A new Regulation (EU) 2015/2365 on transparency of securities financing transactions and of reuse ("Regulation") was published in the Official Journal of the European Union on 23 December 2015 and entered into force on 12 January 2016.
Its purpose is to enhance transparency on the market (i) of securities financing transactions (i.e. mainly securities or commodities lending or borrowing, repurchase and reverse repurchase agreements as well as lending margin transaction) ("SFT") and (ii) of the reuse of financial instruments provided as collateral by counterparties. Undertakings for collective investment in transferable securities (“UCITS”) and their management companies (“Mancos”) and alternative investment funds (“AIFs”) and their alternative investment fund managers (“AIFMs”) are in scope of the Regulation.
In summary, the Regulation introduces 3 new types of requirements for market participants:
1. Reporting obligation of SFT to trade repositories
The reporting requirement applies to any financial and non-financial counterparty established in the European Union (“EU”) that is a party to certain SFT. It also applies to all their branches irrespective of where they are located as well as to the EU branches of counterparties established in a third country.
In accordance with Article 4 of the Regulation, SFT will need to be reported to a trade repository by T+1, or alternatively to ESMA. UCITS Mancos and AIFMs are responsible for reporting on behalf of the UCITS or the AIF respectively. This reporting duty may be delegated by counterparties.
In order to determine the format, frequency and content of the information to be reported, the Regulation provides that ESMA develops draft regulatory technical standards (“RTS”), which shall be submitted to the European Commission by 13 January 2017. Depending on the type of counterparty, this reporting obligation will apply on a phased basis starting in 2018.
Nevertheless, as of 12 January 2016, all counterparties or their delegates (subject to contractual arrangements) have to keep a record of any SFT that they have concluded, modified or terminated for at least five years following the termination of the transaction.
2. Obligation to publish information on the use of SFT and total return swaps
In accordance with Articles 13 and 14 of the Regulation, UCITS Mancos and AIFMs specifically have to include certain information detailed in the Annex to the Regulation in the UCITS and AIFs’ periodical reports (section A of the Annex) and in their pre-investment documents (section B of the Annex) meaning the prospectus for UCITS or in the information made available to investors for AIFs in accordance with Article 23 of AIFMD(1).
Although UCITS are already subject to disclosure requirements in accordance with the ESMA guidelines on ETFs and other UCITS issues (ESMA 2014/937), UCITS will need to review their prospectus and make a gap analysis to comply with the Regulation.
The disclosure requirements with regard to periodical reports will apply from 13 January 2017. The requirements related to pre-contractual documents applies as of 12 January 2016 for newly constituted UCITS and AIFs after this date and from 13 July 2017 for UCITS and AIFs constituted prior to this date. ESMA may develop RTS in respect of the above disclosure requirements.
3. Transparency of reuse of financial instruments received under a collateral agreement
This requirement applies to any financial and non-financial counterparty receiving collateral with a right of reuse established in the EU. It also applies to all their branches irrespective of where they are located as well as to the EU branches of counterparties established in a third country receiving collateral with a right of reuse from an EU counterparty.
In accordance with Article 15 of the Regulation, the following conditions should be fulfilled by the counterparty receiving collateral (including UCITS Mancos and AIFMs) before it exercises its right of reuse:
the counterparty providing the collateral shall be duly informed of the risks and consequences of the reuse;
the providing counterparty has to grant its prior express consent; and
the financial instruments that are the object of the reuse have to be transferred from the account of the providing counterparty.
It applies to any pledge arrangement with a right of reuse and any agreement for the provision of collateral by way of a title of transfer collateral arrangement.
These provisions shall apply from 13 July 2016, including for collateral arrangements existing on that date. Collateral arrangements will need to be reviewed by that date to ensure compliance with the above conditions.
(1) AIFMD refers to Directive 2011/61/EU on alternative investment funds managers.