The SFTR requires both counterparties to an SFT to report details of the SFT entered into, and any modification or termination of the SFT, to an ESMA registered or recognised (in the case of non-EU) trade repository (TR). In addition to the SFTR Level 1 requirement, Level 2 Regulations have issued specifying the details of SFTs to be reported to TRs and laying down the required format and frequency of SFT reports.
The Guidelines provide practical guidance on compliance with, and clarification of, the Level 1 and Level 2 requirements for SFT counterparties.
The Guidelines are extensive and detailed; however, we have summarised below certain of the key aspects of the SFTR reporting obligation for investment funds and their management companies and how they are addressed in the Guidelines.
Who is the SFT counterparty?
The SFTR reporting obligation applies to the counterparties to the SFT. If a sub-fund of an umbrella fund is a counterparty to an SFT, the Guidelines confirm that the sub-fund should be reported as counterparty on a standalone basis. As the Level 2 Regulations require reporting of any beneficiary under the SFT, the Guidelines clarify that where the umbrella fund which enters into an SFT on behalf of the sub-fund, it must report the LEI of the sub-fund as the beneficiary under the SFT.
What is and what is not, an SFT
The SFTR defines an SFT to include repos, securities lending or borrowing, commodities lending or borrowing, sell-buy and buy-sell backs and margin lending. Notwithstanding (and perhaps in light of) the breadth of this definition, the Guidelines clarify that the following transactions should not fall under the definition of an SFT and therefore should not be reported under the SFTR:
- retail client lending (except when it is against an irrevocable trust);
- private banking and Lombard loans;
- syndicated lending and other corporate lendings for commercial purposes;
- overdraft facilities of custodians and CCP daylight lending facilities;
- intraday credit/overdraft fails-curing;
- T2S auto-collateralisation;
- intermediate give-ups and take-ups;
- transactions involving emission allowances.
Who is responsible for reporting?
The SFTR requires that, where a UCITS managed by a management company is the counterparty to SFTs, the management company shall be responsible for reporting on behalf of that UCITS and where an AIF is the counterparty to SFTs, its AIFM shall be responsible for reporting on behalf of that AIF.
The Guidelines clarify that where an AIF with a non-EU AIFM (or a registered AIFM to which the SFTR is not applicable) is the counterparty to an SFT, the AIFM should report any SFTs concluded by the AIF if required to do so by the national rules of the AIF, otherwise, the responsibility for reporting remains with the AIF.
The Guidelines further clarify that a non-EU AIF managed by an AIFM registered or authorised under the AIFMD is subject to reporting under the SFTR.
As provided for under the SFTR, the Guidelines note the ability of an AIFM or a UCITS management company to delegate the performance of, but not responsibility for, reporting. If delegating, the AIFM or UCITS management company should provide its delegate with all details of the SFT in a timely manner and shall be responsible for ensuring that those details are correct.
Reporting start date
As outlined in our April 2019 Update, the commencement dates for SFT reporting have been set by reference to the authorisation status of the reporting counterparty:
**SFTs concluded before the relevant date of application are also in scope if they remain outstanding on that date of application with a remaining maturity on that date that exceeds 180 days or have an open maturity and remain outstanding 180 days after that date.
The Guidelines clarify that where a reporting commencement date falls on a non-working day, counterparties should start reporting the SFTs concluded on or after the commencement date, on the first working day after the commencement date. For example, 11 October 2020 is a Sunday and so UCITS management companies and AIFMs (row 3 above) established in EU member states where 12 October 2020 is not a public holiday, should start reporting by 12 October 2020 the SFTs concluded on or after 11 October 2020. If a UCITS management company or AIFM is established in a Member State where 12 October 2020 is a public holiday, then reporting of SFTs entered into on or after 11 October should start by 13 October 2020.
The Guidelines also address the situation where a UCITS or AIF enters into an SFT with a counterparty subject to an earlier reporting date than the fund i.e. an investment firm, credit institution, CCP or CSD (rows 1 and 2 in the table above). In such case, it is ESMA's understanding "that the reporting counterparty should receive the necessary information by the non-reporting counterparty in order to be able to report the transaction".
Backloading (reporting of SFTs entered into prior to the reporting commencement date (RCD))
The SFTR requires reporting of SFTs concluded before the RCD which remain outstanding on that date if their remaining maturity exceeds 180 days, or the SFT has an open maturity and remains outstanding 180 days after that date i.e. RCD +180 days. While ESMA proposed (in the consultation preceding the Guidelines) a requirement for full reporting of backloaded SFTs (notwithstanding the SFTR limitation) it has elected not to pursue this in the Guidelines following strong resistance from stakeholders to its proposal. Instead, ESMA notes that while full backloading (i.e. reporting of all SFTs in existence on the RCD) is optional, counterparties covered by the same RCD should agree in advance on which day they backload the SFTs and in any case, the backloading should be done within 190 days of the relevant RCD.
Requirement to report LEIs and ISIN codes
Many respondents to the consultation in advance of the publication of the Guidelines raised concerns about the unavailability of LEIs and ISIN codes, especially for non-EU issuers. However, while ESMA acknowledges there may be cases where LEIs and ISINs are not available, it nonetheless reiterates the importance of a correct identification of the issuer and issuance through the LEI and the ISIN and the reporting by counterparties of these fields to achieve the purposes of SFTR reporting. As a temporary measure, ESMA has noted that it will allow reports without the LEI of third-country issuers (that do not have an LEI) of securities which are lent, borrowed or provided as collateral in an SFT to be accepted until 13 April 2021.
The Guidelines are effective immediately and reporting entities are encouraged to use them starting from the first day on which they are obliged to commence reporting under the SFTR. A full copy of ESMA's Final Report including the Guidelines is available here on ESMA's website.