The European Commission has officially sanctioned the Securities Financing Transactions Regulation (SFTR) Level II, which financial institutions must comply with by Q2 2020. It’s not as immediate as other changes looming on the 2019 horizon, but, if 2018 has taught us anything, it’s that it pays to be prepared.
The new SFTR legislation includes 7 delegated Regulatory Technical Standards (RTSs), which are outlined below:
- Details of applying for registration as a trade repository must be specified
- Access to the data held in trade repositories must be regulated
- Details of Securities Financing Transactions (SFTs) that need to be reported to trade repositories must be specified
- Fees charged by the European Securities and Markets Authority (ESMA) to trade repositories must be comply with regulations
- Collection, verification, aggregation, comparison, and publication of data on SFTs by trade repositories must be regulated
- Details of the application for registration and extension as a trade repository must adhere to RTSs
- Access to details of SFTs held in trade repositories must be regulated
Despite this news, Article 13(1) of ESMA’s Regulations must be considered:
“…the European Parliament or the Council may object to a regulatory technical standard (RTS) within a period of three months from the date of notification of the RTS adopted by the commission. At the initiative of the European Parliament or the council that period shall be extended by three months…”
So, what does this mean for the legislation successfully going live? The first six months of 2019 are crucial to achieve an industry-wide agreement regarding the Article 4 requirements. Once the technical standards for the SFTR reporting have been approved, the regulations will be enforced, initiating a countdown towards the following timelines:
- 12 months for reporting Central Counterparties (CCPs)
- 15 months for Central Securities Depositories (CSDs)
- 18 months for insurance companies, pension funds, alternative investment funds, and Undertakings for Collective Investments in Transferable Securities (UCITS)
- 21 months for non-financial counterparties
Now we know what’s in store – what is the actual purpose of SFTR? The major benefits are that the new regulations will provide greater transparency for a variety of market-based financing activities, including cross-asset class lending and borrowing, plus repurchase agreements and buy-back agreements carried out with EU counterparties. Another advantage is that public authorities will be able to observe market developments easily and the level of risk related to SFTs will be reduced, as there will be more time to mitigate against any issues or failures.
With all this in mind, the RTS content has not been made public yet, so only a select few know what the regulations fully entail.
Nevertheless, now is the time that firms should be starting to budget, plan, build, and test the controls for a 2020 SFTR implementation. Larger organisations, such as broker-dealers and agent lenders, have reportedly kickstarted their plans, however; smaller banks and buy-side firms are not being as proactive in their approach. To be ready for Q2 2020, firms are recommended to view the SFTR legislation with a strategic eye, rather than arbitrarily complying with the requirements. This is because there are opportunities to seize for an optimised balance sheet, from increased pre-trade matching levels and reduced trade failures, to improved collateral efficiencies.
We’ll be discussing the latest changes and challenges in asset management at TSAM London on 28th February 2019 – join us!
See you next year!