The Securities Financing Transactions Regulation (Regulation (EU) 2015/2365, hereafter “EU SFTR”) came into force on 12 January 2016.
Its purpose is to improve transparency of securities financing transactions (SFTs) and in certain cases of total return swaps (TRS) in the shadow banking sector, giving regulators (including the European Securities and Markets Authority - ESMA - and national regulators) access to detailed information to enable them to monitor risks in that sector on an ongoing basis.
The UK onshored version of EU SFTR came into force on 31 December 2020 and applies to UK SFT counterparties.
Like EU SFTR, UK SFTR aims to reduce risks by improving transparency in the SFT markets including through:
- Reporting obligations: the counterparties should report SFTs to a trade repository to provide transparency to regulators on the use of SFTs by market participants; and
- Collateral Reuse Requirements: the 'reuse' of financial instruments which have been provided as 'collateral' is submitted to several conditions, so that clients and counterparties understand the risks involved and give their consent to the reuse.
Article 15 of UK SFTR relates specifically to reuse purposes. It requires information from the collateral receiver on the risks and consequences that may be involved when granting consent to a right of use of collateral provided under a collateral arrangement, and likewise, requires the prior express written consent of the collateral provider or in a legally equivalent manner in order for the collateral receiver to have the right to reuse the collateral received in each type of transaction and not just SFTs, including derivatives. Such consent is materialized in the collateral contracts (e.g. CSA or other financial collateral arrangement) that our clients have entered into with us.
Article 15 of EU SFTR applies to EU and non-EU counterparties who receive collateral from an EU counterparty or an EU branch of a non-EU counterparty and requires the collateral receiver to disclose the risks and consequences associated with granting consent to a right of collateral reuse.
Please refer to the Information Statements available in the “Useful links” section below.