ESMA Provides Temporary Reprieve on SFTR Reporting Requirements

January 13, 2020

Just under two weeks into the new decade and financial regulators have already released several publications impacting asset managers. One significant release, especially for firms that do business in Europe, was the Securities and Market Authority’s (ESMA’s) publication of the final Securities Financing Transaction Regulation (SFTR) rules on January 6. 

As a reminder, SFTR is designed to improve the transparency and monitoring of Securities Financing Transactions (SFTs), defined as securities lending, repurchase agreements, and margin lending. SFTR reporting, as we have flagged before, is a major undertaking, requiring firms participating in securities finance activity to report up to 155 data fields on a next day basis for their SFTs. 

Of particular concern in this regard was the availability of legal entity identifier numbers (LEIs) for issuers of non-EU securities involved in securities financing transactions. ESMA has taken the position that an LEI must be available for all such securities because the LEI will associate the issuer with the responsible supervisor of the issuer in their home market. LEIs are 20-character alpha-numeric codes which uniquely identify entities and are fast becoming ubiquitous for issuers and for market participants involved in financial transactions. In Europe, the practice of using LEIs originated from MiFID II and is relatively well-established, but many issuers based in the US and Asia do not have an LEI as they have never had a compelling reason to have one – they do now! 

Throughout the back half of 2019, the industry conjectured about a possible delay to the SFTR reporting requirements. Publication of the final guidelines put those thoughts to bed, confirming that the reporting regime will go live on April 13 for banks and brokers, July for CSDs and CCPs, and October for asset managers. The final publication also included a welcome reprieve by granting a one-year grace period to reporting of third-country securities under SFTR. If the rules stood as initially proposed, many believed they would have resulted in a significant reduction in the ability to lend non-European securities. The adjustment delays the need for an LEI for non-EU issuers whose securities are involved in reportable transactions.

Absence of an issuer LEI under securities financing transactions would have resulted in the possibility of trades being rejected by the trade repository and ultimately sanctions for failure to properly and fully report transactions under SFTR. Without the extension, this could have created widespread liquidity and collateral issues globally. Impairment of a securities financing market representing daily transactions totaling approximately $2 trillion could have resulted in wider systemic market issues. Securities lending is often referred to as the oil upon which the engines of financial markets rely since the ability to sell short and cover trade fails disappears, which in turn means no market making, hedging, or true price discovery, which are all factors that could lead to less efficient and more volatile markets.

To mitigate against these negative wider market impacts, ESMA granted a 12-month reprieve to market participants to provide an LEI for a security, loan or collateral, issued from a third-country (non-EU) when reporting their transactions under SFTR. The reporting reprieve only relates to non-EU issued securities. Securities finance market participants required to report under SFTR must still ensure that for EU securities their reports contain LEIs.

Interestingly, while LEI coverage is pretty good in Europe, ESMA’s own report shows that even in its own regulatory domain, coverage is far from complete. This report indicates that on average, 88% of instruments from EU issuers have an LEI, compared to an average of 30% from non-EU jurisdictions. EU issuers that do not yet have LEIs will not enjoy the extension that applies to non-EU issuers and so will have to acquire an LEI by the original April 2020 deadline. As part of the relief, ESMA requires asset managers, lenders, and agents make the non-EU issuers aware that this is a temporary reprieve and they must start the process of applying for LEIs so that they are adequately prepared for the new deadline in April 2021. 

It is important to note that the temporary reprieve covers only security LEIs. All other LEIs such as lender, borrower, and lending agent are required on the first day the reporting regime goes into effect.

ESMA hopes the adjustment will “ensure the smooth introduction of the SFTR reporting regime.” This issue once more shows the extra territorial impact that EU regulation can have in today’s highly interconnected global capital markets. It also shows that ESMA will show pragmatism in approach if there are genuine practical reasons to delay or defer an implementation. Even though temporary, this is a welcome regulatory reprieve to asset managers engaged in securities lending transactions. 

The article was authored in conjunction with BBH Senior Vice President Tom Poppey.

Brown Brothers Harriman & Co. (“BBH”) may be used as a generic term to reference the company as a whole and/or its various subsidiaries generally. This material and any products or services may be issued or provided in multiple jurisdictions by duly authorized and regulated subsidiaries.This material is for general information and reference purposes only and does not constitute legal, tax or investment advice and is not intended as an offer to sell, or a solicitation to buy securities, services or investment products. Any reference to tax matters is not intended to be used, and may not be used, for purposes of avoiding penalties under the U.S. Internal Revenue Code, or other applicable tax regimes, or for promotion, marketing or recommendation to third parties. All information has been obtained from sources believed to be reliable, but accuracy is not guaranteed, and reliance should not be placed on the information presented. This material may not be reproduced, copied or transmitted, or any of the content disclosed to third parties, without the permission of BBH. All trademarks and service marks included are the property of BBH or their respective owners.© Brown Brothers Harriman & Co. 2020. All rights reserved.

This browser is not fully supported by our public website and may not display or function as expected for this reason. Please note, the Infuse Portal and BBH client applications fully support the IE 11 browser.

Important Information for Non-U.S. Residents

You are required to read the following important information, which, in conjunction with the Terms and Conditions, governs your use of this website. Your use of this website and its contents constitute your acceptance of this information and those Terms and Conditions. If you do not agree with this information and the Terms and Conditions, you should immediately cease use of this website. The contents of this website have not been prepared for the benefit of investors outside of the United States. This website is not intended as a solicitation of the purchase or sale of any security or other financial instrument or any investment management services for any investor who resides in a jurisdiction other than the United States1. As a general matter, Brown Brothers Harriman & Co. and its subsidiaries (“BBH”) is not licensed or registered to solicit prospective investors and offer investment advisory services in jurisdictions outside of the United States. The information on this website is not intended to be distributed to, directed at or used by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation. Persons in respect of whom such prohibitions apply must not access the website.  Under certain circumstances, BBH may provide services to investors located outside of the United States in accordance with applicable law. The conditions under which such services may be provided will be analyzed on a case-by-case basis by BBH. BBH will only accept investors from such jurisdictions or countries where it has made a determination that such an arrangement or relationship is permissible under the laws of that jurisdiction or country. The existence of this website is not intended to be a substitute for the type of analysis described above and is not intended as a solicitation of or recommendation to any prospective investor, including those located outside of the United States. Certain BBH products or services may not be available in certain jurisdictions. By choosing to access this website from any location other than the United States, you accept full responsibility for compliance with all local laws. The website contains content that has been obtained from sources that BBH believes to be reliable as of the date presented; however, BBH cannot guarantee the accuracy of such content, assure its completeness, or warrant that such information will not be changed. The content contained herein is current as of the date of issuance and is subject to change without notice. The website’s content does not constitute investment advice and should not be used as the basis for any investment decision. There is no guarantee that any investment objectives, expectations, targets described in this website or the  performance or profitability of any investment will be achieved. You understand that investing in securities and other financial instruments involves risks that may affect the value of the securities and may result in losses, including the potential loss of the principal invested, and you assume and are able to bear all such risks.  In no event shall BBH or any other affiliated party be liable for any direct, incidental, special, consequential, indirect, lost profits, loss of business or data, or punitive damages arising out of your use of this website. By clicking accept, you confirm that you accept  to the above Important Information along with Terms and Conditions.

 
1BBH sponsors UCITS Funds registered in Luxembourg, in certain jurisdictions. For information on those funds, please see bbhluxembourgfunds.com


captcha image

Type in the word seen on the picture

I am a current investor in another jurisdiction