EUROPE: EU Commission Proposal on reporting and transparency of SFTs

Thursday January 30 2014

The European Commission has published a proposal for a Regulation concerning the reporting and transparency of securities financing transactions. Firms that engage in securities lending and repos, referred to as securities financing transactions (SFTs), will face EMIR-like reporting requirements and stricter rules on rehypothecation (any pre-default use of collateral by the collateral taker for their own purposes). Investment funds will also be subject to increased disclosure requirements. The proposal is designed to enhance transparency and forms part of a wider package of reforms to address the risks posed by shadow banking.

The proposal aims to improve the transparency of securities financing transactions (SFTs) in the following three ways:

First, the proposed regulation would require that all transactions are reported to a central database. This would allow supervisors to better identify the links between banks and shadow banking entities and would shed more light on some of their funding operations. As a consequence, supervisors would be able to monitor the exposures to and risks associated with SFTs and, if necessary, take better-targeted and timelier actions.

Second, it would improve transparency towards investors on the practices of investment funds engaged in SFTs and other equivalent financing structures by requiring detailed reporting on these operations, both in the regular reports of funds and in pre-investment documents. This would lead to better-informed investment decisions by investors.

Finally, the proposal would improve the transparency of the rehypothecation of financial instruments by setting minimum conditions to be met by the parties involved, including written agreement and prior consent. This would ensure that clients or counterparties have to give their consent before rehypothecation can take place and that they make that decision based on clear information on the risks that it might entail.

Click on the above link for the EU Commission’s Proposal.