On 12 January 2016, the EU Regulation on Reporting and Transparency of Securities Financing Transactions (SFTs) came into force. The most immediate effect of the Regulation is that funds must now comply with additional prospectus disclosure requirements.

New prospectus disclosure requirements

The Regulation applies to SFTs, which include total return swaps and securities lending and repurchase agreements. Information on SFTs, to include a description and the rationale for their use, must now be included in the prospectuses of both UCITS and alternative investment funds seeking Central Bank approval. Other disclosure requirements relate to counterparty selection criteria, information on collateral and its reuse, a description of risks, and the policy on sharing returns generated by these SFTs.

UCITS funds managers may have previously considered some of these disclosure requirements, given their similarity with the provisions of the ESMA Guidelines on ETFs and other UCITS issues on the management of collateral. However, the Regulation goes somewhat further in prescribing the extent of disclosure required, notably making it a requirement to specify the maximum expected and the maximum allowed proportion of assets to be subject to SFTs and total return swaps.

The Central Bank has updated its application forms for the authorisation of new funds to reflect the requirements of the Regulation. Funds existing prior to 12 January 2016 have until 13 July 2017 to bring their prospectuses into line with the new requirements.

Even more transparency to come

As reported in the November edition of our ezine, the aim of the Regulation is to regulate ‘Shadow Banking’: the facilitation of credit that involves entities and activities outside the regulated banking system. While Shadow Banking activities diversify sources of financing, the EU believes such activities should be transparent and subject to appropriate regulation. The Regulation therefore aims to achieve this transparency through the staggered introduction of a wide range of new obligations as follows:

  • 13 July 2016 – the reuse of collateral will be subject to the express consent of the party providing it, which party must also be informed of the risks associated with such reuse.
  • 13 January 2017 – extensive information on the use of SFTs and total return swaps is to be provided in periodic reports of funds (e.g. proportion of assets used in these transactions, information on collateral received and its reuse).
  • 2017 and beyond – details of SFTs are to be reported to trade repositories. The obligation to report will follow a transition period of 12-21 months (depending on the type of counterparty), which will commence following the publication of regulatory technical standards specifying the details of the reports.