31 July 2019

ESMA publishes responses to its Consultation on reporting guidelines under SFTR

Euroclear

In November 2001 Euroclear UK & Ireland and the Bank of England introduced an auto-collateralisation process called Auto-Collateralised Repos (ACR) to generate GBP central bank liquidity in the CREST Service. The automated ACR process is similar to T2S Auto-collateralisation and enables a CREST settlement bank to supplement its own cash liquidity, with additional central bank liquidity within the CREST system. The provisions of the ACR process are defined in both the CREST Reference Manual and the RTGS Reference Manual.

The ACR arrangements consist of:

• ‘client auto-collateralisation’ arrangements, to allow a member’s securities in the course of settlement to be repoed to their RTGS settlement bank (and for such securities to be returned by the RTGS settlement bank to the member); and

• ‘Settlement Bank auto-collateralisation’ arrangements, to repo securities from a settlement bank to the Bank of England (and for such securities to be returned by the Bank of England to the settlement bank).

The client auto-collateralisation arrangements:

a.  are triggered by a member’s purchase of eligible securities against sterling or in certain circumstances by a member’s receipt of eligible securities in a stock-versus-stock transaction, or by a member’s receipt of eligible securities in a free-of-payment transaction, regardless of their need for additional credit (known as ‘on-supply’);

b.  will repo the securities (i.e. those received by the member) from the member to their settlement bank (known as ‘on-flow’); and

c.  result in cash consideration equivalent to the settlement bank margined value of the securities being credited to the Cash Memorandum Account (CMA)of the member

The Settlement Bank auto-collateralisation arrangements:

a. are triggered when a settlement bank has insufficient liquidity in their Liquidity Memorandum Account to fund the settlement of an underlying client-member (or a settlement bank linked member) transaction against sterling or in certain circumstances a stock-versus-stock transaction (known as ‘on-demand’) or free-of-payment transaction;

b. will repo securities from the settlement bank repo member to the Bank of England’s repo membership, where the repoed securities are either:

i. the subject of the underlying transaction (known as ‘on-flow’), which may be  either a client-member purchase (where the securities are transferred from the member via client auto-collateralisation to the settlement bank repo member) or a settlement bank linked member purchase; or

ii. not the subject of the underlying transaction, but are held by the settlement bank repo member or the settlement bank linked member (known as ‘on-stock’); and

c. result in a liquidity credit for the settlement bank equivalent to the central bank repo value of the securities.

Full Euroclear response

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ICMA

ICMA would like to stress, as a general remark, the important challenge that reporting firms are facing with the timing of SFTR implementation. In order to comply with the extensive SFTR reporting regime firms are required to implement very significant and complex IT builds and changes to internal systems. In order to allow firms a reasonable timeframe for development and industry testing, the key requirements need to be clearly understood well ahead of the actual reporting go-live. The minimal budget cycle for projects is a year but complex projects can be multi-year. Against this backdrop, we note that the final SFTR Guidelines will only be available in the course of Q4 2019. By this time, most firms will have their core IT developments largely concluded. This means that firms will be forced to make assumptions (based on guidance already available and complementary cross-industry discussions and agreed best practices). We are aware of the constraints that ESMA is facing in terms of governance. Nevertheless, we would like to ask ESMA to be as transparent as possible regarding their evolving thinking on the key open questions and would be keen to continue the good and open dialogue following the end of the consultation.

ICMA agrees with the guidance provided by ESMA but would welcome some further clarifications regarding the scope of the sub-section. It assumes that the section refers more generally to the extension of intraday credit (in commercial bank money) to facilitate the settlement process, i.e. similar to auto-collateralisation offered by T2S or Euroclear UK and Ireland in central bank money (see section 6 below). We would remark that such intraday credit facilities are offered by custodians but also by several (I)CSDs (on a secured basis). On the other hand, ICMA understands from the CCPs that are represented on the ERCC SFTR Task Force that they are not offering any daylight lending facilities as described in the Guidelines.

Full ICMA response

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AMAFI

SFTR constitutes a huge technical and operational challenge for the industry, Trade Repositories (TR) and ESMA in an area where, contrary to the cash or derivatives markets, automation of the process is yet to be achieved. Even if there is some progress to be expected before the entry into force of the regulation, the challenges associated with the reconciliation of different data elements must not be underestimated.

In this context, AMAFI deeply regrets that ESMA’s proposal did not include a reduction of the matching fields, mainly those concerning reference data. Moreover, it seems that it will be difficult to match some fields, such as the market value of collateral. AMAFI believes it would be very helpful if ESMA could provide the industry with golden source or consider setting more reasonable margins.

Therefore, it is of the utmost importance that ESMA provides the industry with clear Guidelines with limited room for interpretation. Otherwise, reconciliation of many SFTs between two counterparts will be difficult to achieve, despite the processes being implemented by the industry.

Regarding the technical questions raised in the CP, AMAFI supports the joint contribution by ICMA and ISLA, and will not provide its own response, given that several AMAFI members brought their contributions to the joint response by ICMA and ISLA. However, AMAFI would like, in the general comments below, to stress some critical issues that should be addressed by ESMA before issuing its final Guidelines in order to limit (i) the number of mismatched trades (breaks) (ii) the number of rejected trades by TR.

It must be noted that the general comments do not specifically raise issues posed by the CP only but also level 2 measures that have already been endorsed by the European Commission (EU). AMAFI believes there is a need either to change some level 2 provisions or to specify in the Guidelines that some transitional rules are to be put in place before the full application of SFTR. Those topics need further discussion between ESMA and the industry, and AMAFI would be more than happy to take part in it.

Full AMAFI response

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AIMA

AIMA’s members employ a variety of securities financing transactions (“SFTs”) to manage risk and deliver returns for their investors and we welcome the publication by ESMA of Guidelines to support the industry in their implementation of SFTR reporting requirements.

In order to ensure consistent implementation of the framework, it is important that the scope of application of the rules is clear; accordingly, we focus in this submission on the position of alternative investment funds (“AIFs”). In brief, our understanding is that only AIFs established in the European Union (“EU”) are subject to the Article 4 reporting obligation. It would be helpful if the Guidelines could confirm this position with a view to ensuring that the market adopts a consistent position on this point.

Article 4 of SFTR establishes a reporting obligation for “[c]ounterparties to SFTs”; Article 2 of SFTR further clarifies that the associated obligation is limited to an entity established: (i) in the Union, including all its branches irrespective of where they are located; (ii) in a third country, if the SFT is concluded in the course of the operations of a branch in the Union of that counterparty.” The branch limb of this scope provision is unlikely to be applicable to a fund and therefore the default position under SFTR is that non-EU AIFs will not be subject to Article 4 reporting obligation.

This scope differs from the scope of the Article 9 reporting obligation under EMIR; in respect of AIFs, Article 9 of EMIR applies to AIFs that are either established in the EU or that are managed by an AIFM that is authorised or registered in accordance with Directive 2011/61/EU [AIFMD]. As such, a non-EU AIF with an EU-established AIFM – a common structure in our industry – is subject to the EMIR reporting obligation, but will not be subject to the SFTR reporting obligation.

The difference between the scope of EMIR and SFTR rests on technical provisions that will not necessarily be immediately familiar to all market participants. There is also potential for confusion given that SFTR Article 4(3) third indent requires that “[w]here an AIF is the counterparty to SFTs, its AIFM shall be responsible for reporting on behalf of that AIF”. Our understanding is this provision is only relevant to the extent that the AIF that is the counterparty to an SFT has a reporting obligation in the first place, i.e. the provision is not relevant where the AIF in question is established outside the EU.

This view is reinforced by section 5.3.3 of the Guidelines which explore scenarios in which an EU AIF has a non-EU AIFM to clarify that the non-EU AIFM does indeed retain the responsibility for reporting under SFTR (despite the fact the non-EU AIFM might not be authorised in the EU). We support the analysis as set out in section 5.3.3.

However, while we welcome this discussion of the obligations that might be borne by non-EU AIFMs in respect of the EU AIFs that they manage, it would also be helpful to preface this discussion by noting more explicitly that non-EU AIFs and their managers are not subject to the Article 4 reporting obligation.

Full AIMA response

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All responses

Full consultation paper

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