ESMA has clarified that its request for national regulators to ignore the Securities Financing Transactions Regulation’s (SFTR) reporting rules until 13 July, also means it no longer requires transactions to be backloaded.
SFTR’s regulatory technical standards (RTS) include a backloading requirement for trades that are live on the 11 April go-live date and are still active 180 days after that.
Trades that are open at go-live but closed before the 180 days timeframe do not need to be reported.
The confusion following the European Securities and Markets Authority’s (ESMA) first statement (18 March) stemmed from the fact that if the backloading requirement was enforced, but firms were simultaneously not expected to report trades between 11 April and 13 July, it would create a three-month hole in the dataset sent to ESMA and trade repositories.
To side-step the whole issue, ESMA now says that firms are not expected to fulfill SFTR’s backloading requirement.
Today’s statement comes after a week of confusion which saw national regulators, industry bodies and other stakeholders attempt to interpret the specific implications of the unofficial delay, given the unconventional legal method with which it was handed down.
Banks and investment firms that are in scope for phase one must now wait for national competent authorities (NCAs) to state if they will comply with ESMA’s request.
The UK’s Financial Conduct Authority has already corrected its earlier interpretation of the terms of the delay to fall in line with today’s statement.
The Dutch regulator has also agreed to abide by the reprieve.
It is understood that further clarifications are still required by market stakeholders around whether this statement includes all four phases of SFTR and if it’s now ESMA’s permanent stance on the matter.
Commenting on ESMA clarification, Val Wotton, managing director of product development and strategy, repository and derivatives services, DTCC says “We welcome ESMA’s clarification on SFTR backloading which will no doubt be well received by the industry as it progresses its preparations for the revised SFTR deadline of 13 July.”
Why was this clarification needed?
As part of its original de facto delay statement (19 March), ESMA suggested that NCAs should “not to prioritise their supervisory actions” towards those in-scope to report SFTs concluded between 13 April and 13 July under SFTR or the Markets in Financial Instruments Regulation.
National regulators should instead “generally apply their risk-based approach in the exercise of supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner”.
The reprieve was universally welcomed by industry stakeholders that had seen their business operations crippled by the COVID-19 pandemic.
However, questions remained around how this affected transactions that fell between 11 April and 13 July, as well as the date to be used as a reference point for SFTR’s backloading requirements.
On 20 March, UK’s Financial Conduct Authority published itsopinion on the backloading issue stating that it expected firms to also use the 13 July implementation date as the new reference point for trades subject to backloading.
This was widely accepted by the industry, including the International Securities Lending Association, which said at the time that it was in line with its own reading of ESMA’s statement.
ESMA’s latest clarification has overruled this reading and will now enable all stakeholders and NCAs to align their expectations for the SFTR’s belated implementation.
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