European Commission ends uncertainty over SFTR by adopting rules

The go-live date for the regulation is set for Q2 2020 after the EC formally adopted the measures. 

By Jonathan Watkins

The European Commission has formally adopted measures under the Securities Financing Transactions Regulation (SFTR), effectively setting the go-live date for Q2 2020.

Market infrastructures, funds and non-financial institutions will then be subject to the rules at three month intervals, respectively, following the initial date of implementation.

The rules enforce that all securities financing transactions to be reported to a trade repository.

“These technical standards are also known as the level 2 requirements,” explained Jonathan Lee, senior regulatory reporting specialist at Kaizen Reporting. “They provide comprehensive details around the data and reporting requirements for SFTR enabling reporting firms to plan, build and test their SFTR reporting infrastructure.”

The purpose of SFTR is to provide greater transparency on cross-asset class lending, borrowing, repurchase agreements and sale/buy-back agreements among counterparties in the EU.

Market participants active in repo and securities lending markets have not had to comply with reporting requirements before when engaging in these activities. SFTR will contain an estimated 150 reporting fields to fill in, and there will be a need for unique transaction identifiers (UTI) along with dual-sided reporting.

Earlier this year, Global Custodian reported that the European Securities and Markets Authority (ESMA) has rejected the request of the European Commission to remove the wording of legal entity identifiers (LEIs) for the incoming rules, creating uncertainty around the deadline.

The rejection was based on the view that the amendments will “hinder the possibility to take into account international developments and reporting standards agreed at global level,” according to ESMA.

According to Lee, however, it appears there have been “few changes” from previous versions.

“At present, the actual content of the RTS and ITS have only been released to a select few – it is not yet public – but we understand that few changes have been made from the ESMA 31
 March 2017 and EC July 2018 versions.”

Valdis Dombrovskis, vice-president responsible for Financial Stability, Financial Services and Capital Markets Union, describted the adoption as a “crucial element to ensure that, as risks move outside our highly regulated banking sector, they do not disappear from the radar screen of supervisors.”

 “It will make market-based financing activities more transparent and allow public authorities to better observe market developments. Supervisors will be able to act timely in order to mitigate potential risks related to securities financing transactions,” he added.

The delegated and implementing acts will now be submitted to the European Parliament and Council for scrutiny. At the end of the scrutiny period, the acts will jointly be published in the Official Journal.

“The approval of the technical standards for the reporting rules of SFTR fires the starting gun on the countdown to the implementation of this new regulation which we expect to take place in just over a year’s time,” said Val Wotton, managing director, product development & strategy, derivatives & collateral management, DTCC.

“In order to be ready in time, the securities financing industry has a significant amount of work to do, particularly around data availability and workflows. We know that large broker dealers and agent lenders have kicked off their preparations, however many of the smaller banks and buy-side firms have not yet initiated their response to the regulation and we would recommend that they begin these preparations as soon as possible.

“Further, as market participants start to prepare, we urge them to take a more strategic approach to addressing the SFTR requirements, rather than viewing them as a compliance exercise. In doing so, they will have an opportunity to gain wider advantages such as increased levels of pre-trade matching, reducing trade fails and creating greater collateral efficiencies, which will result in significant benefits such as balance sheet optimisation.”