ESMA published a Consultation paper “Guidelines for reporting under Articles 4 and 12 SFTR,” together with the latest consolidated SFTR validation rules. The deadline for responses is 29 July 2019. ESMA plan to consider feedback during Q3 2019 and the final report is scheduled to be published in Q4 2019. This does not give a lot of time, particularly for the 1st phase of reporting counterparties (Banks), due to go-live in April 2020.
Nevertheless, ESMA provided clarity on many issues and gave reason to be cheerful as many SFTs executed on behalf of financial institutions through powers of attorney during the course of daily clearing, custody and settlement activities at CCPs, CSDs and ICSDs were ruled out of scope. This has undoubtedly removed a major operational headache from the SFTR reporting requirements and will assist regulatory authorities in gaining a better understanding of the data (as they will be significantly less overwhelmed with noise).
- In particular, Chapter 5 (General Principles), paragraphs 25-27 rule out any reporting of short term credit lines for custody or CCP clearing.
- Paragraphs 36-41 rule out reporting of any transactions relating to “fails-curing” services offered by CSDs.
- Paragraph 43 rules out the need to report any transactions associated with Target 2 Securities Auto-Collateralisation.
The guidelines also clarify the exclusion of the need to report under SFTR in relation to: Retail client lending (except when it is against an irrevocable trust), private banking & Lombard loans, syndicated lending and other corporate lending for commercial purposes, intermediate give-ups and take-ups (in the execution & clearing chain) and transactions involving emission allowances.
In further points of clarification:
- Buy-sellbacks and Sell-buybacks should be reported as such with the appropriate master agreement detail where applicable (overruling the original SFTR regulation) (paragraph 61).
- Margin Loan reporting only applies to Prime Brokerage business (paragraph 11).
- Modifications that are agreed but have not taken place should not be reported until the actual modification takes place (paragraph 117).
- Margin loans – where the value of an existing margin loan hits zero, the transaction should be modified (MODI action type) rather than terminated (ETRM action type) (paragraph 83).
- Securities lending and borrowing transactions can only involve a single ISIN being transferred between a given pair of counterparties (paragraph 65).
- Backloading: ESMA advises that they like the idea of reporting all open and term transactions executed prior to the date of application whether they meet the requirements for backloading or not. This approach is seen as operationally simpler for many reporting parties and provides authorities with greater information in relation to variation margining (paragraphs 167-170).
- When trading with sub-funds, each sub-fund should be treated as a counterparty if they have their own LEI (paragraph 52)
- For cleared SFTs, each SFT between the CCP, its clearing members and the clients of those clearing members should be treated as separate SFTs with different UTIs (paragraph 53).
- In relation to Repos, collateralised loans in more than one currency constitute separate SFTs. This doesn’t preclude a single SFT having collateral denominated in multiple currencies though
- Small & medium sized non-financial counterparties trading with a non EU third country entity must either trade with an entity that has been granted equivalence (in which case there is no reporting obligation under SFTR), else they will need to delegate or self-report the transaction/s (paragraph 93).
- Execution by a branch was clarified to cover the following: a) for a client in accordance with a discretionary mandate given to it by the client; b) where the branch has supervisory responsibility for the person responsible for the investment decision concerned; c) where the branch has supervisory responsibility for the person responsible for execution of the transaction; d) where the transaction was executed on a trading venue or an organised trading platform located outside the Union using the branch’s membership of that trading venue or an organised trading platform (paragraph 102).
- Counterparties should not report the LEI of the CSD in which they are either a direct or indirect participant (paragraph 122) in the CSD participant field.
- ESMA acknowledged that updating valuations of securities on loan or used as collateral may not be possible where pricing becomes stale. This can affect suspended shares and some illiquid fixed income securities. In these instances, reporting parties should use contractually agreed values and only update them if new price information becomes available (paragraph 155).
- ESMA advises counterparties should always use official sources for CFI codes. Those who felt that it would be sufficient to just populate the first 2 characters are likely to be disappointed as ESMA states that X should only be used when a character is not applicable (paragraph 163).
- Non-bank entities are permitted to start reporting earlier than their date of application if they find it easier (paragraph 188).
The consultation also contains an extensive set of sample reports for many different scenarios, detailing how each of the 4 reporting tables should be populated. Once we’ve had the opportunity to review these samples and the latest trade repository validation rules, we will produce a follow-up blog.