SFTs include a variety of secured transactions that have similar economic effects such as lending or borrowing securities and commodities, repurchase or reverse repurchase and buy-sell back or sell-buy back transactions, including collateral and liquidity swaps.
The publication of the proposed SFT Regulation on 29 January 2014 by the Commission was part of an initiative to address the perceived risks of shadow banking. The regulation includes measures addressing: reporting of SFTs to trade repositories; reporting requirements for funds and requirements on counterparties engaged in rehypothecation.
In so far as funds are concerned, the proposed SFT Regulation contains new rules on transparency which supplement the requirements of the UCITS Directive and the AIFMD. In particular, UCITS managers or investment companies and AIFMs will need to supplement their existing periodical reports with detailed information on any recourse they have to the use of SFTs and total return swaps. In addition, the proposed SFT Regulation provides that a fund’s investment policy with respect to SFTs and total return swaps should be clearly disclosed in pre-investment documents, such as the prospectus for UCITS funds and the pre-contractual disclosure for AIFs.
The latest text of the SFT Regulation provides that it will enter into force on the twentieth day after its publication in the Official Journal of the European Union (“OJ”) and that it will apply from the date of entry into force, with important exceptions in respect of certain provisions:
- The provisions in relation to transparency in periodical reports applicable to UCITS management companies / investment companies and AIFMS will apply 12 months after the date of entry into force.
- The provisions relating to investment fund’s transparency in pre-investment documents will apply 18 months after entry into force for UCITS and AIFs established prior to the date of entry into force.
- The provisions relating to reuse of financial instruments received under a collateral arrangement will apply 6 months after the date of entry into force.
- The provisions requiring financial counterparties to report details of securities financing transactions to trade repositories will apply at various dates after the adoption of certain regulatory technical standards required to be adopted under the SFT Regulation, depending on the type of financial counterparty involved. In the case of UCITS and AIFs, the reporting obligation will apply 18 months after the date of entry into force of the relevant delegated acts.
The Council of the EU is now in the process of formally adopting the SFT Regulation, and it will then be published in the OJ.
By Matheson.
