The mandatory reporting of securities financing transactions is designed to enhance transparency on shadow banking activities.

The European Union's new reporting requirement under Regulation (EU) 2015/2365 of November 25, 2015—known as the Securities Financing Transactions Regulation ("SFTR")—will go into effect beginning on April 11, 2020, for credit institutions and investment firms and on January 11, 2021, for non-financial counterparties. The mandatory reporting of securities financing transactions ("SFT") to authorized or recognized trade repositories constitutes the third and final pillar of the SFTR, designed to enhance transparency on shadow banking activities.

The in-scope SFTs encompass repurchase transactions, securities or commodities lending transactions, and buy-sell backs. They also include margin lending transactions, which are defined as an extension of credit "in connection with the purchase, sale, carrying or trading of securities, but not including other loans that are secured by collateral in the form of securities." Given this equivocal definition, market participants have expressed strong concern that the new reporting requirement could potentially apply to a substantial number of transactions—such as private banking lending, corporate lending collateralized by securities, and merger and acquisition finance—that have no or limited relation to shadow banking.

In its latest guidelines and the related Final Report, the European Securities and Markets Authority ("ESMA") brings some much-needed clarification by stating that private banking and Lombard loans not related to securities financing, as well as corporate lending for commercial purposes, are not in scope. Although ESMA seems to take a pragmatic approach by distinguishing transactions with commercial purposes from those with financial or trading purposes, to avoid collecting an enormous amount of irrelevant information, market participants should be cautious about the purpose of a margin lending that may be difficult to assess in certain circumstances.

The mandatory reporting applies not only to new SFTs but also to outstanding transactions with a remaining maturity exceeding 180 days, and it is triggered each time the relevant transaction is amended or terminated.

Compliance with this reporting obligation is sanctioned by national regulators, which recently demonstrated particular scrutiny with respect to similar obligations in France.