On June 29, the Council of the European Union announced that its Permanent Representatives Committee (Coreper) approved a final compromise text of the proposed regulation on reporting and transparency of securities financing transactions (SFT Regulation). The compromise brings consensus to variations between the European Commission’s proposal published on January 29, 2014 (2014/0017 (COD)) and the European Parliament’s draft report. The final text of the compromise text, which can be found here, was published along with an “I” item note inviting the Coreper to agree. If approved by the Parliament on October 27 as anticipated, the SFT Regulation could be in force as early as the first calendar quarter of 2016. The SFT Regulation is intended to provide transparency in securities financing transactions and is part of the Financial Stability Board’s and European Union’s initiative on “shadow banking.”
Generally an SFT includes any transaction that uses assets of one counterparty to generate financing (i.e., repos, reverse repos, securities lending, buy/sell back and sell/buy back transactions and margin lending transactions) where at least one of the counterparties has a nexus to the European Union.
The SFT Regulation will now require (1) counterparties to these transactions to report the details of each transaction to a designated trade repository, (2) Undertakings for the Collective Investment of Transferrable Securities (UCITS) management companies and Alternative Investment Fund Managers (AIFMs) to provide pre-contractual and ongoing disclosures to investors regarding a collective investment scheme’s use of SFTs, and (3) rights of reuse of collateral, which are in addition to several existing EU requirements with respect to collateral arrangements.
Market participants (including companies, proprietary trading firms and hedge funds) that engage in an SFT where an EU counterparty is involved will be affected by the SFT Regulation.