knowledge | 12 September 2018 |

SFTR Draft Technical Standards – ESMA and the European Commission Disagree

On 5 September 2018 the European Securities and Markets Authority (“ESMA”) published an Opinion (here) rejecting the European Commission’s (“EC”) proposed amendments to the draft technical standards on the details of securities financing transactions to be reported to trade repositories and the format and frequency of such reporting (the “Opinion”).  The EC may now adopt or amend the draft technical standards.

Background

On 30 March 2017 ESMA submitted to the EC draft regulatory technical standards on the details of securities financing transactions to be reported to trade repositories (“RTS”) and implementing technical standards on the format and frequency of such reports (“ITS”), pursuant to Regulation (EU) 2015/2365 of the European Parliament and of the Council on transparency of securities financing transactions and of reuse and amending Regulation 648/2012 (“SFTR”).

By letter dated 24 July 2018 the EC informed ESMA of its “intention to endorse with amendments” the draft RTS and ITS submitted by ESMA. The EC’s amendments mainly relate to provisions of the draft RTS and ITS which stipulate, for reporting to trade repositories, the use of legal entity identifiers (“LEIs”) for branches and unique trade identifiers (“UTIs”) for transactions once these standards have been “endorsed by ESMA”. 

According to the EC’s letter (which is annexed to the Opinion), permitting ESMA to endorse potentially forthcoming industry standards would involve an impermissible delegation of regulatory powers by the EC to ESMA. To address this, the EC proposes to remove from the draft regulatory and implementing technical standards the references to ‘endorsements by ESMA’ of such industry standards and to restrict the reporting obligations to requirements with which market participants must comply using current rather than future industry standards.

The EC has also proposed amendments to the recitals in the ITS referencing ongoing work on the development of LEIs for branches and UTIs for transactions and noting that “…the use of such industry standards once available, and considered appropriate by ESMA and the Commission, could be required through an amendment of the relevant implementing technical standards on the basis of a future proposal by ESMA”.

The Opinion

According to the Opinion, ESMA disagrees with the EC’s proposed amendments to the SFTR standards as those amendments would:

  • prevent ESMA from fulfilling its mandate under SFTR Article 4(10) by eliminating the possibility of taking into account international developments and reporting standards agreed at global level and put timely alignment with international reporting standards at risk;
  • not provide the certainty, clarity, predictability and consistency which is integral for the market and authorities in relation to reporting standards;
  • deviate from and create inconsistency with current EMIR reporting standards, already endorsed by the EC and not objected by the European Parliament and the Council, for the endorsement of Unique Product Identifier and UTI; and
  • result in a significantly extended timeline (up to two years) for the introduction of global standards in the EU, meaning either a reduced timeline for the adaptation by the industry or failure to meet international commitments for the introduction of those reporting standards in the EU.

ESMA therefore requests the EC to adopt the RTS and ITS on reporting without the amendments relating to the removal of “endorsed by ESMA”.

Next Steps

As set out above, the EC may now adopt the RTS submitted by ESMA or the amended RTS.  The European Parliament and Council then have the right to object to the RTS.  The objection period is one month from the date of notification to the European Parliament and Council, if the EC adopts the RTS submitted by ESMA, otherwise the relevant period is three months. Each of these periods may be extended by one or three months, respectively, at the initiative of either the European Parliament or the Council.

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.

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