12 Mar 2020

The first deadline for reporting under the Securities Financing Transactions Regulation (“SFTR”) is on Tuesday 14 April 2020, directly after the Easter holiday long weekend. As this deadline approaches, firms must ensure that they know how they will be impacted by this regime and what, if anything, they need to do to update their systems, processes and documentation to ensure compliance.

Below, we set out some SFTR basics and some recent developments in this area, along with an SFTR implementation timeline and some remarks upon the possible impact of Brexit. If you would like more detailed advice, please do not hesitate to get in touch.

1. SFTR basics
2. Recent developments
3. Timetable for implementing SFTR
4. Brexit implications
5. How can we help?

1. SFTR basics

The scope of the SFTR is largely defined by reference to participation in various reportable securities financing transactions (“SFTs”). SFTs include repurchase transactions, securities or commodities lending or borrowing transactions, buy-sell back or sell-buy back transactions and margin lending transactions. Any firm that engages in SFTs is likely to be caught by SFTR.

SFTR creates various new regulatory requirements, including an obligation on SFT counterparties to report trades.

Generally, both counterparties to an SFT must report the trade; however, financial counterparties that conclude SFTs with small non-financial counterparties are obliged to report on behalf of the non-financial counterparty. Counterparties may delegate SFT reporting, but cannot delegate the regulatory responsibility for such reporting.

The FCA may impose penalties for breach of SFTR, including fines, public censure, and, where the regulator has been misled, criminal prosecution.

2. Recent developments

ESMA SFTR Guidance

On 6 January 2020, the European Securities and Markets Authority (“ESMA”) published their Final Report and Guidelines (see here).  Clarity was provided on a number of points including: the number of reportable SFTs; the population of reporting fields for different types of SFTs; the approach used to link SFT collateral with SFT loans; the population of reporting fields for margin data; the population of reporting fields for reuse, reinvestment and funding sources data; the generation of feedback by trade repositories (“TRs”) and its subsequent management by counterparties, namely in the case of (i) rejection of reported data and (ii) reconciliation breaks; and the provision of access to data to authorities by TRs.

The Master Regulatory Reporting Agreement

On 19 December 2019 various trade associations published a Master Regulatory Reporting Agreement (“MRRA”) intended to simplify reporting across different European Union regulatory regimes (see here).

The MRRA sets out common terms governing mandatory and delegated reporting in relation to derivatives under European Market Infrastructure Regulation No 648/2012 (as amended) (EMIR) and securities financing transactions under SFTR, including those entered into under industry standard documentation, such as the ISDA Master Agreement, Global Master Repurchase Agreement (GMRA) and the Global Market Securities Lending Agreement (GMSLA).

The MRRA has also been drafted with a view to ensuring these terms remain effective post-Brexit.

The MRRA is the product of a collaboration between several industry bodies (including the Association of Financial Markets in Europe (AFME), Futures Industry Association (FIA), International Capital Market Association (ICMA), International Swaps and Derivatives Association, Inc. (ISDA) and International Securities Lending Association (ISLA)) and has been published in advance of the phasing in of SFTR reporting obligations from April 2020.

3. Timetable for implementing SFTR

The timetable for implementing SFTR reporting is staggered according to the type of counterparty to the SFT:

4. Brexit implications

We do not expect Brexit to materially alter the requirement for counterparties to report SFTs.

In more detail: the Brexit transitional period ends 31 December 2020. If the transitional period ends without a trade deal on financial services between the UK and the EU (which seems likely), a UK legal instrument will come into effect that adapts the SFTR: for example, certain supervisory obligations will be transferred from ESMA to the Bank of England.

Although Article 4(1) of the SFTR, which specifies the reporting obligation, was not in force on exit day, we expect that the UK government will ensure that the substance of this obligation continues.

5. How can we help?

Fox Williams LLP advises on all aspects of the SFTR and the EMIR, including the creation of bespoke reporting documents consistent with the industry standard MRRA. If you have any questions, please get in touch with Chris Finney (CFinney@Foxwilliams.com) or Mardi MacGregor (MMacGregor@Foxwilliams.com), who will be pleased to assist.

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