knowledge | 24 June 2016 |
Deadline Approaching for Collateral Reuse Compliance
All collateral reuse arrangements should be reviewed immediately to ensure compliance with the new reuse requirements set out in the Securities Financing Transactions Regulation1 (“SFTR”), which will apply from 13 July 2016.
Overview of Collateral Reuse Arrangements
Many industry standard collateral arrangements afford a right to the collateral recipient to reuse the collateral provided to it; common examples include the ISLA Global Master Securities Lending Agreement, ICMA Global Master Repurchase Agreement, SIFMA Master Repurchase Agreement, ISDA Master Agreements incorporating an English Law ISDA Credit Support Annex or a New York Law ISDA Credit Support Annex and the English Law ISDA Credit Support Deed incorporating a right of use, but there are many others. Arrangements pursuant to which collateral is provided by outright title transfer will, of necessity, afford a right of reuse to the recipient.
SFTR conditions to exercise right of reuse
From 13 July 2016 a recipient of collateral within the scope of the SFTR2 will only be able to reuse that collateral if it:
- informs the collateral provider in writing of the risks and consequences (including, at a minimum those that may arise in the event of the recipient’s default) of granting its consent to reuse collateral provided under a security collateral arrangement, or of concluding a title transfer collateral arrangement, as applicable; and
- obtains the collateral provider’s prior express written consent to the right of reuse in a security collateral arrangement, or the provision of collateral by way of a title transfer collateral arrangement, as applicable.
Moreover, the recipient can only exercise its right of reuse:
- in accordance with the terms specified in the relevant collateral arrangement; and
- once the collateral in question is transferred from the account of the collateral provider (subject to a limited exception relating to the implications of certain third country laws, if applicable).
What is “reuse”?
The term ‘reuse’ of collateral refers to the use of that collateral by a receiving counterparty, in its own name and on its own account, or on the account of another counterparty, excluding any such use comprising liquidation of that collateral in the event of default of the provider.
Industry template to facilitate compliance with SFTR requirements
Five industry associations - the Association for Financial Markets in Europe (AFME), the Futures Industry Association, Inc (FIA), the International Capital Market Association (ICMA), the International Swaps and Derivatives Association, Inc. (ISDA) and the International Securities Lending Association (ISLA) - have jointly prepared a template SFTR Information Statement that market participants can tailor to assist them comply with the new reuse requirements. A separate appendix has been prepared by ISDA, AFME, FIA and the Securities Industry & Financial Markets Association (SIFMA) for use where a transaction involves a US collateral recipient, to address the additional risks and consequences to be disclosed in such circumstances. The templates are available on relevant industry association websites3.
- Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012, OJ L 337, 23.12.2015, p. 1
- This comprises the instruments set out in Section C of Annex I to “MiFID II” (Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Directive 2002/92/EC and Directive 2011/61/EU ) and includes, among other financial instruments, transferable securities, money-market instruments and units in collective investment undertakings. Importantly, it excludes cash
- See, for example ISDA Bookstore, under the heading “SFTR Initiative Documents” 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.