And the reporting obligation goes to…?
In one word: everybody! The list includes banks, brokers, funds, insurance companies, asset managers, pension funds, and other financial as well as non-financial companies.
The Regulation will cover SFTs carried out by any company established in the EU, irrespective of the location of its respective branch offices. Over and above, it also includes SFTs conducted by EU branches of non-EU firms, and any SFT where the securities used are delivered by an EU counterparty or by an EU branch of a third-country firm under collateral agreement, which also allows the collateral to be provided by an entity other than the borrower. The proposal also explicitly identifies UCITS funds and AIFM funds as being subject to the regulation in its final form (remember shadow banking?).
There are some exceptions (if one could call them that), and a handful of institutions are exempt from the reporting obligations. Surprisingly or not, the SFTR does not apply to the ECB, the European System of Central Banks, the Bank for International Settlements, and bodies managing public debt, in order not to affect their discretionary policies.
Article 4 requires counterparties to an SFT to report details of any SFT they have concluded, modified, or terminated to a trade repository no later than the working day following the conclusion, modification or termination of the transaction or, if no trade repository is available, to the European Securities and Markets Authority (ESMA).
The basic features of SFT trade reporting are similar to those of EMIR trade reporting in respect of over-the-counter derivatives, which went live in February 2014. Although certain aspects of the requirements do differ in form and content compared to EMIR. In that regard, there might be a need to adjust the systems to ensure the required data is properly captured and reported.
Details that need to be reported will include the parties to the SFT, the principal amount and currency, and the assets used as collateral. Furthermore, where a non-financial counterparty does not exceed at least two of the following three thresholds on its balance sheet, the financial counterparty will have an obligation to report on behalf of both itself and that non-financial counterparty: (i) balance sheet total of EUR 20 million; (ii) net turnover of EUR 40 million; and (iii) an average of 250 employees during the financial year. In essence the regulator wants to prevent any value depreciation of the asset during the lifetime of any transaction, so in reality any change needs to be reported.
Is there a ‘next level use’ for the data reported?
Yes, there is!
Trade repositories should regularly, and in an accessible way, publish aggregate positions by type of SFTs reported. Beside this publication mandate, supervisors and regulators (incl. relevant national authorities) responsible for financial stability and securities markets would have access to the data collected.
The Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) will provide further details regarding the information that counterparties must report. ESMA published a consultation on 30 September 2016 that includes its draft RTS and ITS. The consultation was open for responses until 30 November 2016 and ESMA is obliged to submit to EC the draft RTS and draft ITS in Q1 2017, and to have it approved by end of 2017. This practically means that the reporting will not start before the end of 2018 or -more likely- some time during 2019.
What makes a Regulation effective one?
Simply put: Penalties and sanctions.
For non-compliance with the Reporting Requirements and Reuse Requirements, the competent authorities of the Member States will have the power to apply various administrative sanctions and other measures. Ranging from a ‘cease and desist order’ to an administrative penalty of up to the larger amount of EUR 5 million or equivalent (in case of non-compliance with the Reporting Requirements) or EUR 15 million or equivalent (in case of non-compliance with the Reuse Requirements) and 10% of the total annual turnover of the legal entity.
For non-compliance with the Disclosure Requirements, the competent authorities of the Member States will have the power to apply various administrative sanctions and other measures under the UCITS Directive and Alternative Investment Fund Managers Directive.
The SFTR preparation checklist
- Identify the SFT and STF-like transactions performed by the entity
- Prepare for potential operational challenges data collection, processing, reporting and storing
- Review the applied internal accounting practices in order to properly identify SFTs
- Look for a reporting solution