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SFT Regulation: immediate action for pre-contractual disclosures and annual reports

SFT Regulation: immediate action for pre-contractual disclosures and annual reports

  • United Kingdom
  • Financial institutions - Asset managers and funds


The EU Securities Financing Transactions Regulation (SFTR) came into effect on 12 January 2016. The SFTR is similar to the European Market Infrastructure Regulation (EMIR), extending many of the obligations found in EMIR to SFTs, which are not otherwise caught by EMIR.

Whilst coming into force at the beginning of last year, the SFTR has a staggered implementation timeline and so far it has only impacted newly established AIFs and UCITS where disclosure has had to be made in Prospectuses. Some of those transitional periods are coming to an end and this briefing sets out key immediate considerations for asset managers in respect of pre-contractual disclosures and reporting as they do so. Further detail of the SFTR (EU 2015/2365), including in relation to reporting, reuse and record keeping is set out in our earlier briefing, “SFT Regulation: its immediate impact for fund managers” (see below). 

What is the SFTR – a recap

The SFTR sets out the rules for the transparency of the SFTs and the reuse of financial instruments received as the collateral.

The SFTR requires:

  • in-scope entities to report SFT data to trade repositories;
  • disclosure in:
    • pre-contractual documents, being the prospectus for a UCITS or pre-contractual disclosures (which may also take the form of a prospectus) for an AIF; and
    • periodic reports, with respect to SFTR and total return swaps (TRS) by:
      • UCITS management and investment companies; and
      • full scope alternative Investment Fund managers; and
      • prior disclosure and written consent before counterparties may rehypothecate assets.

The SFTR also imposes requirements on the registration and supervision of trade repositories.

What is an SFT?

The SFTR defines an SFT to include:

  • a repurchase transaction
  • securities or commodities lending and securities or commodities borrowing
  • a buy-sell back transaction or sell-buy back transaction
  • a margin lending transaction

Note that the SFTR also covers TRS in relation to the disclosure requirements – please see further below.

Disclosure in pre-contractual documents

Managers are required to inform investors about the use UCITS and AIFs make of SFTs and TRS.

Every pre-contractual disclosure must include the detailed information required by Section B of the Annex to the SFTR.  This information includes:

  • the general description of the SFTs and TRS and the rationale for their use (together with a clear statement that these techniques are used)
  • overall data to be reported for each type of SFT and TRS
  • parameters around the use of SFTs and TRS (such as types of assets that can be used, maximum allowable usage as a proportion of assets under management and the expected proportion of AUM that will subject to each of them)
  • criteria for selecting counterparties
  • acceptable collateral
  • collateral valuation practices
  • risks associated with SFTs and TRS
  • safe-keeping arrangements
  • restrictions on re-use of collateral
  • revenue sharing arrangements

Some of the above detail may already be included in the pre-contractual disclosure due to the existing requirements under COLL, FUND and the ESMA Guidelines on ETFs and other UCITS issues, but this will need to be considered for fund prospectuses on a case by case basis.

Any new fund, and sub-fund of an umbrella, for both AIF and UCITS launched after 12 January 2016 has had to include the above disclosures, where relevant, meaning that some scheme documents will already be compliant. Some funds, and sub-funds, which were updated post 12 January may also have been updated to include these disclosures. However, for those funds, and sub-funds, which were launched prior to 12 January last year, and whose prospectuses have not been amended for this in the past year, prospectuses will need to be reviewed to determine whether the pre-contractual disclosures are required.

Where these disclosures are applicable, prospectuses will need to be updated by 13 July 2017.  Provided reference to these disclosures does not reflect a change in investment or risk strategy, and is simply an update to include these disclosures, the FCA has confirmed that they will not need to provide approval for these updates, and a revised version of the prospectus should be filed with the FCA in the usual way.

In addition, the FCA has confirmed that if these disclosures are not applicable, there is no need to include a negative statement in the prospectus. 

Disclosure in periodic reports

Annual reports (and half yearly reports for UCITS) will need to include the information required by Section B of the Annex to the SFTR with detail on:

  • global data
  • concentration data
  • aggregate transaction data for each type of SFT and total return swap separately to be broken down into particular categories
  • data on reuse of collateral
  • safekeeping of collateral received by the fund as part of SFTs and total return swaps
  • safekeeping of collateral granted by the fund as part of SFTs and total return swaps
  • data on return and cost for each type of SFT and total return swap

Annual reports produced from 13 January 2017 will need to be compliant with the SFTR.

Other transitional periods to note

Requirements in respect of reporting and safeguarding, and the conditions in respect of reuse arrangements have also benefitted from transitional periods, but these too are coming to a close:

  • the transitional periods in respect of reporting and safeguarding span from 12 to 21 months after 12 January 2016 depending on the entity involved; and
  • for the conditions relating to arrangements for reuse, compliance was required 13 July 2016.

Further details of these requirements are set out in our previous briefing which can be found here

How Eversheds can help

We have already provided assistance to a number of clients in respect of the SFTR requirements.  We have reviewed scheme documents to determine where pre-contractual disclosures are required and assisted with the review and drafting of these disclosures.  We have also carried out a gap analysis for some clients to confirm what further detail is required in the annual reports in order to ensure compliance.  We have delivered training to clients and can tailor this as required. Please do speak to your usual Eversheds contact if you would like further details.

For more information contact

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