Correct as of 12pm on 23 March. This article is not being maintained.
On 18 March 2020, the European Securities and Markets Authority (“ESMA”) published a statement about regulatory forbearance for the first phase of reporting obligations under the Securities Financing Transactions Regulation (“SFTR”). These obligations are due to become effective on 13 April 2020 for credit institutions and investment firms when acting as counterparties. ESMA says that it has been made aware of the pressure that the financial industry is facing to comply with SFTR amid the COVID-19 pandemic and recommends that national competent authorities (“NCAs”) do not prioritise supervision of these reporting obligations and apply a risk-based approach in terms of enforcement until 13 July 2020.
ESMA’s statement also applies to the related reporting obligations for certain securities financing transactions (“SFTs”) under the Markets in Financial Instruments Regulation (“MiFIR”).
In response, the FCA has updated its webpage on SFTR and has stated that it will not prioritise the supervision of these reporting requirements until at least 13 July 2020.
SFTR entered into force on 12 January 2016 and is an EU-wide regulation aiming to address a lack of transparency relating to SFTs. SFTR captures SFTs such as repurchase transactions, lending and borrowing of securities and commodities, buy-sell back and sell-buy back transactions and margin lending transactions. SFTR introduces various measures including the requirement for counterparties to a SFT that is concluded, modified or terminated (within the past five years of the date of the transaction) to report the transaction to a trade repository (“TR”) or to ESMA where no TR is available.
SFTR provides for certain exemptions to the reporting obligations based on trade types, counterparties involved, systemic risk and financing type. Among the exempted trades are SFTs concluded with members of the European System of Central Banks. These transactions are not reported under SFTR but are subject to reporting obligations under MiFIR.
ESMA’s public statement concerning regulatory forbearance
ESMA says that it has been made aware of the pressure that the financial industry is facing to comply with SFTR amid the COVID-19 pandemic. Reporting obligations for credit institutions, investment firms, and relevant third country entities are due to become applicable from 13 April 2020 in the first phase of the implementation. The next phase is due to start on 13 July 2020.
ESMA has decided not to initiate a formal delay of the first phase of the SFTR reporting go-live date, however, it expects NCAs not to prioritise their supervisory actions towards firms’ compliance with SFTR reporting obligations between 13 April and 13 July. ESMA recommends that NCAs apply a risk-based approach in relation to non-compliance with SFTR and exercise their supervisory powers in a proportionate manner. Additionally, ESMA now expects that TRs will not need to register ahead of 13 April 2020, which will give TRs more time to cope with COVID-19 and also be ready to support the new reporting regime at a later point. ESMA expects TRs to be registered sufficiently ahead of the second phase.
ESMA has said that it will continue monitoring the implementation of SFTR as well as the impact of the relevant measures taken with regards to COVID-19, to ensure alignment of SFT reporting requirements and supervisory practices in the EU.
The FCA supports ESMA's position, will allow firms to focus their resources on critical functions during the pandemic and will not prioritise supervision of SFTR reporting requirements due by 13 April 2020 until at least 13 July 2020. The FCA has said that it will not require firms to back report any SFTs that are concluded between 13 April and 13 July 2020, however, SFTs that are required to be backloaded should provide the requisite reports by using 13 July 2020 as the application date.
The FCA has also said that firms in scope of the first two application phase-in dates should continue to plan to meet their requirement to report SFTs under SFTR and MiFIR from 13 July 2020.
The FCA has said that it will continue to keep this situation under review.
ICMA’s and ISLA’s letter to ESMA: COVID-19’s impact on SFTR implementation effort
ESMA’s statement was made in light of a letter from the International Capital Markets Association (“ICMA”) and the International Securities Lending Association (“ISLA”) requesting a delay to the SFTR reporting go-live date because of the COVID-19 pandemic. The trade associations have cited the following examples of how COVID-19 has critically compromised firms SFTR implementation programmes:
- Human Resources – increasing numbers of staff have taken sick leave and/or are self-isolating which has caused difficulties implementing SFTR with the necessary levels of resource and technical expertise.
- Business Continuity – business continuity measures such as restrictions on the number of staff working on-site and more staff working from home have impacted firms’ ability to manage SFTR implementation effectively, not least because communication networks are not able to cope.
- Market volatility – due to extreme market volatility, staff who would ordinarily be focusing on infrastructure changes such as implementing SFTR, are now having to focus on running firms’ day-to-day business operations.
- Third party service providers – with high reliance on market infrastructure and third-party service providers, many of whom are facing their own issues from COVID-19, prioritisation and resources are being diverted away from SFTR to business continuity measures to support ongoing regulatory obligations.
- Third country firms – third country firms are particularly impacted due to travel restrictions and travel bans which have prevented experts travelling to assist firms with developing, testing and implementing SFTR on-site. With the short timeframe until 11 April 2020, firms are unable to source the relevant experience and knowledge through local staff.
The trade associations suggested that ESMA take one of the following actions to tackle the challenges that have been brought by COVID-19:
- Set 11 October 2020 as the new commencement date for SFTR reporting (the date which phase three of SFTR reporting commences); or
- Consider equivalent measures that would provide forbearance and sufficient reassurance for firms so that they are not expected by both ESMA and NCAs to ensure strict compliance with SFTR reporting obligations for ‘an appropriate period of time’. The trade associations stated that the 11 October 2020 date would be a reasonable reference date.
Given the various challenges of managing the COVID-19 pandemic, changes to the work environment and volatile global markets, ESMA’s and the FCA’s statements will allow market participants more time to implement, test and prepare for SFTR reporting. Though this breathing space is much needed, it remains to be seen if further regulatory forbearance measures will be required for phase two, and whether a formal delay of SFTR reporting to 11 October 2020 as suggested by ICMA and ISLA would be appropriate. With the growing concerns over COVID-19 and the stricter measures currently being taken by governments across the world, including full lockdowns, the market might well be looking for more time and supervisory leniency to become fully compliant.
CMS has industry leading experts that can help you manage your business response to the COVID-19 pandemic and advise on how to comply with your regulatory obligations given the pressures caused by this crisis.
Co-authored by Yeva Agayan.
 Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012
 Note that the go-live date is 11 April 2020 however the first trading day is 13 April 2020.