The EU Regulation on transparency of securities financing transactions and of reuse¹ (SFT Regulation) entered into force on 12 January 2016. This regulation mainly sets out provisions aimed at improving the transparency and monitoring of securities financing transactions, such as securities lending and repurchase transactions, and similar financing structures, which are widely used in both the banking sector and the "shadow banking sector".

Second Act Amending Financial Markets Regulations

By way of the German Second Act Amending Financial Markets Regulations (Zweites Finanzmarktnovellierungsgesetz) of 23 June 2017², legislators nominated BaFin as the competent authority within the meaning of the SFT Regulation. This act contains specific implementing rules and requirements relating to administrative fine criteria to enable BaFin to take any actions that are suitable and necessary for monitoring whether the provisions of the SFT Regulation and the delegated acts and regulatory technical standards of the European Commission adopted on the basis of this regulation are being complied with.

In the context of introducing the Second Act Amending Financial Markets Regulations, the provisions of the SFT Regulation concerning management companies and collective investment undertakings within the meaning of the German Investment Code (Kapitalanlagegesetzbuch) were adopted into the Investment Code. In particular, the transparency obligations to investors and the provisions on reporting requirements and safeguards were thus inserted into the Investment Code. The provisions of the SFT Regulation on administrative sanctions and other administrative actions were all laid down in the Securities Trading Act, and the Investment Code refers to the Securities Trading Act in this context where the provisions of Article 28 of the SFT Regulation are not applicable. Article 28 of the SFT Regulation specifies that sanctions and other measures established in accordance with the Directive on Undertakings for Collective Investment in Transferable Securities (UCITS)³ and the Alternative Investment Fund Managers (AIFM) Directive⁴ are applicable to infringements of the transparency obligations of Articles 13 and 14 of the SFT Regulation.

Reporting obligation

In addition, Article 4 of the SFT Regulation lays down a reporting obligation for securities financing transactions. However, the parties subject to the reporting obligation have to submit the report not to the competent authority, but to a registered trade repository. Even though the SFT Regulation entered into force on 12 January 2016, the reporting obligation will only come into effect in stages on subsequent dates. The implementation periods set out in Article 33 of the SFT Regulation will only commence once the legal acts specified there have been adopted.

The reporting obligation in Article 4 of the SFT Regulation requires first of all that at least one of the parties to the transaction is considered a counterparty. This is the case if the entity entering into the trade is a financial or non-financial counterparty. Financial counterparties are listed in the exhaustive catalogue of Article 3(3) of the SFT Regulation. The only prerequisite for a non-financial counterparty⁵ is that it must be a company that has its registered office in the EU or one that operates through a branch in Europe. The reporting obligation in Article 4 of the SFT Regulation covers all securities financing transactions entered into, i.e. securities repurchase agreements, securities or commodity lending transactions, purchase/repurchase or sale/repurchase transactions and Lombard transactions. In addition, the obligation covers not only reports on the conclusion of such transactions, but also on any modification or termination, details of which must be reported by both parties no later than the following working day.

However, Article 4 of the SFT Regulation only describes the minimum information the reports to be submitted must contain. It does not provide any details, including of the design of the respective reporting fields. For this reason, Article 4(9) and (10) of the SFT Regulation specifies that ESMA, in cooperation with the European System of Central Banks (ESCB), should draft regulatory technical standards specifying the details of the report content and format. ESMA presented the draft regulatory standards to the European Commission on 31 March 2017. They provide details on reporting standards and the reporting logic as well as the most important aspects of the structure of a report.

Footnotes: