Non-EU AIFs are exempt from SFTR, says EC
10 February 2020 Brussels
Image: Shutterstock
The European Commission (EC) has clarified that third-country alternative investment funds (AIFs) with managers based in Europe are, in fact, not required to report under the Securities Financing Transactions Regulation (SFTR) after all.
The explanation aims to dispell the first of several areas of industry confusion that have arisen from the publication of the final guidelines for SFTR.
When the final guidelines for SFTR were belatedly released on 6 January, one of the main surprises was the implication that non-EU AIFs would be expected to report SFTs if their manager was within the EU.
Specifically, trouble arose around the industry’s reading of the categorisation of ‘financial counterparties’ listed in Article 3(3) of SFTR, which includes “an AIF managed by AIFMs authorised or registered in accordance with Directive 2011/61/EU”.
In response, the Alternative Investment Management Association (AIMA), which represents the global alternative investment industry, wrote to the EC requesting clarification on apparent inconsistencies in the terms of the guidelines.
The commission has now clarified in a reply letter to AIMA seen by SLT that, the association’s reading of the guidelines is correct, but the inclusion of non-EU AIFs is subject to SFTR Article 2(1).
This article limits the application of SFTR to “(a) a counterparty to an SFT that is established (i) in the EU, including all its branches irrespective of where they are located; (ii) in a third country, if the SFT is concluded in the course of the operations of a branch in the EU of that counterparty”.
The letter continues that in this article, no reference is made to the location or to the authorisation of the fund manager.
Therefore, the EC states, non-AIFs “are not subject to the obligations set out in Article 4(1) SFTR, even if the AIF manager is authorised or registered in accordance with Directive 2011/61/EU, except in respect of SFTs concluded in the course of the operations of a branch in the EU of the non-EU AIF.”
A spokesperson for AIMA tells SLT that it "welcomes the fact that the commission has confirmed our understanding of the scope of SFTR.
"This will make sure firms are approaching the new rules in a more consistent way."
The commission’s letter on non-EU AIFs marks the first of what is expected to be several clarifications on the final guidelines ahead of the phase-one go-live in September.
Key areas of uncertainty that remain include whether failed deliveries of securities should be reported and the suitability of the formula for calculating collateral re-use, among other areas.
The clarification will come as welcome news to those non-EU funds that, since January, have been facing the complex task of scrambling to get their reporting frameworks in order before the October deadline.
The wider industry will also be breathing a sigh of relief as the prospect of a significant portion of these buy-side firms not managing that timeline would have seen them excluded from the lending market overnight, which would have adversely affected overall liquidity.
Concerns around the unintended impact of SFTR on market liquidity also linger around the mandatory use of legal entity identifiers (LEIs).
The EC has faced criticism from industry observers that its previously hard-line stance on SFTR’s LEI requirements would lead to a liquidity squeeze across the EU as those unable to gain an LEI in time would be shut out from the market.
This was particularly pertinent for third-country counterparties as the EC’s own research showed 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, the final guidelines included a grace period of up to 12-months – starting when SFTR enters into force – where reports without an LEI of non-EU issuers will be accepted.
However, it has been noted that although the reprieve is welcome, it does not address the challenges that would come from the 12 percent of EU firms that do not have an LEI being removed from the market.
The explanation aims to dispell the first of several areas of industry confusion that have arisen from the publication of the final guidelines for SFTR.
When the final guidelines for SFTR were belatedly released on 6 January, one of the main surprises was the implication that non-EU AIFs would be expected to report SFTs if their manager was within the EU.
Specifically, trouble arose around the industry’s reading of the categorisation of ‘financial counterparties’ listed in Article 3(3) of SFTR, which includes “an AIF managed by AIFMs authorised or registered in accordance with Directive 2011/61/EU”.
In response, the Alternative Investment Management Association (AIMA), which represents the global alternative investment industry, wrote to the EC requesting clarification on apparent inconsistencies in the terms of the guidelines.
The commission has now clarified in a reply letter to AIMA seen by SLT that, the association’s reading of the guidelines is correct, but the inclusion of non-EU AIFs is subject to SFTR Article 2(1).
This article limits the application of SFTR to “(a) a counterparty to an SFT that is established (i) in the EU, including all its branches irrespective of where they are located; (ii) in a third country, if the SFT is concluded in the course of the operations of a branch in the EU of that counterparty”.
The letter continues that in this article, no reference is made to the location or to the authorisation of the fund manager.
Therefore, the EC states, non-AIFs “are not subject to the obligations set out in Article 4(1) SFTR, even if the AIF manager is authorised or registered in accordance with Directive 2011/61/EU, except in respect of SFTs concluded in the course of the operations of a branch in the EU of the non-EU AIF.”
A spokesperson for AIMA tells SLT that it "welcomes the fact that the commission has confirmed our understanding of the scope of SFTR.
"This will make sure firms are approaching the new rules in a more consistent way."
The commission’s letter on non-EU AIFs marks the first of what is expected to be several clarifications on the final guidelines ahead of the phase-one go-live in September.
Key areas of uncertainty that remain include whether failed deliveries of securities should be reported and the suitability of the formula for calculating collateral re-use, among other areas.
The clarification will come as welcome news to those non-EU funds that, since January, have been facing the complex task of scrambling to get their reporting frameworks in order before the October deadline.
The wider industry will also be breathing a sigh of relief as the prospect of a significant portion of these buy-side firms not managing that timeline would have seen them excluded from the lending market overnight, which would have adversely affected overall liquidity.
Concerns around the unintended impact of SFTR on market liquidity also linger around the mandatory use of legal entity identifiers (LEIs).
The EC has faced criticism from industry observers that its previously hard-line stance on SFTR’s LEI requirements would lead to a liquidity squeeze across the EU as those unable to gain an LEI in time would be shut out from the market.
This was particularly pertinent for third-country counterparties as the EC’s own research showed 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, the final guidelines included a grace period of up to 12-months – starting when SFTR enters into force – where reports without an LEI of non-EU issuers will be accepted.
However, it has been noted that although the reprieve is welcome, it does not address the challenges that would come from the 12 percent of EU firms that do not have an LEI being removed from the market.
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