On 29 October 2015, the European Parliament voted to adopt the Regulation on Reporting and Transparency of Securities Financing Transactions (SFTs). The Regulation was proposed by the European Commission in January 2014 with the aim of improving the transparency of SFTs and the understanding and identification of the risks related to them.
SFTs allow parties to use their assets as collateral to secure financing and include margin lending transactions, lending or borrowing securities and commodities, repurchase transactions and buy-sell back or sell-buy back transactions.
The Regulation was created 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 still believes such activities should be transparent and subject to appropriate regulation.
Some key requirements of the Regulation are set out below:
- Details of SFTs must be reported to a trade repository no later than the first working day following the conclusion, modification or termination of the transaction. Supervisors and regulators will have access to the data collected by trade repositories.
- Minimum transparency conditions regarding all collateral reuse (the use by a party of financial instruments which were given to them by their clients or counterparties as collateral. Such conditions include the disclosure of the risks involved by the party wishing to engage in reuse and the requirement for the counterparty involved to give prior written consent.
- Detailed disclosure by fund managers on the use of SFTs and total returns swaps in their half-yearly/annual reports and in their pre-investment documents (generally the prospectus) to provide regulators and particularly investors with a more informed understanding of the transactions.
The Regulation must be formally adopted by the European Council before it can enter into force. However, not all obligations will apply immediately and there are certain important transition periods:
- The obligation to report SFTs to a trade repository will apply 12, 15, 18 or 21 months after the entry into force of the level 2 measures, depending on the type of entity.
- The transparency conditions for collateral reuse will apply 6 months after the Regulation enters into force.
- The required disclosures by fund managers regarding their reports and pre-investment documents will apply 12 and 18 months respectively after the regulation enters into force. However, the transition period regarding pre-investment documents is only available to existing funds.
Financial entities and particularly investment fund entities should ensure that they are aware of the new requirements in the Regulation which will be relevant to their business, particularly new funds which have not yet been launched, as if they come into existence after the Regulation enters into force it will impact their disclosure requirements from the outset.