The final obligations under the SFTR will come into effect on 13 July, requiring AIFMs and UCITS ManCos to include investor disclosures in their fund documents on securities financing transactions.
Since 12 January 2016 EU-based fund managers whose funds carry on securities financing transactions (SFTs) (i.e. securities lending agreements, buy-sellbacks, margin lending, repos and total return swaps) have been getting to grips with the Securities Financing Transactions Regulation (the "Regulation"). Much like EMIR, the early content lacked much "bite" but its impact has increased slowly and surely as time has gone on.
By way of brief historic recap, any UCITS or AIF (or sub-find of an umbrella UCITS or AIF) launched on or after 12 January 2016 has been required to disclose to investors the use of SFTs by the relevant fund – usually through the fund prospectus. The disclosures required by the Regulation include a general description of the SFTs used and the rationale for their use, the maximum and expected proportion of AUM that can be subject to SFTs, the criteria used to select counterparties, details of acceptable collateral and the policy on sharing returns generated by SFTs.
The end of transition
Transitional provisions contained in the Regulation make it clear that the disclosure requirements will not apply until 13 July 2017 for funds (and sub-funds) launched before 12 January 2016 and there is now less than a month until that deadline. As such, EU-based fund managers that operate funds constituted before this date and which use SFTs will need to make the relevant disclosures prior by 12 July 2017. For UCITS ManCos, those disclosures will need to be contained in the UCITS prospectus whilst AIFMs will have a choice of whether to include the disclosures in the prospectus of the fund or in a separate disclosure document (although the FCA has indicated that for an authorised AIF, such as a NURS, it will expect to see this information in the fund’s prospectus).
Will the FCA expect applications to approve the changes?
Unless fund managers are making other operational changes to the fund documents, the FCA will not expect to approve changes made to the fund documentation to include the SFT disclosures. Meanwhile, as far as existing investors are concerned, managers should treat the inclusion of SFT disclosures as post-event notifiable and should consider on a case by case basis how best to provide notification to the investors.
In addition to the requirements around investor transparency (as outlined above) fund managers that use SFTs are also subject to a number of other requirements under the Regulations, including:
- the transaction reporting obligation which requires SFT counterparties to record and report details of transactions to trade repositories no later than the working day following the conclusion, modification or termination of each relevant transaction
- disclosure of the use of SFTs in the half-yearly (in the case of UCITS) and annual report of each fund - including detail of the value of securities and commodities on loan
- the requirement to make prior risk disclosures and to obtain consent from counterparties before agreeing to the reuse of financial instruments received under a collateral arrangement.