On December 23rd 2015, Regulation (EU) 2015/2365 of the European Parliament and of the Council of November 25th 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (the “Regulation”) was published in the Official Journal of the EU.
The Regulation aims to improve the transparency of securities lending and repurchase transactions and applies from January 12th 2016.
As described in one of our previous newsletters regarding the proposal for the Regulation, which was adopted by the European Commission in 2014, the financial crisis has highlighted the need to further regulate not only the traditional banking sector but also areas where bank-like credit intermediation known as “shadow banking” takes place, which may affect the rest of the financial sector.
The Regulation applies to counterparties to Securities Financing Transactions (“SFTs”) and counterparties engaged in reuse of financial instruments under a collateral arrangement established in the EU or (under certain conditions) in third countries, management companies of UCITS, UCITS investment companies and AIFMs.
Such entities shall report the details of SFTs that use assets belonging to the counterparty to generate financing. SFTs usually involve the lending or borrowing of securities or commodities, repurchase (repo) or reverse repurchase transactions, or buy-back/sell-back transactions.
The key requirements set out in the articles of the Regulation comprise:
- counterparties to SFTs having to report the details of any SFT they have concluded to a trade repository (article 4);
- UCITS management companies, UCITS investment companies and AIFMs being obliged to inform investors on the use of SFTs and total return swaps in their regular reports (article 13), as well as in their prospectuses and pre-contractual documents (article 14). This should ensure that investors understand and appreciate the inherent risks before they decide to invest in a particular UCITS or AIF. ESMA is empowered to provide draft Regulatory Technical Standards (“RTS”) specifying further details to be disclosed;
- parties reusing financial instruments received as collateral having to (i) disclose the potential risks in writing, for example those in the event of default of the receiving counterparty and (ii) obtain prior written consent for such assets to be reused. The financial instruments should be transferred from the account of the counterparty (i.e. the reuse should not take place on the counterparty’s own account) (article 15).
The key requirements mentioned above will apply on specific dates after the entry into force of the Regulation or after the adoption of RTS, depending upon the type of counterparty that has entered into a SFT, as follows:
- UCITS managers and AIFMs shall apply the reporting requirement under article 4 of the Regulation 18 months after the adoption of RTS;
- the disclosure requirement of SFTs in regular reports under article 13 shall apply from January 13th 2017;
- the disclosure requirement of SFTs in pre-contractual documents under article 14 will apply from July 13th 2017 in case of UCITS and AIFs constituted before January 12th 2016 (for those UCITS and AIFs constituted after this date the disclosure requirements apply immediately);
- article 15 regarding the reuse of financial instruments shall apply from July 13th 2016, including for collateral arrangements existing on that date.
Lastly, without prejudice to the right of Member States to impose criminal sanctions, Member States shall provide their competent authorities with the power to impose administrative sanctions in case of non-compliance with article 4 (Reporting) and 15 (Reuse) of the Regulation