The new Regulation on transparency of Securities Financing Transactions (also known as SFTR) was published in the Official Journal of the EU on 23 December 2015 and entered into force on 12 January 2016.
The SFTR is part of the Commission’s action plan on shadow banking and aims to improve the transparency of certain transactions outside the regulated banking sector. Securities financing transactions (SFTs) include a variety of secured transactions such as lending or borrowing securities and commodities, repurchase or reverse repurchase transactions and sell/buy-back transactions. They play an important role in providing liquidity and are often used for short selling, for obtaining leveraged exposures or for settlement purposes.
Traditional players in the shadow banking sector will be affected, such as private equity or hedge funds. In general, the SFTR requires that:
- UCITS management and investment companies and AIFMs disclose details on their use of SFTs towards their investors;
- all SFTs are reported to central trade repositories; and
- certain conditions are met on the reuse of collateral (counterparty consent).
The requirements regarding the reuse of financial instruments received as collateral will take effect as of 13 July 2016. The requirements on pre-contractual disclosure and on periodic reporting by UCITS and AIFMs will only take effect as of 13 January 2017, which is also the due date for the ESMA’s Implementing Technical Standards on the details, format and frequency of SFT transaction reports.