Following on from the first article focusing on the scope of the SFTR, we now delve into next steps. What are the requirements? There are three main limbs to the regulation: Disclosure to fund investors; Requirements for the re-use of financial instruments as collateral; and Transaction reporting and recordkeeping Limb 1. Disclosure to fund investors For the purpose of this article, we do not go into the detail of this limb as it is already operational and the impact on Australian firms was likely minimal to nil. In brief, UCITS funds and AIFs, via their Management companies, must inform investors of the fund’s planned and then actual use of any SFTs and TRS. The planned usage must be disclosed in pre-investment documentation (think fund prospectus), and actual usage reported in the annual/bi-annual reporting cycle. This limb came into force between January 2016 and July 2017 depending on when the fund was established, but is now fully operational for all in-scope funds. Limb 2. Requirements for the re-use of financial instruments as collateral This limb has been fully operational since July 2016 and, if caught, your firm should already be aware and compliant. This limb states that prior to being able to re-use financial instruments, the providing counterparty must: Be informed by the receiving counterparty in writing of the risks and consequences of allowing the right of use or a title transfer collateral arrangement; and Grant its prior express consent in writing, or legally equivalent manner, to the right of use or title transfer collateral arrangement In exercising their right to re-use, the receiving counterparty is also subject to the following conditions: Re-use is undertaken in accordance with the terms of the collateral arrangement; and The financial instruments received under a collateral arrangement are transferred from the account of the providing counterparty. These rules apply to all types of collateral, not just that in respect of SFTs. In reality, this requirement was typically solved between counterparties at the master service agreement level, rather than on an individual transaction to transaction basis. Limb 3. Transaction reporting and recordkeeping The transaction reporting limb of SFTR is arguably the most burdensome part of the regulation overall and also has the greatest potential to impact Australian firms. We note here three generic possible scenarios: An Australian domiciled firm with an EU branch An Australian domiciled firm with an EU subsidiary An Australian domiciled firm is the counterparty to a trade which is captured under SFTR (i.e. when trading with an EU counterparty) In scenario 1, there is an obligation on the Australian firm to perform transaction reporting under SFTR where the firm has engaged in SFTs through the EU Branch. SFT trades through non-EU branches would not fall under SFTR. Specifically, in scenario 1, the obligation would fall upon the Australian legal entity as branches have no recognised legal character. In scenario 2, where the EU subsidiary has entered into an SFT as a legal counterparty, the reporting obligation would fall to the subsidiary of the Australian firm and not the Australian firm itself. In scenario 3, there is no reporting requirement under SFTR for the Australian firm. However, in this scenario, the firm may have to provide details to the enable the EU counterparty to report (e.g. LEI). Those in-scope must report details of SFT transactions they have concluded (including modifications and terminations) to a trade repository on a T+1 basis. Reporting can be delegated to a third party. The records of any SFT that has been concluded, modified or terminated must also be kept for at least five years after the termination of the transaction. Reporting is dual-sided (both counterparties to the transaction must report) much like EMIR reporting, and will require Unique Transaction Identifiers (UTIs). There are some further nuances that are not covered here. Not long since the implementation of complex EMIR and MiFIR reporting, SFTR’s additional 153 required data points will no doubt come as relatively unwelcome news to those in-scope. The requirement will be phased in for different firm types, but will first become effective 12 months following publication of the final rules, which is expected to result in the first reports falling due in Q2-3 2020. Next steps There remains over 12 months until the transaction reporting requirements begin to fall due. Therefore the first step is an initial impact assessment of if and how your firm may be caught. As a general guide, any firm with EU branches or subsidiaries, or transacting in SFTs in or out of the EU, or undertaking transactions involving EU collateral, may find themselves in-scope. A thorough regulatory assessment is encouraged, even if it confirms that your firm is in fact not currently captured by the regulation. While this may be the case currently, it will be important to recognise the type of future activities that would bring your firm into scope, and plan for the implications of this. If in-scope, then work can begin to assess the (primarily) data requirements and look to build systems or processes to solve for what is required.