The final text for the new regulation on the reporting and transparency of securities financing transactions has been finalised after the Parliament adopted the text of the regulation at its first reading on 29 October. The Council subsequently adopted the text on 16 November and now the industry needs to prepare itself for yet another reporting regime.
Why is it needed?
This new regulation represents an important step in the move towards more transparency in the shadow banking sector. In the aftermath of the global financial crisis, the prevalence of the use of SFTs and other transactions which take place outside the scope of regulatory measures was highlighted, along with the associated risks that were incurred. In particular, the lack of transparency involved in the use of SFTs prevented everyone from the regulator to the investor from “correctly assessing and monitoring the respective bank-like risks and level of interconnectedness in the financial system”. While the essential function of SFTs is preserved, the regulation sets out to increase the level of transparency in three main ways.
How does it do it?
The first step involves the introduction of mandatory reporting processes for all SFTs, except those concluded with central banks, through established channels of trade repositories. The implementation timeline for this requirement varies depending on the status of the market participant. In this regard, investment firms and banks will have 12 months in which to comply, whereas non-financial counterparties have 21 months before they must fulfil their reporting obligations. CCPs and CSDs have a 15-month phase-in period, while an 18-month phase-in will be in place for insurance and re-insurance undertakings, UCITS, AIFs and institutions for occupational retirement provisions.
The second step concerns reuse, which is defined as “any pre-default use of collateral by the collateral taker for their own purposes”. The regulation sets out that reuse can be approved under the express conditions that there must be appropriate information supplied outlining the risks and consequences involved, as well as the provision of express prior consent to these terms. These rules will be applicable after six months from the entry into force of the regulation.
Finally, investment funds have also been subjected to additional reporting obligations and now must disclose to investors in their pre-contractual documents, as well as their regular reports, whether they use SFTs and total return swaps. For new funds, this will be applicable from the entry into force of the regulation, while existing funds will have 18 months to amend their paperwork in order to be compliant.
What is the result?
This regulation complies with the standards that were set out by the FSB in relation to increasing transparency in the shadow banking sector. In order to be prepared, firms should be getting to grips with the new rules and ensuring that they understand the operational, legal and business requirements the regulation will impose, as well as the way it links into other key reporting regimes, e.g., MiFID and REMIT, as, in some instances, they will become operational as soon as it comes into force.