On January 12, the Regulation on Reporting and Transparency of Securities Financing Transactions will come into force (“the SFT Regulation”).

Securities financing transactions (“SFTs”) allow market participants to access secured funding, in order to secure financing for their activities. This involves the temporary exchange of assets as collateral for a funding transaction.

The SFT Regulation enhances transparency in the shadow banking sector in three ways:

  1. introduction of reporting by any EU financial or non-financial counterparty (excluding SMEs) of all SFTs, except those concluded with central banks, to central databases known as trade repositories. Depending on their category, firms should start reporting at different stages from 12 to 21 months after the entry into force of the relevant regulatory technical standards;
  2. requirement for investment funds to disclose information regarding their use of SFTs and total return swaps to investors in their regular reports and in their pre-contractual documents from the entry into force of the SFT Regulation, while the existing funds with have 18 months to amend them; and
  3. introduction 6 months after the entry into force of the SFT Regulation of some minimum transparency conditions that should be met on the reuse of collateral, such as:
    • counterparty’s consent to the reuse must have been obtained in a written agreement;
    • the potential risks must have been disclosed to the counterparty; and
    • the collateral reused must be shifted away from the account of the counterparty to the account of the re-user.

The provisions relating to reuse apply to all EU entities as well as third country entities which reuse collateral belonging to an EU entity.

On October 29, the Commission also published FAQs on the SFT Regulation.