The proposed regulation, aimed at enhancing the transparency of securities financing transactions (SFTs), seeks to ‘balance the scales’ between the two sectors and, along with that, introduce a brand new reporting regime for the industry.
Regulators, faced with the reality that their actions so far may force banking practices into non-banking sectors, are now turning their attention to the shadows. For those used to long lead times, beware! They are moving quickly, too.
The ECON Committee, who voted on the proposed regulation recently, has added a provision that listed companies and banks, in addition to investment funds, would have to disclose their use of SFTs and reuse of collateral in their annual financial reports.
Differing approaches to SFT reporting and transparency from the Parliament and the Council will need to be addressed in order to provide clarity for the industry. However, with a plenary session set for September and a speculative implementation timeline in 2017, new requirements could come into force as early as Q3 2016.[i] The period for clarification is diminishing fast.
“We need to make sure that there is not too wide a regulatory gap between banks and non-banks. If the difference between both sectors is too significant, economic activity will be strongly incentivised to migrate to the less regulated sector – shadow banking.” Danuta Maria Hübner (EPP, PL), ECON member.[ii]
In general, the SFT regulation broadly seeks to reduce the risks created by securities lending and repo transactions by:
- Central reporting of securities financing transactions (SFTs)
- Disclosure of SFTs and reuse to investors
- Minimum requirements for reuse of collateral
- Minimum requirements relating to the haircuts applicable to SFTs.
The new rules relating to the central reporting of SFTs will provide more headaches for already stretched resources. Compliance and operations functions are already battling to get on top of the regulatory requirements and the mass of disparate data required to be reported in existing regimes (MiFID, DFA and EMIR) as well as preparing for upcoming changes in MiFID II.
The SFT reporting impact
At a high level, the SFT reporting requirements stipulate:
- SFT are to be reported to a central trade repository no later than the working day after that SFT is entered into
- Counterparties must keep a record of their SFTs for five years from the termination of the transaction
- Counterparties may delegate the task of reporting.
The proposal recommends that all SFT reports are to be reported to trade repositories that were established under the EMIR trade reporting rules:
“Existing mechanisms under EMIR should be established to mitigate extra costs for counterparties to report their SFTs and for trade repositories (TRs) to extend their services to the recording of these trades.” From the Economic and Monetary Affairs (ECON) Committee draft report on SFT regulation.[iii]
This approach will, of course, have its limitations – the industry will again be reliant on TRs to provide the relevant platforms for the reporting of SFTs and to ensure that the mechanisms in place are aligned with the regulators’ view of data quality expected.
Once agreement on the legislation is finalised, the job of providing prescriptive guidance to the industry will undoubtedly fall to the European Securities and Markets Authority (ESMA).
At JWG we’ve been monitoring the impact of regulation on the financial services sector for almost 10 years. We’ve analysed and documented regulation that touches all areas of the industry, particularly in capital markets and banking sectors with market structure regulations, such as MiFID II, EMIR, Dodd-Frank (to name but three), having a major impact.
Rarely have we seen a piece of regulation that will have consequences for so many, emerge to so little fanfare. In many ways, the regulation itself is emerging from the shadows. When those with their heads down in implementation realise how quickly this set of requirements will affect their repo and securities lending activity, change programmes will have to be reassessed, rebaselined and even more resource added.
[i] Rachel Wolcott, “Securities financing transaction reporting regime to start in Europe next year”, March 16 2016 http://www.complinet.com/global/news/news/article.html?ref=177633
[ii] Danuta Maria Hübner, “EU must shine a light on shadow banking sector”, April 1 2015 https://www.theparliamentmagazine.eu/articles/opinion/eu-must-shine-light-shadow-banking-sector
[iii] Committee on Economic and Monetary Affairs, “DRAFT REPORT on the proposal for a regulation of the European Parliament and of the Council on reporting and transparency of securities financing transactions”, December 22 2014 http://www.europarl.europa.eu/sides/getDoc.do?pubRef=-//EP//NONSGML+COMPARL+PE-544.170+01+DOC+PDF+V0//EN&language=EN