The Securities Financing Transactions Regulation (SFTR) defines among other items the transparency provisions for securities or commodities lending transactions, buy-sell back and sell-buy back transactions, repurchase transactions, margin lending transactions and total return swaps, as well as the reuse of financial instruments received as collateral.
What is the SFTR?
Regulation (EU) No. 2015/2365 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No. 648/2012 Securities Financing Transactions Regulation – SFTR) aims to increase the transparency of securities financing transactions. In particular the risks associated with such financial transactions should be detected as early as possible and monitored and protection against potential conflicts of interest created. Counterparties are therefore required to report every securities financing transaction as well as any modification or termination thereof to a registered or recognised transaction register. Furthermore, the reuse of financial instruments received as collateral is only permitted under certain conditions.
The SFTR entered into force on 12 January 2016, although it should be noted that some Articles in the Regulation only enter into force at a later date based on the transitional provisions.
Who is affected?
The following fall in the scope of application of the SFTR:
- counterparties to a securities financing transaction that are established in the EU included all of their branch establishments, irrespective of where they are located, or in a third country, if the securities financing transaction has been concluded in the course of the operations of a branch establishment within the European Union of these counterparties
- management companies of undertakings for collective investment in transferable securities (UCITS) and UCITS investment companies in accordance with Directive 2009/65/EC
- managers of alternative investment funds (“AIFM“) authorised in accordance with Directive 2011/61/EU
- and counterparties, who reuse collateral, and that are authorised in the EU or subject to certain conditions are authorised in a third country
What are the key themes of the Regulation?
Pursuant to Article 3 (11) SFTR repurchase transactions, securities or commodities lending transactions, buy-sell back transactions or sell-buy back transactions or margin lending transactions are considered to be securities financing transactions.
The reporting obligation in Article 4 (1) SFTR prescribes that counterparties to securities financing transactions shall report the details of any securities financing transaction they have concluded, as well as any modification or termination thereof, to a trade repository registered in accordance with Article 5 or recognised in accordance with Article 19. Those details shall be reported no later than the working day following the conclusion, modification or termination of the transaction.
Article 3 point 2 SFTR defines a “counterparty” as a financial counterparty or a non-financial counterparty.
The SFTR reporting obligations enter into effect in 2020 for financial counterparties and in 2021 for non-financial counterparties pursuant to Article 33 (2) lit. a SFTR.
The reporting obligation pursuant Article 4 (1) SFTR will become effective
- in accordance with Article 33 (2) lit. a sublit. (i) as of 13 April 2020
- in accordance with Article 33 (2) lit. a sublit. (ii) as of 13 July 2020
- in accordance with Article 33 (2) lit. a sublit. (iii) as of 12 October 2020
- in accordance with Article 33 (2) lit. a sublit. (iv) as of 11 January 2021.
The ESMA Guidelines “Guidelines Reporting under Articles 4 and 12 SFTR” were published on the ESMA Website (Link: https://www.esma.europa.eu/search/site/sftr) on 6 January 2020.
UCITS management companies, UCITS investment companies, and AIFMs shall inform investors on the use they make of SFTs and total return swaps in the following manner:
- UCITS management companies or UCITS investment companies include this information in their half-yearly and annual reports referred to in Article 68 of Directive 2009/65/EC;
- AIFMs include this information in the annual report referred to in Article 22 of Directive 2011/61/EU.
The information on SFTs and total return swaps shall contain detailed information, provided for in Section A of the Annex to the SFTR.
Furthermore, the UCITS prospectus referred to in Article 69 of Directive 2009/65/EC, and the disclosure by AIFMs to investors referred to in Article 23(1) and (3) of Directive 2011/61/EU shall specify the securities financing transactions and total return swaps which UCITS management companies or UCITS investment companies, and AIFMs respectively, are authorised to use and include a clear statement that those transactions and instruments are used.
The prospectus and the disclosure to investors shall include the data provided for in Section B of the Annex of the SFTR.
The regulation regarding the re-use of collateral under Article 15 SFTR stipulates that a counterparty shall be allowed to re-use a financial instrument held as collateral, if the following two requirements are fulfilled:
- The receiving counterparty must inform the providing counterparty in writing in an appropriate manner about the risks and consequences in connection with the granting of consent to a right of use of collateral in the form of a security collateral arrangement or the conclusion of a title transfer collateral arrangement.
- Beforehand the providing counterparty shall have granted its prior express consent to a security collateral arrangement or has expressly agreed to provide collateral by way of a title transfer collateral arrangement. “Express consent” is understood as being evidenced by a signature in writing or in a legally equivalent manner.
It should be emphasised that stricter sectoral legislation, in particular Directives 2009/65/EC and 2014/65/EU, and the national legislation (in particular the Securities Lending and Repurchase Transactions Regulation (WPV; Wertpapierleih- und Pensionsgeschäfteverordnung) which is intended to ensure a higher level of protection for providing counterparties, remain unaffected by this Article.