The European Commissions has published a legislative proposal for a regulation on reporting and transparency of securities financing transactions (SFTs).

What are SFTs?

SFTs are defined in the draft regulation as:

  • Repurchase transactions
  • Securities or commodities lending/borrowing
  • Any transaction having an equivalent economic effect and posing similar risks, in particular a buy-sell back or sell-back transaction

Why has this proposal come about?

The Commission Communication on shadow banking and the European Parliament’s 2012 Resolution on shadow banking highlighted that strengthening transparency and data availability, in particular for activities frequently undertaken by the shadow banking sector such as repurchase agreements and securities lending is essential.

What are the main elements of the proposal?

The draft regulation introduces measures to improve transparency of securities financing transactions in the following three ways:

  • A requirement that all transactions are reported to a central database, allowing supervisors including ESMA to monitor the exposures to and risks associated with SFTs
  • A requirement for detailed reporting on these operations, both in the regular reports of funds and in pre-investment documents, leading to better informed investment decisions by investors
  • Harmonised rules with respect to hypothecation (the use by a financial company, for their own purposes, of financial instruments that have been given to them as collateral) including a requirement that counterparties give their written consent prior to the hypothecation

The reporting requirement

Counterparties to SFTs must report details of such transactions to a trade repository registered with, or, in the case of a third country repository, recognised by ESMA within one working day of the conclusion, modification or termination of the transaction.

Data transparency and availability

Trade repositories must collect and maintain the details of SFTs and ensure that the European Supervisory bodies have direct and immediate access to these details enabling them to fulfil their respective responsibilities and mandates.

Transparency towards fund investors

Transparency in periodical reports

Management companies of UCITS, UCITS investment companies and AIFMs must inform their investors on the use they make of SFTs as well as of other financing structures. This information must be included in their half-yearly and/or annual reports.

Transparency in pre-investment documents

A fund’s investment policy with respect to SFTs should be clearly disclosed in the pre-contractual documents, such as the prospectus for UCITS funds and the pre-contractual disclosure to investors for AIFs, ensuring that investors appreciate the inherent risks before they decide to invest.

Administrative sanctions

The draft regulation provides for the imposition by Member States of administrative sanctions in relation to at least:

  • A breach of the reporting obligation
  • A breach of the rehypothecation requirements

Orla McKnight