ESMA publishes final SFTR guidelines with LEI reprieve
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ESMA publishes final SFTR guidelines with LEI reprieve 06 January 2020Paris Reporter: Drew Nicol
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ESMA has released its final report on the Securities Financing Transactions Regulation (SFTR) along with amended validation rules for non-EU legal entity identifiers (LEIs) that threatened to “severely impact liquidity” under the original reporting timetable.
The first phase of SFTR is due to come into force on 13 April for investment firms and credit institutions, and July for central counterparties and central securities depositories.
As part of its new guidelines, the European Securities and Markets Authority (ESMA) acknowledged the wide-spread industry concerns around the disparity between LEI coverage for EU and third-country jurisdictions.
In its report, ESMA stated that, on average, 88 percent of instruments issued by EU issuers have an LEI code, compared to an average of 30 percent from non-EU jurisdictions.
As a result, ESMA will allow a grace period of up to 12-months – starting when SFTR enters into force – where reports without an LEI of non-European Economic Area issuers will be accepted.
In its statement on the decision, the EU watchdog reiterated the importance of receiving LEIs from all relevant parties under SFTR but noted that “considering the still unsatisfactory level of LEI coverage on the global scale” it was adjusting its rules in order to “ensure the smooth introduction of the SFTR reporting regime”.
ESMA stressed that the relaxation of the validation rules only applies to third-country issuers and does not affect LEI reporting in any other instance, including the identification of third-country entities that take part in a securities financing transaction.
A spokesperson for EquiLend welcomed the grace period, noting that the LEI requirement for third-country issuers would have “severely impacted market liquidity” if it had come into effect this year. This is because assets available to lend from third-country issuers that did not have LEIs for SFTR would have become inaccessible to those in-scope for the regulation from April.
Along with its explanation on the reprieve, ESMA went on to state that it expects agent lenders and triparty agents that interact with third-country entities to ensure those counterparties are aware of the temporary nature of the rule change and that they are ready for the new 13 April 2021 deadline.
Speaking to SLT on the release, Seb Malik, head of financial law at Market FinReg, says: “Third-country LEI issuers have been a major bugbear for the industry and what ESMA has done regarding the LEI issuer is quite reasonable.
“ESMA has acknowledged the industry concerns that were expressed forcefully over the summer on the difficulty in obtaining LEIs from third-country entities.”
Elsewhere in the report, ESMA outlined its assessment of the feedback received to the proposals in the consultation paper published in May 2019, as well as a more detailed discussion on the market transactions that are not in scope.
ESMA previously released “further technical details” to its reporting XML schemas on 31 October, but these were unable to be validated by the ISO evaluation team due to having several defects.
The December update reflects the changes made to the October draft which gained its ISO registration on 29 November.
Commenting on the update at the time, Tomas Bremin, convenor of the ISO evaluation team and vice president of REGIS-TR, commended ESMA and the SWIFT MyStandards team for releasing the new schemas “pretty fast” after the ISO registration was made.
“Having SFTR reporting with ISO 20022 registered schemas delivers a stable foundation for the implementation by solution providers, reporting firms and trade repositories," he added. "I’m very proud of the achievements we made in this ISO evaluation team.”
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