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 shadow banking industry.
The SFTR came into force on 12 January 2016, although many of its requirements are subject to transitional provisions.
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 SFTR aims to reduce risks by enhancing transparency in the securities financing markets by:
- imposing limitations on the 'reuse' of collateral, so that clients and counterparties understand the risks involved and give their consent to the reuse
- imposing 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
- requiring 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.
Furthermore, the new rules have significant extraterritorial effects.
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').
ESMA will develop detailed rules on reporting to trade repositories through RTS and ITS. The phase-in of the rules on reporting only begins when these TS have been adopted. In September 2016, ESMA issued for consultation draft technical standards implementing the SFTR. The RTS/ITS are due for submission end Q1/beginning Q2 2017.
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. ESMA also consulted on supervision fees for trade repositories under SFTR and EMIR (December 2016).
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.