The Securities Financing Transactions Regulation (Regulation (EU) 2015/2365, hereafter “EU SFTR”) came into force on 12 January 2016, although many of its requirements were subject to transitional provisions.
Its purpose is to improve transparency of securities financing transactions (SFTs) and in certain cases of total return swaps (TRS) in the shadow banking sector, giving regulators (including the European Securities and Markets Authority - ESMA - and national regulators) access to detailed information to enable them to monitor risks in that sector on an ongoing basis.
EU SFTR aims to reduce risks by improving transparency in the securities financing markets. It contains 3 main pillars:
- Collateral Reuse Requirements: the 'reuse' of financial instruments which have been provided as 'collateral' is submitted to several conditions, so that clients and counterparties understand the risks involved and give their consent to the reuse;
- Transparency to Fund Investors Requirements: the managers of UCITS and alternative investment funds (AIFs) should make detailed disclosures to their investors of the use they make of securities financing transactions (SFTs) and total return swaps; and
- Reporting obligations: the counterparties should report SFTs to a trade repository to provide transparency to regulators on the use of SFTs by market participants.
Article 15 of EU SFTR relates specifically to reuse purposes and started to apply from July 13, 2016. It breaks new ground by requiring information from the collateral receiver on the risks and consequences that may be involved when granting consent to a right of use of collateral provided under a collateral arrangement, and likewise, by requiring the prior express written consent of the collateral provider or in a legally equivalent manner in order for the collateral receiver to have the right to reuse the collateral received in each type of transaction and not just SFTs, including derivatives. Such consent is materialized in the collateral contracts (e.g. CSA or other financial collateral arrangement) that our clients have entered into with us.
The UK onshored version of EU SFTR (hereafter “UK SFTR”) came into force on 31 December 2020. Article 15 UK SFTR applies to UK and non-UK counterparties who receive collateral from a UK counterparty or a UK branch of a non-UK counterparty and requires the collateral receiver to disclose the risks and consequences associated with granting consent to a right of collateral reuse.
Please refer to the Information Statements available in the “Useful links” section below.