knowledge | 18 September 2020 |
Next up for SFTR Reporting
From 12 October 2020, UCITS and most AIFs will be required to report all securities financing transactions (“SFTs”) that they enter into, modify or terminate to a trade repository (“TR”). Responsibility for making the relevant reports generally lies with the relevant UCITS Manager or AIFM.
As outlined in our previous briefing (here), Regulation 2015/2365 on transparency of securities financing transactions and of reuse (the “SFTR”) requires certain counterparties to an SFT to report the details of that transaction, as well as any modification or termination thereof, to a registered or recognised TR no later than the working day following the conclusion, modification or termination of the transaction (the “Reporting Obligation”).
In April 2020, ESMA registered 4 TRs for the purpose of the Reporting Obligation: DTCC Derivatives Repository Plc (DDRL), Krajowy Depozyt Papierów Wartosciowych S.A. (KDPW), Regis-TR S.A. and UnaVista TRADEcho B.V.
The Reporting Obligation is currently being phased in. While the first phase was due to commence on 13 April 2020, it was delayed due to the impact of COVID-19. Specifically, ESMA published a statement, on 19 March 2020, stating that national competent authorities (“NCAs”) should exercise regulatory forbearance in terms of enforcing the application of the Reporting Obligation between 13 April and 13 July 2020. See our related briefing (here).
Phase one of the Reporting Obligation ultimately commenced on 13 July 2020, on which date the four TRs started to receive and process data from counterparties within the scope of phase one (credit institutions and investment firms) and phase two (central counterparties and central securities depositories) of that obligation. Almost 1.5 million trades were reported that first week.
Phase-in of the Reporting Obligation for UCITS and AIFs
The third phase of the Reporting Obligation will start on 12 October 2020, notwithstanding industry representations seeking delayed commencement due to the impact of COVID-19. It will apply each time a UCITS or an EU AIF managed by an AIFM authorised or registered in accordance with AIFMD enters into, modifies or terminates an SFT either at the fund or sub-fund level. The SFTR also provides that certain SFTs concluded by a UCITS or an AIF before 12 October 2020 must be reported by way of backloading (the “Backloading Requirement”).
Non-EU AIFs are not in scope of the Reporting Obligation, with the exception of SFTs concluded in the course of the operations of an EU branch of the non-EU AIF. While there was some confusion in this regard following the publication of ESMA’s Guidelines on the Reporting Obligation in January 2020 (the “Guidelines”), the fact that non-EU AIFs are generally out of scope of the Reporting Obligation was subsequently confirmed by the European Commission and ESMA in February 2020. See our related briefing here.
While an EU AIF with a non-EU investment manager is in scope of the Reporting Obligation, it is generally considered to be a “non-financial counterparty” for the purposes of the SFTR, meaning that it first becomes subject to the Reporting Requirement from 11 January 2021.
According to ESMA Guidelines,1 regardless of their legal status, a UCITS or AIF is deemed to be a contracting party for SFTR reporting purposes.2 Where a UCITS or AIF is established as an umbrella fund, whether the umbrella fund or sub-fund in respect of which the SFT is transacted should be reported as the counterparty will depend on whether the sub-fund has an independent LEI; where it does, it will be treated as the contracting party for SFTR reporting purposes and, where it does not, the umbrella fund should be reported as the contracting party to the SFT with the relevant sub-fund reported as the beneficiary of the SFT.3
Responsibility for Complying with the Reporting Obligation
Generally, the relevant UCITS Management Company or AIFM (the “Fund Manager”) is responsible for reporting on behalf of a UCITS or EU AIF. However, in certain cases, this responsibility rests with the fund, namely where the AIFM is outside the scope of the SFTR because it is a registered AIFM, or a non-EU investment manager.
It is possible to delegate the performance of the Reporting Obligation, however the relevant Fund Manager retains responsibility for compliance. According to the Guidelines, the Fund Manager must ensure that it provides the report submitting entity with all the details of the SFT in a timely manner, and is responsible for ensuring that those details are correct.
The Backloading Requirement
Pursuant to the Backloading Requirement, in scope entities must report some SFTs concluded before the start of the Reporting Requirement, namely SFTs either having (i) a (fixed) remaining maturity exceeding 180 days as of the relevant phase-in date or (ii) an open maturity and remaining outstanding 180 days after that date. The SFTR provides that SFTs within the scope of the Backloading Requirement must be reported within 190 days of the relevant phase-in date.
On 26 March 2020, ESMA published a revised public statement confirming that its statement on regulatory forbearance referenced above also applied to SFTs within the scope of the Backloading Requirements. That statement does not specifically limit the SFTs to which it relates to those that would have been encompassed by Phases 1 and 2 (to which the other aspects of the regulatory forbearance was limited) and certain industry bodies have taken from this that it applies to the backloading requirement more generally.4
The Contents of a Report
The details of what must be reported are set out in the SFTR and Commission Delegated Regulation 2019/356 and clarified by the Guidelines. These details include the provision of a valid Legal Entity Identifier (“LEI”). As a significant number of non-EU issuers do not have an LEI, ESMA is allowing reports of securities which are lent, borrowed or provided as collateral in an SFT to be accepted without the LEI of third-country issuers (that do not have an LEI) up until 13 April 2021.
- ESMA’s 6 January 2020 Final Report incorporating guidelines on the reporting obligation of counterparties to securities financing transactions (SFTs) under the Securities Financing Transaction Regulation (EU 2015/2365) (SFTR) (ESMA70-151-2838) (the “ESMA Guidelines”).
- See section 4.2.2 (paragraph 16) of the ESMA Guidelines. Certain UCITS and AIFs established under Irish law have no legal personality and so, as a matter of Irish law, would not be legally capable of contracting or therefore constituting a contracting party. However, for SFTR reporting purposes such a UCITS or AIF (or, where established as an umbrella fund each sub-fund of which has a separate LEI, as would typically be the case, the relevant sub-fund in respect of which the SFT is transacted) would be treated (and should be reported) as the counterparty.
- Section 4.17 (paragraph 155) of the ESMA Guidelines.
- See statement from the International Capital Markets Association here and from the International Securities Lending Association here.
This briefing is for general guidance only and should not be regarded as a substitute for professional advice. Such advice should always be taken before acting on any of the matters discussed.