The post Are you ready for the reporting obligations under SFTR? first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>The Regulation captures:
The types of firms to be affected by SFTR include; UCITS, AIFs, Pension Funds, Central counterparties (“CCPs”), Central Securities Depositories (“CSDs”), Insurance, Reinsurance, Banks, Investment Firms and Non-Financial Counterparties.
Where the SFT counterparty is a UCITS or AIF, the reporting obligation applies to the management company or AIFM as opposed to the fund itself.
Broadly speaking, an SFT is any transaction where securities are used to borrow cash, or vice versa.
SFTs provide market participants with the opportunity to access secured funding through the temporary exchange of their collateralised assets as a guarantee. Lending or borrowing securities and commodities, repurchase (repo) or reverse repurchase transactions (reverse repo) and buy-sell back or sell-buy back transactions, including collateral and liquidity swaps are some typical examples of SFTs.
In each of the cases above, ownership of the securities temporarily changes in return for cash.
At the end of an SFT, the ownership reverts, with both counterparties being left in their original position. This will also be plus or minus a small fee (depending on the purpose of the transaction).
In this respect, SFTs act in a similar way to collateralised loans.
The SFTR introduces, among others: a) a transaction reporting obligation in respect of securities financing transactions; b) an obligation to make prescribed pre-contractual disclosures to UCITS and AIF investors in respect of SFTs and total return swaps in the UCITS/AIF prospectus and annual return, and; c) provisions for minimum transparency requirements relating to the “re-use” of collateral (financial instruments only) under financial collateral agreements.
The SFTR requires both financial and non-financial market participants to report details of their SFTs to an approved EU Trade Repository (“TR”). This is in addition to any requirement to report transactions that occur under the European Market Infrastructure Regulation (“EMIR”) and MiFID/MiFIR and is part of a general move to increase transparency in the capital markets.
In order to align reporting standards to the maximum extent possible, the European Securities and Markets Authority has developed its reporting standards for SFTs building on its experience with EMIR and other EU-wide reporting regimes.
Transactions that must be reported under SFTR include, repurchase transactions, securities or commodities lending and borrowing, buy-sell back and sell-buy back transactions, margin lending transactions, collateral swaps, liquidity swaps, modifications, collateral updates and valuations, margin valuations for CCP-cleared transactions, collateral reuse and margin lending funding sources and transaction terminations and positions for CCP-cleared SFTs, if opting to report modifications and collateral updates at the position-level.
Broadly speaking, the SFTR applies to all EU financial and non-financial counterparties, including all branches irrespective of their location, as well as the EU branches of non-EU entities.
The SFTR overall represents another significant challenge for firms engaged in SFTs, however some of the key issues that will be faced include:
There are 155 reportable fields, although the XML currently has 170-180 fields depending on the type of SFT and the XML structure is complex. Firms need to ensure for reporting purposes that they have populated all the necessary fields correctly. If one single validation rule fails, then the entire report fails.
In addition, the LEI of the issuer is mandatory for firms within the EU, or where it is an EU security.
Coupled with the above, the timeframe of T+1 is incredibly short to obtain all the data required in order to make a valid report. The validation rules are strict and have proven hard to meet. This is then compounded by the fact that as noted above, if a single validation rule fails, then the whole report fails, and the firm is likely to breach the T+1 requirement.
Whilst there is no explicit requirement in the Regulations to reconcile, there is the obligation to ensure accurate and complete reports are made, which implies that the data must be reconciled somewhere/somehow. The main issue here is that the only place that will have access to all the data likely to be needed to reconcile correctly, will be the TRs.
Firms should look to select a TR or a third-party agent that best suits their reporting needs in terms of cost and operational efficiency. Another challenge is to analyse the SFTR’s requirements and produce an action plan for compliance based on their business and/or operations. In terms of reporting, firms should also produce sample reports based on the nature of the transactions they carry out. Once a firm fully understands the requirements and drafts its report templates, it has to develop systems to automate report generation while ensuring consistency and accuracy. This process requires careful organisation and coordination between the dealers, compliance and IT personnel.
Complying with the regulatory obligations introduced by SFTR is costly, both in terms of labour and capital. Careful planning and regulatory expertise are required to meet the challenge of analysing the SFTR’s obligations and developing the technical means and infrastructure to cope with the requirements. Furthermore, reporting to TRs entails out-of-pocket costs, and the reporting and reconciliation process has the potential to take a substantial amount of time if not automated.
Furthermore, firms should consider their internal resources and, where required, hire appropriate additional resources or utilise the services of an experienced external consultant to assist with relevant tasks. A suitable compliance advisor should be able to bridge the gap between law and practice, identify and find solutions to problems, and help affected firms dealing with shortages in resources to comply with SFTR.
In today’s financial services sector, businesses are largely driven and impacted by developments in the regulatory landscape. Financial institutions are under heightened scrutiny, and there is a need to invest significantly in compliance to protect organisations from reputational damage and costly penalties.
Given the above, there is very little time left for firms to ensure they are going to be compliant with SFTR, and firms should ensure that any areas of uncertainty are covered off in good time.
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]]>The post Brexit: EC notices issued stating potential consequences relating to UCITS, MiFID and AIFMD first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>| Of relevance to: | All firms involved in Asset Management and Markets in Financial Instruments |
| Key date: | 30 March 2019 |
The UK will become a ‘third country’ (being a country that is not a member of the remaining EU (“EU27”)) on 30 March 2019 (“the withdrawal date”), unless a ratified withdrawal agreement establishes another date.
On 8 February 2018, the European Commission issued a ‘Notice to Stakeholders’ to managers of investment funds and investors, reminding them of the legal repercussions which need to be considered when the UK becomes a third country. It issued a similar ‘Notice to Stakeholders’ to UK investment firms involved in markets in financial instruments.
The following is a summary of the worst-case scenario – The EC notices are ‘without prejudice’ to any equivalence decisions that may be adopted by the EU and the ‘third country passport regime’ laid down in the Alternative Investment Fund Managers Directive (“AIFMD”).
Many commentators are assuming the final withdrawal agreement will allow some sort of access to the EU for UK financial services operations, at least during transition (the ‘implementation period’). The FCA stated, on 20 December 2017, ‘Firms based in the UK servicing clients in the EEA should continue to prepare for a range of scenarios and should discuss these arrangements and the implications of an implementation period with the relevant EU regulator. The FCA will keep these expectations under review as negotiations on an implementation period progress and communicate to firms accordingly‘.
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]]>The post SFTR – Transparency Requirements for UCITS and AIFs first appeared on Complyport - Your Trusted Partner in Governance, Risk, Compliance & Technology .
]]>Of Relevance to:
UCITS Management Companies and AIFMs
Although the principal requirement under the Securities Financing Transactions Regulation (2015/2365) (“SFTR”) is the obligation on counterparties to securities financing transactions (“SFT”) to report details of any concluded SFTs to a trade repository, it also brought transparency requirements – see Regulatory Roundup 72 for further information on the SFTR as a whole, including on the reuse of collateral.
A SFT is defined in Article 3(11) of the SFTR as:
By virtue of recital 7 of the SFTR, the definition of a SFT does not include derivative contracts as defined in EMIR, but does include transactions that are commonly referred to as liquidity swaps and collateral swaps which do not fall under the definition of derivative contracts under EMIR.
The transparency obligations for UCITS Management Companies and AIFMs arise under Article 13 (periodical reports) and Article 14 (pre-contractual documentation – UCITS prospectus and AIFMs disclosures to investors).
The transparency obligations under Article 13 applied from 13 January 2017 (see Regulatory Roundup 84).
As mentioned in the above Regulatory Roundup, the transparency obligations under Article 14 will apply from 13 July 2017.
Note that transparency obligations under Article 13 and Article 14 concern both the use of SFTs and total return swaps.
The requirements are copied out into the Handbook as follows (transitional provisions in place ensure that the requirements do not take effect until 13 July 2017):
There is no obligation to include information on the above in pre-sale documentation where SFTs or total return swaps are not used (see COLL 4.2.5A(4) or COLL 8.3.4A(4) or FUND 3.2.4A(3) as relevant).
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