitional provisions) and aims to improve transparency of securities financing transactions.
The SFTR is directly applicable in all EU member states. However, member states will need to adopt national rules to ensure that national competent authorities can supervise the implementation of the SFTR and to give their national authorities powers to impose sanctions and other measures to enforce its provisions.
The Regulation imposes requirements on all types and sizes of EU and UK entities who enter into securities financing transactions (SFTs) such as repo transactions, securities lending transactions, margin lending transactions and commodities lending transactions. The new rules have significant extraterritorial effect. They apply to non-EU and non-UK firms if the securities financing transaction is concluded through an EU or UK branch.
Furthermore, SFTR has registration and operational requirements for TRs offering SFTR repository services, and defined levels of access to data for different authorities.
- imposes limitations on the 'reuse' of collateral, so that clients and counterparties understand the risks involved and give their consent to the reuse
- imposes disclosure requirements on managers of UCITS and AIFs to make detailed disclosures to their investors of the use they make of securities financing transactions (SFTs) and total return swaps, through periodical reports and through pre-contract disclosures
- requires both financial and non-financial market participants to report details of their SFTs to an approved EU trade repository in order to provide transparency to regulators on the use of SFTs by market participants
Application of the SFTR is broad and requirements on reuse of collateral are not limited to SFTs. The definition of SFTs includes some transactions in relation to commodities and margin loans and the transparency requirements for UCITS and AIFs also apply to total return swaps.
There are limited exemptions.
The SFTR leverages substantially on key aspects of EMIR such as, among others, the establishment of the reporting obligation (Article 4 SFTR), the registration requirements for TRs (Article 5 SFTR) and the establishment of levels of access to data (Article 12 SFTR), building on the sufficiency of some of the controls in place for the already registered TRs. It also amends the definition of OTC derivatives in EMIR to create a new procedure for recognising 'equivalent' non-EU markets (so that derivatives traded on those markets are no longer treated as 'OTC').
The reporting obligation will apply on a phased-in basis from the date which is 12, 15, 18 or 21 months after the date of entry into force of the RTS, in each case, depending on counterparty type.
SFTR mandates reporting of all SFTs to TRs. ESMA has developed detailed rules and guidance on reporting, registering, and accessing data.
ESMA has also issued Guidelines on reporting under Articles 4 and 12 of the SFTR. (see also the Final report)
In addition, ESMA may develop RTS in respect of periodical reports and pre-contractual disclosure by managers of UCITS and AIFs. No timeline is specified for these, as they are optional, but timing may be an issue if further content is specified close to the dates these requirements come into effect.
There are no requirements for Level 2 measures to be adopted in relation to the rules on reuse of collateral.