Continue to look the other way over LEIs, ESMA tells supervisory authorities
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Continue to look the other way over LEIs, ESMA tells supervisory authorities 13 March 2021France Reporter: Alex Pugh
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The European Securities and Markets Authority (ESMA) has extended the forbearance period for reporting legal entity identifiers (LEI) from third-country counterparties under EU SFTR, due to expire today, until 10 October 2022.
EU securities finance market participants began the day unsure how they were going to fulfil their obligations to report under the Securities Financing Transactions Regulation (SFTR) as the deadline day for the 12-month grace period arrived with no communication from market overseers on how to deal with the third-country LEI field.
ESMA subsequently published a statement clarifying the grace period would be extended by 18 months due to the “unsatisfactory level of LEI coverage on a global scale”.
The EU markets watchdog expects national competent authorities to avoid supervisory actions in relation to reporting of LEIs of third-country issuers, until October next year “at the latest”. The wording of the statement presents a more hardline stance than the one taken by the UK regulator which, although only offering a 12-month delay, appeared more pragmatic in getting market participants up to speed.
Last Tuesday, the UK’s Financial Conduct Authority (FCA) extended the deadline for the reporting of LEIs by third-country issuers under UK SFTR until 13 April 2022 “at the earliest”.
Today, the European Securities and Markets Authority (ESMA) says it maintains its January 2020 position, when it said it would accept SFT reports without the LEI of third-country issuers for a period of up to 12 months starting from the entry into force of the SFTR reporting regime — April 2020.
At the time, ESMA stressed that it expected 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”.
Despite some improvement in global LEI coverage, the repeal of the exemption for third-country LEIs would still cause a significant drain on EU market liquidity if counterparties without an LEI were shut out overnight.
In a statement explaining the decision to push back the deadline again, ESMA says that despite some progress in “the evolution of the reporting of LEI issuer details” — less than 16 per cent of all open securities finance transactions are missing an issuer LEI, compared to 26 per cent in September 2020 — from an individual securities perspective more than 75 per cent lack an LEI of the third-country issuer.
ESMA says it will continue liaising with third-country competent authorities to make them aware of the requirement and solicit a broader coverage of LEIs in third countries.
The regulator also pledges to give advance notice to market participants regarding its position on third-country issuer LEI reporting ahead of 10 October 2022.
But the on-going amnesty comes with conditions. Up to October 2022, ESMA says it expects counterparties, as well as agent lenders and triparty agents that lend, borrow or use as collateral securities issued by third-country entities that do not have an LEI, “to liaise with those issuers with a view to ensuring that they are aware of the requirements under SFTR.”
The last-minute reprieve will be welcome as it means avoiding suboptimal reporting; mooted options if the grace period was not to be extended ranged from using a dummy LEI to leaving the field blank, which would naturally undermine the integrity of reported data.
It comes after the International Securities Lending Association, the International Capital Market Association, the Association française des marchés financiers and the Association for Financial Markets shared a joint letter with the FCA, ESMA and various other national competent authorities requesting an extension to the forbearance period for the EU and UK SFTR regime, citing joint research which revealed the lingering gaps in global LEI coverage.
Commenting on today’s decision, the International Securities Lending Association (ISLA) says it is “pleased to see a consistent stance” for both the EU and UK SFTR and it welcomes the decision by both authorities.
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