Securities Financing Transactions (SFT)
Regulation (EU) 2015/2365 of the European Parliament and the European Council on the transparency of securities financing transactions (SFTs) and of reuse.
The 2008 global financial crisis revealed significant holes in the regulation of the financial system. It also highlighted the need to improve transparency and monitoring not only in the traditional banking sector, but also in the sectors where non-banking credit activities take place, which is known as the “parallel banking system” and named SHADOW BANKING.
In order to closely follow the market trends concerning entities whose activities can be considered as pertaining to the parallel banking system, in particular in the area of securities financing transactions, the Commission feels it is necessary to implement transparency obligations.
The proposed regulation concerning the structural reforms of the banking sector of the EU which accompanies this proposal is the last piece of the new regulatory framework, which guarantees that even the biggest banks within the EU will become less complex and able to be the subject of an effective resolution with minimal consequences for taxpayers.
According to the European Commission, an obligation for reporting via trade repositories could remedy the problems found.
The securities financing transactions in the parallel banking system would thus be subject to appropriate surveillance and regulation. Their use would not be prohibited or limited by specific restrictions as such but would benefit from increased transparency.
The securities financing transactions targeted by this regulation are transactions of the parallel banking sector which principally comprise:
- The repurchase agreement or repo;
- Securities lending;
- The buy-sell back and sell-buy back transactions;
- And the margin lending transactions.
For Unregulated Collective Investment Schemes (UCIs): The periodic reports that the undertakings for collective investment in transferable securities (UCITS) management companies or UCITS investment companies and alternative investment fund managers must currently produce (beyond the AIFM and UCITS V directives) would thus be completed by this additional information on the use of securities financing transactions and other equivalent financing structures.
One of the major key points of this proposed regulation was the introduction of governance of rehypothecation by fixing minimum conditions to be respected during transactions by the parties concerned, such as the existence of a prior written agreement signed by the counterparties, total respect for the conditions of this agreement, full information on the potential risks in the event of default of a counterparty, and the prior transfer of the collateral to the account of the counterparty.
The three main measures of this Regulation/2012
- Obligations regarding re-use of assets (art.15): They have been less stringent and will depend on the outcome of the working group dedicated to re-use and lead by the Financial Stability Board (FSB). Collateral & master agreements must reflect new provisions contained in the regulation (client consent granted for transferring or no entitlement). Provisions came into force on 13 July 2016.
- Information to investors (art.14): Current UCIs have 18 months (13 July 2017) to update pre-contractual documents like the prospectus. However, for art.13 (annual & half-yearly financial reports) it was 13 January 2017. UCIs closing before the date of 13 January 2017 had to include new information listed in Annex section A of the regulation.
- Compulsory notification of SFT (art.4): Delegated and implementing regulations entered into force on 11 April 2019 and SFTR reporting requirements apply as follows:
11 April 2020 for banks and investment firms, 11 July 2020 for Central Counterparties (CCPs) & Central Securities Depositories (CSDs); 11 October 2020 for other financial counterparties which include AIFs and UCITS, Pension Funds and Insurance/Reinsurance Companies; 11 January 2021 for Non-Financial Counterparties.
The text has been published in the Official Journal of the European Union on 23 December 2015.