What is the regulation on transparency of securities financing transactions?
The Regulation on Transparency of Securities Financing Transactions (the SFTR) Regulation (EU) 2015/2365 was approved by the European Parliament on 29 October 2015 and forms part of the EU’s initiative to enhance the transparency of securities financing markets and increase oversight and monitoring in the “shadow banking” sector. The SFTR entered into force on 12 January 2016.
Does the SFTR apply to SPVs?
Yes - in certain situations.
The SFTR applies to Irish special purpose vehicles (SPVs) entering into new securities financing transactions (SFTs) and also retrospectively to SPVs which have previously entered into SFTs but which are still outstanding as at 13 July 2016.
For the purposes of the SFTR, counterparties to SFTs are categorised as either a “Financial Counterparty” or a “Non-Financial Counterparty”.
Financial Counterparties include authorised credit institutions, MiFID investment firms, UCITS and AIFs managed by AIFMs registered or authorised by AIFMD.
A Non-Financial Counterparty is an undertaking established in the EU or in a third country that is not a Financial Counterparty for the purposes of the SFTR. SPVs fall within the definition of Non-Financial Counterparty and will need to consider the impact of the SFTR and its applicability to their business.
What type of transactions are covered by the SFTR?
The SFTR covers SFTs which include:
- repurchase transactions;
- securities and commodities lending and borrowing transactions;
- buy / sell-back and sell / buy-back transactions; and
- margin lending transactions.
In the context of SPVs the most common SFTs would be where the SPV has entered into repos, reverse repos, securities lending or securities margining transactions or has agreed to a collateral arrangement related to OTC derivatives transactions. Consequently, the SPV is likely to have SFTs if it entered into transactions governed by one of the following industry standard agreements: GMRAs, GMSLAs, MRAs, ISDA CSAs or ISDA CSDs.
What obligations are imposed on SPVs under the SFTR?
The SFTR introduces mandatory record keeping of any SFTs, various requirements relating to the reuse of collateral in collateral arrangements and reporting obligations in respect of SFTs to which the relevant SPV is a party.
The record keeping obligations have already entered into force (see below).
The next issue that will have an impact on SPVs in the short term will be the requirements relating to the reuse of collateral which commence on 13 July 2016 as these requirements apply both to new collateral arrangements which SPVs enter into following 13 July 2016 but also to existing collateral arrangements to which SPVs are already a party (see below).
SPVs do not need to worry about the reporting obligations immediately as the anticipated timeframe for implementation of these is not expected to be until 2018 (see below).
Record keeping (Article 4)
There is an obligation to keep a record of any SFT that has been concluded, modified or terminated for at least five years following the termination of that SFT. As noted above, there was no phase-in period in respect of this record keeping requirement which applied from 12 January 2016.
As a result, SPVs need to ensure they, or a third party on their behalf, have been and will keep records of all SFTs. Many SPVs will already have record keeping procedures and frameworks in place in the context of EMIR.
Requirements relating to the reuse of collateral (Article 15)
The requirements relating to the reuse of collateral apply to all collateral arrangements.
Will these requirements affect SPVs?
Yes - these requirements affect all counterparties to collateral arrangements including Non-Financial Counterparties under the SFTR such as SPVs.
What are “collateral arrangements”?
The definition of “collateral arrangements” is linked to the Directive on Financial Collateral Arrangements – Directive 2002/47/EC. It is broadly defined and overlaps with the definition of SFT referred to above. As such “collateral arrangements” in the context of SPVs would typically include GMRAs, GMSLAs, MRAs, ISDA Credit Support Annexes and ISDA Credit Support Deeds.
What are the requirements relating to the reuse of collateral?
The requirements relating to the reuse of collateral can be broken down into four key elements:
Disclosure of Risk – a counterparty receiving the right to reuse the collateral is required to inform the providing counterparty in writing of the risks and consequences that may arise from granting consent to such right to reuse. Where the relevant collateral arrangement involves both parties having a right to reuse collateral received from the other party, both the SPV and its counterparty will be required to provide such disclosure to the other party. Industry standard risk warnings have been developed for this purpose by six industry associations (AFME, FIA, ICMA, ISDA, ISLA and SIFMA).
Prior Written Consent – the counterparty providing the collateral must grant its prior written consent to the reuse of that collateral and this consent must be evidenced by a signature in writing or a legally equivalent manner. Typically, this requirement will have been satisfied by the parties having signed the relevant agreement establishing the collateral arrangement.
Comply with the terms of written consent – in order to exercise the right of reuse, the counterparty must only reuse the collateral in accordance with the terms specified in the collateral arrangement to which the providing counterparty granted its consent.
Securities account requirement – the collateral provided must be transferred from the account of the providing counterparty to the account of the receiving counterparty.
When do the requirements relating to the reuse of collateral enter into force?
The reuse requirements will take effect from 13 July 2016 and will apply both retrospectively to existing collateral arrangements and to any new collateral transactions entered into following 13 July 2016.
What steps should SPVs take to prepare for the requirements relating to the reuse of collateral in the SFTR?
Following 13 July 2016, the new SFTs will broadly be dealt with by standard industry documentation and new market practice. However, in respect of existing SFTs, SPVs are faced with the task of identifying and dealing with such SFTs which will still be outstanding on 13 July 2016.
SPVs (and corporate administrators on their behalf) will need to liaise with relevant counterparties, arrangers and managers in order to:
- assess whether a right of collateral reuse was granted in a particular arrangement and whether that arrangement will still be in place on 13 July 2016;
- assess whether consent to reuse that collateral was provided in the documentation and / or whether appropriate disclosure was made;
- determine whether there are any knock-on consequences to other transaction documents; and
- work together where applicable to ensure consent will be obtained and disclosure will be made to the relevant counterparty in advance of 13 July 2016.
Reporting (Article 4)
Similar to the reporting obligations imposed under EMIR in respect of derivatives transactions, the SFTR imposes an obligation on counterparties to SFTs (including SPVs) to report certain details of the transaction to a trade repository within one working day of the conclusion, modification or termination of such SFT.
What details will need to be reported?
The full details that are required to be reported have not yet been finalised. However, ESMA issued a draft discussion paper on this issue on 11 March 2016 (followed by the relevant industry responses) and a consultation paper is expected in Q3 2016.
The European Securities and Markets Authority (ESMA) is required to submit to the European Commission no later than 13 January 2017:
- draft regulatory technical standards (RTS) specifying details of the information to be reported by the appropriate counterparties; and
- draft implementing technical standards (ITS) specifying the format and frequency of the reports.
The SFTR does specify the minimum information to be reported, which includes the parties to the SFT, the principal amount, the currency, the assets used as collateral and whether collateral is available for reuse.
When will the reporting obligation enter into force?
The commencement date for the reporting obligation is phased depending on the category of counterparty. For SPVs (ie Non-Financial Counterparties), the commencement date will be 21 months following the adoption and publication of the RTS by the European Commission (the 21 Months Commencement Date).
Who is obliged to report?
Each counterparty to the SFT is obliged to report subject to certain caveats.
Article 4 of the SFTR provides that the obligation to report applies to each counterparty to an SFT. However, it is worth noting that, similar to the case of EMIR, counterparties are permitted to delegate this reporting function to the other counterparty or to a third party, though the delegating party will retain regulatory responsibility.
Where a Financial Counterparty (such as an authorised credit institution) concludes, modifies or terminates an SFT with a Non-Financial Counterparty (such as an SPV), the Financial Counterparty will be required to report on behalf of both counterparties to the SFT where the Non-Financial Counterparty does not exceed two out of the following three limits (a) balance sheet total of €20m; (b) net turnover of €40m; or (c) average number of 250 employees during the relevant financial year.
It is expected that industry standard delegated reporting agreements will be agreed in due course and that a similar approach to the form of arrangements put in place in the context of EMIR reporting will be adopted as market practice.
Is there a requirement to report existing SFTs?
Yes - the reporting obligation will apply to SPVs in respect of:
- all SFTs concluded, modified or terminated following the 21 Month Commencement Date; and
- any SFT concluded prior to the 21 Month Commencement Date but which remains outstanding on the 21 Month Commencement Date and has (i) a remaining maturity of more than 180 days following the 21 Month Commencement Date; or (ii) has an open maturity and actually remains outstanding for 180 days following the 21 Month Commencement Date.
What is the timeframe for submitting reports in respect of relevant SFTs?
Following the 21 Month Commencement Date, reports in respect of SFTs must be submitted within one business day of the conclusion, modification or termination of the SFT.
Where the SFT is concluded prior to the 21 Month Commencement Date, reports must be submitted within 190 days following the 21 Month Commencement Date.
What steps should SPVs take to prepare for the record keeping and reporting obligation in the SFTR?
As a starting point, SPVs will need to consider whether they have entered into any SFTs within the scope of the SFTR (for example GMRAs, GMSLAs, MRAs, ISDA CSAs or ISDA CSDs).
In some cases the reporting obligation will be automatically delegated to the relevant Financial Counterparty as set out above. Where this automatic delegation does not apply, an SPV may nonetheless delegate the reporting obligation to its counterparty or to a third party.
SPVs may wish to consider including provisions in any transaction documents currently under negotiation (such as corporate services agreements and SFT documents) requiring the appropriate counterparties to report on behalf of the SPV as appropriate and generally to provide relevant assistance to the SPV to ensure compliance with the SFTR (specifically record keeping and reporting obligations).
SPVs may also wish to consider including appropriate references to the SFTR and the requirement to comply with its reporting obligations as an additional risk factor in relevant documentation where appropriate.
What are the consequences of failing to comply with the SFTR?
The national competent authority in Ireland for the purposes of the SFTR is the Central Bank of Ireland. While details of the administrative sanction regime in respect of the SFTR have not been published (Member States have until 13 July 2017 to notify the Commission and ESMA of such sanctions), it is expected that this will follow the regime introduced under EMIR.