Transparent securities financing transactions

SUMMARY OF:

Regulation (EU) 2015/2365 on transparency of securities financing transactions and of reuse

WHAT IS THE AIM OF THE REGULATION?

It increases the transparency of certain activities in financial markets, such as the use of securities financing transactions (SFTs)* and of collateral* reuse*, so that they can be monitored and the risks identified.

KEY POINTS

The regulation establishes EU rules for the reporting of details of SFTs to trade repositories, for information on SFTs and total return swaps* to be disclosed to investors in collective investment companies, and for minimum transparency conditions to be met by the parties involved in collateral reuse.

Reporting

Counterparties to SFTs have to report the details of any SFT they have concluded, as well as any modification or termination, to a central database (‘trade repository’) registered with the European Securities and Markets Authority (ESMA) or recognised in accordance with this regulation.
Those details must be reported no later than the working day following the conclusion, modification or termination of the transaction.
Counterparties must keep records of all SFTs that they have concluded, modified or terminated for at least 5 years following the termination of the transaction.

In this respect, ESMA must develop:

draft regulatory technical standards specifying the details of the reports for the different types of SFTs;
draft implementing technical standards specifying the format and frequency of the reports for the different types of SFTs.

These technical standards are subsequently scrutinised and adopted by the European Commission as delegated regulations or implementing regulations.

Transparency for investors

Managers of collective investment companies should include detailed information on their use of SFTs and total return swaps in regular reports so that investors are aware of the risks associated with their use.
A collective investment company’s investment policy with respect to SFTs and total return swaps should be clearly disclosed in the pre-contractual documents.

Transparency of reuse

To increase transparency on the extent of reuse of financial instruments provided as collateral, in particular regarding the respective risks and consequences, for example in the case of bankruptcy, the regulation imposes minimum information requirements.
Reuse should take place only under the following conditions:
- the prior consent of the providing counterparty to a security collateral arrangement, or the express agreement to provide collateral by way of a title transfer; and
- the transfer of the collateral from the account of the providing counterparty.

Cooperation between competent authorities

Competent national authorities and ESMA must cooperate closely and exchange information, in particular in to identify and remedy infringements of this regulation. The entities that have access to data stored in trade repositories (e.g. supervisory authorities) and the relevant members of the European System of Central Banks must also cooperate closely in accordance with certain conditions.
A competent authority may refuse to act on a request to cooperate and exchange information, in exceptional circumstances.

Professional secrecy

Any confidential information received, exchanged or transmitted pursuant to this regulation is subject to the conditions of professional secrecy.

Relationship with non-EU countries

The regulation grants the Commission the power to assess the rules of non-EU countries for the purposes of recognising trade repositories in non-EU countries, and in order to avoid potentially duplicate or conflicting requirements.
A trade repository established in a non-EU country may provide services to entities in the Union only after recognition by ESMA. ESMA must publish on its website a list of the trade repositories recognised in accordance with this regulation.

Sanctions

EU countries must ensure that competent authorities have the power to impose administrative sanctions and other administrative measures which are effective, proportionate and dissuasive.

Certain essential requirements apply in relation to the:

criteria to be taken into account when applying a sanction or measure;
publication of sanctions or measures;
nature and types of sanctions and measures;
levels of administrative monetary sanctions.

Delegated acts

The Commission has adopted a series of delegated acts supplementing or amending the regulation. These regulations supplement Regulation (EU) 2015/2365 with regard to regulatory technical standards:

specifying the details of SFTs to be reported to trade repositories;
on access to details of SFTs held in trade repositories;
on the collection, verification, aggregation, comparison and publication of data on SFTs by trade repositories; and
specifying the details of the application for registration and extension of registration as a trade repository.

Further delegated regulations concern:

the fees charged by the European Securities and Markets Authority to trade repositories; and
an amendment to the list of exempted entities (concerns UK (1) entities in the event of Brexit).

Implementing acts

The Commission has also adopted 3 implementing acts:

Regulation (EU) 2019/363 lays down technical standards for the format and frequency of reports on the details of securities financing transactions to trade repositories. It also amends Regulation (EU) No 1247/2012 with regard to the use of reporting codes in the reporting of derivative contracts;
Regulation (EU) 2019/364 lays down technical standards for the format of applications for registration and extension of registration of trade repositories;
Regulation (EU) 2019/365 lays down implementing technical standards for the procedures and forms for exchange of information on sanctions, measures and investigations.

Progress

Within 36 months of the entry into force of the regulatory technical standards that it adopts, the Commission must submit a report to the European Parliament and to the Council. This report will cover the effectiveness, efficiency and proportionality of the obligations laid down in this regulation and may be accompanied by appropriate proposals.

The Commission also submitted a report on progress in international efforts to mitigate the risks associated with SFTs on 19 October 2017.

FROM WHEN DOES THE REGULATION APPLY?

The regulation applies from 12 January 2016 but establishes the following phased-in implementation process:

Reporting to trade repositories: depending on the type of entity (e.g. bank, investment firm, central counterparty), reporting to trade repositories will start at different stages 12 to 21 months after the entry into force of the regulatory technical standards mentioned above.
Funds disclosure requirements in periodic reports apply since 13 January 2017. As regards pre-contractual documents, investment funds constituted before 12 January 2016 have had to disclose the use of SFTs and total return swaps in the pre-contractual documents since 13 July 2017, while funds constituted more recently had to do it as from 12 January 2016.
Transparency rules on collateral reuse: the reuse rules have applied since 13 July 2016.

The delegated and implementing regulations have applied since 11 April 2019. The delegated regulation relating to UK (1) entities will apply when the main regulation ceases to apply in the UK (1) following Brexit.

BACKGROUND

For more information, see:

Regulation on security financing transactions (European Commission).

KEY TERMS

Securities financing transaction: this can refer to a number of transactions including:

a repurchase transaction (when a party sells a security, i.e. a financial asset such as a share or a government bond, and agrees to repurchase it in the future repaying the original sum of money plus a return for the use of that money);
a case where the lending counterparty lends securities for a fee in return for a guarantee in the form of financial instruments or cash given by their clients or counterparties;
a buy-sell back transaction or sell-buy back transaction; and
a margin lending transaction (e.g. where a counterparty extends credit in connection with the purchase, sale, carrying or trading of securities but the transactions do not include other loans that are secured by collateral in the form of securities).

Collateral: the provision of assets (e.g. securities) by a borrower to a lender to secure the performance of an obligation by:

transfer of full ownership from a collateral provider to a collateral taker (title transfer); or by
transfer of possession from a collateral provider to a collateral taker under a security right where the full ownership of the assets remains with the collateral provider (security collateral arrangement).

Reuse: the use by a receiving counterparty, in its own name and on its own account or on the account of another counterparty, of financial instruments received under a collateral arrangement.

Total return swap: a financial contract that transfers both the credit risk (e.g. a borrower’s ability to repay a loan) and market risk of an underlying asset (i.e. the financial instrument, such as a share or commodity, on which the price of a derivative is based).

MAIN DOCUMENT

Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (OJ L 337, 23.12.2015, pp. 1-34)

RELATED DOCUMENTS

Commission Delegated Regulation (EU) 2019/463 of 30 January 2019 amending Regulation (EU) 2015/2365 of the European Parliament and of the Council with regard to the list of exempted entities (OJ L 80, 22.3.2019, pp. 16-17)

Commission Implementing Regulation (EU) 2019/363 of 13 December 2018 laying down implementing technical standards with regard to the format and frequency of reports on the details of securities financing transactions (SFTs) to trade repositories in accordance with Regulation (EU) 2015/2365 of the European Parliament and of the Council and amending Commission Implementing Regulation (EU) No 1247/2012 with regard to the use of reporting codes in the reporting of derivative contracts (OJ L 81, 22.3.2019, pp. 85-124)

Commission Implementing Regulation (EU) 2019/364 of 13 December 2018 laying down implementing technical standards with regard to the format of applications for registration and extension of registration of trade repositories in accordance with Regulation (EU) 2015/2365 of the European Parliament and of the Council (OJ L 81, 22.3.2019, pp. 125-127)

Commission Implementing Regulation (EU) 2019/365 of 13 December 2018 laying down implementing technical standards with regard to the procedures and forms for exchange of information on sanctions, measures and investigations in accordance with Regulation (EU) 2015/2365 of the European Parliament and of the Council (OJ L 81, 22.3.2019, pp. 128-133)

Commission Delegated Regulation (EU) 2019/356 of 13 December 2018 supplementing Regulation (EU) 2015/2365 of the European Parliament and of the Council with regard to regulatory technical standards specifying the details of securities financing transactions (SFTs) to be reported to trade repositories (OJ L 81, 22.3.2019, pp. 1-21)

Commission Delegated Regulation (EU) 2019/357 of 13 December 2018 supplementing Regulation (EU) 2015/2365 of the European Parliament and of the Council with regard to regulatory technical standards on access to details of securities financing transactions (SFTs) held in trade repositories (OJ L 81, 22.3.2019, pp. 22-29)

Commission Delegated Regulation (EU) 2019/358 of 13 December 2018 supplementing Regulation (EU) 2015/2365 of the European Parliament and of the Council with regard to regulatory technical standards on the collection, verification, aggregation, comparison and publication of data on securities financing transactions (SFTs) by trade repositories (OJ L 81, 22.3.2019, pp. 30-44)

Commission Delegated Regulation (EU) 2019/359 of 13 December 2018 supplementing Regulation (EU) 2015/2365 of the European Parliament and of the Council with regard to regulatory technical standards specifying the details of the application for registration and extension of registration as a trade repository (OJ L 81, 22.3.2019, pp. 45-57)

Commission Delegated Regulation (EU) 2019/360 of 13 December 2018 supplementing Regulation (EU) 2015/2365 of the European Parliament and of the Council with regard to fees charged by the European Securities and Markets Authority to trade repositories (OJ L 81, 22.3.2019, pp. 58-68)

Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (OJ L 201, 27.7.2012, pp. 1-59)

Successive amendments to Regulation (EU) No 648/2012 have been incorporated into the original text. This consolidated version is of documentary value only.

Report from the Commission to the European Parliament and the Council under Article 29(3) of Regulation (EU) 2015/2365 of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (COM(2017) 604 final, 19.10.2017)

last update 05.06.2019

(1) The United Kingdom withdraws from the European Union and becomes a third country (non-EU country) as of 1 February 2020.