The European Commission recently issued a proposed regulation on the reporting and transparency of securities financing transactions (“SFTs”).

This is the latest piece of the jigsaw in relation to the measures instituted to reduce risks in the shadow banking sector. This proposal was issued in conjunction with the EU proposal regarding the structural reform of the EU banking sector (for more information on the structural reform of the banking sector please click here). The rationale behind the issuance of this proposed regulation was to ensure that banks affected by the structural reform do not transfer parts of their trading activities to the shadow banking sector.

The proposed regulation imposes an obligation to report SFTs to trade repositories; such an obligation will apply to all counterparties to securities financing (whether financial or non-financial parties), and to parties to rehypothecation arrangements. Therefore this would include banks, investment firms, investment funds, insurance companies and pension funds, as well as normal ‘non-financial’ trading entities.

The proposed regulation focuses on three areas:

  1. Highly granular and frequent reporting of SFTs to trade repositories;
  2. Enhanced disclosure to fund investors of UCITS and AIFMs of the use of SFTs; and
  3. Specific rules on rehypothecation, as well as increasing the disclosure to clients and counterparties.

SFTs are deemed to include repos, reverse repos, securities lending and borrowing transactions (amongst others), which means that derivative transactions (such as total return swaps and liquidity swaps and other similar derivative contracts) will be subject to the reporting obligation. This will lead to some overlap with the European Market and Infrastructure Regulation. Such information will be available to European supervisory bodies such as the EBA, ESMA, EBA and EIOPA.

The obligation of reporting SFTs to trade repositories will apply 18 months following the entering into force of the proposed regulation, while the disclosure to fund investors will apply within 6 months. However, the provisions applicable to rehypothecation would take immediate effect without any exceptions for existing contractual arrangements.

Prior to coming into force, the Regulation has to be approved both by the European Parliament and by the Council.

A copy of the draft proposal can be found here.The annex to the proposal can be seen by clicking here. Both documents are provisional.