An introduction to the EU Securities Financing Transactions Regulation (SFTR)

European Union Securities Financing Transactions Regulation: Transaction reporting implications for Australian firms

Are you an Australian firm that interacts with collateral from the European Union (EU)? Are you an Australian firm that undertakes securities financing transactions with EU counterparties? If so, you may wish to read on…

In this blog James Paull, Investment & Wealth Advisory Manager at Deloitte, explores the detail and scope of the EU law and, in particular, assesses potential impacts for Australian firms.

The EU Securities Financing Transactions Regulation (SFTR) was effective from 12 January 2016, though has been subject to numerous transitional provisions and delays which mean the legislation is still not yet fully operational. European in-scope firms have been hard at work for some time to comply with the first two limbs of the requirements, and the time is now coming for non-EU firms to turn their minds to the implications of limb 3.

At the time of writing in January 2019, two of the three limbs of the regime are fully operational and would not have impacted Australian firms to a huge extent. The last limb – transaction reporting – remains to come, and has the potential to have the greatest impact on Australian firms. Potential penalties for non-compliance with the transaction reporting requirement includes a fine of EUR 5m or up to 10% of total annual turnover. The final transaction reporting requirements are expected to enter into force in roughly Q2-3 2019, with reporting beginning 12 months later in Q2-3 2020 onwards.

What is SFTR?

SFTR is an EU regulation which was introduced as a result of a G20 commitment to address risks from ‘shadow banking’. The regulation aims to minimise risks and potential impacts from the pro-cyclicality of Securities Financing Transactions (SFTs), often subject to complex rehypothecation structures, which can make it more difficult for firms to achieve funding in stressed market scenarios. The law seeks to achieve its aims via two main levers:

  1. Transparency
    1. Disclosure to investors
    2. Transaction reporting to trade repositories
  2. Requirements for the re-use of collateral

Much like the recent European Markets Infrastructure Regulation (EMIR) and the Markets in Financial Instruments Directive II / Regulation (MiFID II/MiFIR), SFTR has extra-territoriality implications, which can bring firms into scope across the globe due to their business activities with the EU.
SFTs are defined as repurchase transactions (repos and reverse repos), securities and commodities lending and borrowing, buy-sell back and sell-buy back transactions, and margin lending. Total Return Swaps (TRS) are also in scope of the disclosure requirements (limb 1) as they are considered economically equivalent instruments for investor purposes; they are not in scope of transaction reporting (Limb 3) as they fall under the scope of European Market Infrastructure Regulation (EMIR) reporting.

What is the scope?

Each limb of the SFTR requirements applies to entities in subtly different ways. At an overall level, the law applies to:

  1. Any counterparty to a SFT which is:
    • Established in the EU, including non-EU branches of such firms;
    • A non-EU entity, if the SFT is concluded via an EU branch of that non-EU entity;
  2. UCITS ManCos or self-managed UCITS;
  3. AIFMs
  4. A counterparty undertaking ‘re-use’ that is established:
    • In the EU, including non-EU branches of such firms
    • Outside of the EU, where either:
      1. re-use is performed by an EU branch of the non-EU entity; or
      2. re-use concerns financial instruments provided as collateral by an EU counterparty or an EU branch of a non-EU entity.

That may seem like a myriad of overlapping requirements, but in short the law directly captures EU firms – including their non-EU branches, and in reverse – EU branches of non-EU firms.

Indirectly, Australian and other non-EU firms which interact with EU counterparties, even if not caught directly, may be required to provide additional data for their counterparties’ own compliance requirements; much like the provision of LEIs under MiFID II/MiFIR.

Find out more on the implications for Australian firms here.

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