Our Insights at a glance
- The law of 6 June 2018 on transparency of securities nancing transactions (“SFTs”), implementing the European regulation 2015/2365 on transparency of securities nancing transactions and of reuse (“SFTR”) under Luxembourg law, has been adopted and is effective as from 12 June 2018 (the “SFTR Law”). As a reminder, all EU nancial SFT counterparties, such as credit institutions, insurance and reinsurance undertakings, UCITS, UCITS ManCos, AIFs, AIFMs, central counterparties, central securities depositaries or counterparties engaging in reuse of nancial instruments received as collateral, but also all EU non-Financial Counterparties of SFTs, may fall within the scope of SFTR.
- The SFTR Law, in particular, (i) empowers the CSSF and the CAA to impose sanctions in case of violation of SFTR requirements and (ii) updates insurance, UCITS and AIFM laws. SFT counterparties were already subject to some requirements, e.g. record keeping, offering documents' information disclosures, etc.
- Next step is the implementation of the long-awaited SFTs reporting requirement. Giving the industry the opportunity to have access to more real-time insights, this reporting should signi cantly improve counterparties decision-making.
As a parallel source of financing compared to the traditional banking system, securities nancing transactions (“SFTs”), using securities to borrow cash or other securities without falling back on credit institutions, were brought into the spotlight by the Financial Stability and European Systemic Risk Boards as a result of its investigation on “shadow banking”, which began in 2011.
With the intent of improving transparency and better regulating transactions including securities lending, repurchase transactions, total return swaps (“TRS”) or the reuse of financial instruments received under a collateral arrangement, the European Commission has issued the European regulation 2015/2365 on transparency of securities nancing transactions and of reuse (“SFTR”), applicable since 12 January 2016. To properly implement SFTR into existing Luxembourg regimes, the law of 6 June 2018 on transparency of securities nancing transactions (the “SFT Law”) was adopted and has been effective since 12 June 2018.
Are you in the scope?
All EU nancial SFT counterparties (including all their branches, irrespective of their location), such as credit institutions, insurance and reinsurance undertakings, UCITS and their management companies (“UCITS ManCos”), alternative investment funds and their managers (“AIFMs”), central counterparties, central securities depositaries or counterparties engaging in reuse of nancial instruments received as collateral established in the EU (“Financial Counterparties”), but also all EU non-Financial Counterparties of SFTs (which are other undertakings, excluding the Financial Counterparties), fall within the scope of SFTR.
SFTR applies equally to non-EU counterparties (i) when the SFT or the reuse is carried out by an EU branch of that counterparty or (ii) when the counterparty is established in the EU or is an EU branch of a non-EU counterparty established in a third country.
What are the obligations already imposed by SFTR?
The existing and upcoming SFTR requirements will continue to bring new implications and raise challenges for the industry.
Transparency on the use of SFTs being the main pillar of SFTR, both UCITS ManCos and AIFMs have been impacted through (i) their periodical reports and (ii) disclosure to investors (through their offering documents).
In this regard, UCITS ManCos and AIFMs are required to:
- keep a record of SFTs concluded, modi ed or terminated, for a period of ve years after the termination of any relevant transaction;
- inform investors and disclose information on the use they make of potential SFTs and TRS by including some data in their (annual/semi-annual) reports;
- specify in their offering documents (prospectus or private placement memorandums) all SFTs and TRS which
- they are authorised to use by clearly indicating which transactions and instruments are used;
- comply with transparency requirements.
As such, a receiving counterparty (i.e. the counterparty receives nancial instruments based on a collateral arrangement and it wants to reuse them) needs to ful ll the following requirements when reusing nancial instruments received as collateral:
a- give a written information to the providing counterparty, describing the risks and consequences that may be involved if the latter consented to the right of use of
the collateral provided under the security collateral arrangement or if it concluded a title transfer collateral arrangement;
b- ensure that the providing counterparty has granted its prior written consent to such reuse;
c- and ensure that the nancial instruments are effectively transferred.
The SFT Law empowers (i) the Luxembourg regulator for the financial sector, the Commission de Surveillance du Secteur Financier (“CSSF”) and (ii) the Luxembourg regulator for the insurance sector, the Commissariat aux Assurances (“CAA”) to impose adequate administrative sanctions and other administrative measures, which have to be efficient, proportionate and dissuasive. The sanctions, applied in case of infringements (i) to the reporting requirements or (ii) to the obligations relating to the reuse of financial instruments received under a collateral arrangement, are directed to Financial Counterparties (subject to their respective supervision) and non-Financial Counterparties (the power of sanction being vested in the CSSF for the latter).
The STF Law also amends the law of 17 December 2010 on undertakings for collective investment, the law of 12 July 2013 on alternative investment fund managers and the law of 7 December 2015 on the insurance sector by implementing SFTR’s transparency requirements. As a consequence, UCITS ManCos, AIFMs, as well as the directors or conducting of cers of these entities, as applicable, can be subject to administrative sanctions and measures if they violate the transparency requirements imposed in their relationship with the investors and do not include the required information on SFTs and TRS in the periodical reports or the pre-contractual documents.
CSSF and CAA sanctions, which may range from a simple warning to a ne as high as EUR 15 million, may be applied to both rms and individuals, against members of any relevant entity’s management body and any other persons considered as responsible of the violation. Sanctions will be determined considering various factors such as the seriousness of the infringement and its duration, the relevant person’s nancial situation or the amount of gain resulting from the violation if this can be determined. In addition to the above, any regulatory license held may be either suspended or withdrawn.
Finally, and as a last deterrent measure, sanctions applied in respect of the SFT Law will be published by the CSSF and the CAA on their respective websites and will remain public and accessible during ve years after their publication.
While each counterparty has had to ensure the safeguarding of any SFT it concludes, modifies or terminates for at least ve years following the termination of the transaction, the long- awaited implementation of SFTs reporting requirement, referred to here above, remains pending.
If you have not already completed it, you should assess if your firm, funds under management and any group vehicles fall within the scope of SFTR. If so, the implementation of this requirement can be immediately tackled by assigning resources to study ESMA’s regulatory technical standards(RTS) specifications, review, organise and check the quality of your data accordingly and build/test efficient operating models ensuring a smooth compliance process as soon as the reporting terms will be finalised and the target date known.
In any case, the implementation of the reporting obligation must be anticipated as this requirement is expected to be rapidly phased-in over a nine month go-live period. SFTs counterparties, depending on the nature of the relevant entity, will have between twelve and twenty-one months from the much-anticipated adoption of RTS by the European Commission to implement and run this complex reporting. The expected entry into force of the RTS should be in Q3 2019 at the earliest for investment rms and credit institutions, continuing until Q2 2020 for non-Financial Counterparties.
Although draft RTS were submitted more than one year ago, the European Commission has yet to give its green light and adopt them, leaving many players in the securities lending industry in a rather uncomfortable situation in terms of resource management and IT development.
Giving the industry the opportunity to have access to more real-time insights, SFTR reporting should signi cantly improve counterparties decision-making process, leading to better business outcomes. To achieve this goal and enhance transparency on the market, it will be crucial that stakeholders integrate and implement this requirement.
Without any doubt, if you are in the scope of these reporting obligations, the coming months will be full of challenges for your teams. Be prepared!