EU SFTR Reporting for Investment Managers — Top Five Things to Know

The EU Securities Financing Transactions Regulation (SFTR) introduces a reporting obligation for certain counterparties to securities financing transactions (SFTs). The reporting obligation will apply in stages, starting in April 2020 and extending to January 2021.

For alternative investment funds (AIFs), undertakings for the collective investment in transferable securities (UCITS) and/or any trading vehicles underneath an AIF or UCITS that fall within the scope of the SFTR reporting requirement (see the section on “Scope” below), the most relevant phase-in dates will be October 11, 2020, and January 11, 2021.

The reporting requirement will not apply to non-EU AIFs and non-EU trading vehicles.

1. What entities are subject to the SFTR reporting obligation?

The SFTR reporting obligation applies to counterparties established in the EU (including their branches) and non-EU counterparties acting through an EU branch.

Where an EU AIF that is managed by an EU-authorised AIF manager (AIFM) or UCITS is a counterparty to an SFT, the EU-authorised AIFM or UCITS management company (as applicable) is responsible for such reporting.

While the SFTR reporting framework is similar to the derivatives reporting framework under the European Market Infrastructure Regulation (EMIR) — confusingly — there are certain differences. Under EMIR, any AIF (including a non-EU AIF, e.g., Cayman hedge fund) that is managed by an EU-authorised AIFM is subject to the EMIR reporting obligation. However, in February 2020, the European Securities and Markets Authority (ESMA) and the European Commission each confirmed (by way of letters addressed to the Alternative Investment Management Association) that non-EU AIFs managed by EU-authorised AIFMs are not subject to the SFTR reporting obligation.

The reporting requirement will not apply to non-EU AIFs and non-EU trading vehicles. However, for the purposes of EU dealers fulfilling their own SFTR reporting obligation, non-EU counterparties should expect to receive requests from their EU dealers for certain information, including the non-EU counterparty’s legal entity identifier (LEI).

2. What are SFTs?

 The term “SFT” is defined in the SFTR to comprise the following:

1. securities or commodities repurchase transactions
2. securities or commodities lending/securities or commodities borrowing transactions
3. securities or commodities buy-sellback transactions or sell-buyback transactions
4. securities margin lending transactions

The SFTR provides further guidance as to the meaning of the above types of transactions.

3. What must firms report?

 In-scope counterparties entering into SFTs must report the details of any SFT they have concluded, modified or terminated no later than the working day following the conclusion, modification or termination of the transaction (i.e., on a T+1 basis).

The report (which is to contain details of the trade and the counterparties, with strict information fields prescribed by the SFTR) must be made to a trade repository (TR) that has been registered or recognised under the SFTR. Where no registered or recognised TR is available, counterparties must report directly to ESMA.

As in-scope counterparties are permitted under the SFTR to delegate the reporting of the details of the SFTs to another person, it is possible that EU SFT dealers may offer such assistance to its SFT clients. Many sell-side firms already provide their clients with delegated reporting services for the purposes of reporting derivative transactions under EMIR.

The International Swaps and Derivatives Association, along with other industry bodies, has published a new template agreement, the Master Regulatory Reporting Agreement (MRRA), to make it easier for counterparties of derivatives and securities financing transactions to comply with their obligations to report transactions to TRs under EMIR (as amended by EMIR Refit) and the SFTR. The MRRA has been drafted to work post-Brexit as well.

4. When does the reporting obligation begin?

 The date from which the SFTR reporting requirement applies depends on the nature of the counterparties to the SFT.

1. For EU investment firms and EU credit institutions (e.g., EU SFT dealers): April 11, 2020.
2. For EU AIFs managed by EU-authorised AIFMs, EU insurance/reinsurance companies, UCITS/UCITS management companies and EU occupational pension funds: October 11, 2020.
3. For non-financial counterparties (NFCs): January 11, 2021. 

As an additional area where the SFTR reporting framework differs from EMIR, under EMIR (as a result of an amendment introduced by EMIR Refit) all AIFs established in the EU are classified as Financial Counterparties (FCs), even if the relevant AIFM is not an EU-authorised AIFM. However, because the changes in EMIR Refit are not reflected in the SFTR, it is still the case that under the SFTR, an EU AIF managed by a non-EU AIFM may be classified as an NFC rather than FC (which has a bearing on the SFTR reporting start date noted above).

In addition to reporting new SFTs entered into, on or after the relevant phase-in date, in scope counterparties are required to “backload” outstanding SFTs concluded before that date where those SFTs either (i) have a (fixed) remaining maturity exceeding 180 days as at the relevant phase-in date or (ii) have an open maturity and remain outstanding 180 days after the relevant phase-in date.

Trades in scope of the backload requirement must be reported within 190 days of the relevant phase-in date for that counterparty.

5. Next steps

Firms should assess whether their SFT trading counterparties are in-scope of the SFTR reporting requirement.

For in-scope buy-side clients, it may be helpful to discuss with their EU dealers whether any delegated reporting is available.

We are available to assist clients with any questions that they may have.