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SFT Regulation: its immediate impact for fund managers

SFT Regulation: its immediate impact for fund managers
  • United Kingdom
  • Financial services - 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.

Further detail of the SFTR (EU 2015/2365) is set out below but it is important for asset managers to note that while there are generally some helpful transitional provisions the SFTR will have an immediate impact in certain areas. 

There is still some uncertainty as to whether new sub-funds added after 12 January 2016 to umbrella UCITS and AIF structures already in existence should be able to take advantage of the transitional provisions set out in the SFTR, rather than require an immediate update.  However, the FCA Fund Authorisation and Supervisions Team last week commented that they will want to see the pre-contractual disclosures required by the SFTR to be included in the draft documentation submitted for any new fund approval from 12 January i.e. including a new sub-fund as well as a new umbrella or stand-alone fund.  This will also apply in respect of any outstanding fund or sub-fund application with the FCA as at that date.

We understand that the Central Bank in Ireland is considering the application of the transitional provisions to sub-funds, while the CSSF in Luxembourg has indicated that the transitional provisions will apply at umbrella level.  This is something we hope there is further clarity on as soon as possible among the European Regulators.

What is the SFTR?

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 (UCITS); and
      • full scope alternative Investment Fund (AIF) 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 total return swaps (TRS) in relation to the disclosure requirements – please see further below.

Disclosure in pre-contractual documents

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 SFTs 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.

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 SFTRs 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 swap
  • data on return and cost for each type of SFT and total return swap

What are the reporting duties?

The SFTR’s reporting framework is similar to that under EMIR. Counterparties must report the details of each SFT concluded on or after 12 January 2016 (the Effective Date), as well as any modification or termination thereof (a Trade), to a trade repository no later than the following working day of the Trade.

The following must be reported within 190 days of the Effective Date:

  • all SFTs which were concluded before the Effective Date
  • which remain outstanding on that date
  • have a remaining maturity in excess of 180 days; or
  • have an open maturity and remain outstanding for a further 180 days

Counterparties may delegate reporting.

What is a counterparty?

The SFTR defines a counterparty broadly to include both financial counterparties and non-financial counterparties. In addition to other types of financial institution, financial counterparty includes:

  • MiFID investment firms
  • UCITS and its management companies
  • AIFs
  • pension funds
  • CCPs and Central Securities Depositories
  • any third county entity which would require authorisation or registration as one of the above if it were established in the EU

A “non-financial counterparty” is any undertaking established in the EU or a third country which is not a “financial counterparty”.


Like EMIR, both parties to a SFT are responsible for reporting. However, where a financial counterparty concludes a SFT with a non-financial counterparty, that is a medium sized undertaking for the purposes of Directive 2013/34/EU, the financial counterparty is responsible.

Where a UCITS managed by a management company is a counterparty to SFTs, the management company shall be responsible for reporting on behalf of that UCITS; where an AIF is counterparty to SFTs, its AIFM shall be responsible for reporting on behalf of that AIF.

Record keeping

Counterparties must keep a record of any SFT concluded, modified or terminated for at least five years following the termination of the transaction.

What are the transparency duties for UCITS and AIFs?

UCITS and AIFM are required to inform investors about the use they make of SFTs and total return swaps (TRS). The information to be provided focuses on five main areas:

  • the amount of fund assets being employed in SFTs and TRS
  • concentration data
  • aggregate transaction data (currency, maturity, domicile of counterparty etc.)
  • collateral arrangements
  • returns and costs associated with SFT and total return swap activity.

Reuse arrangements

Any right of counterparties to reuse financial instruments received as collateral is subject to at least the conditions set out below:

The provider must have been duly informed in writing by the receiver of the risks and consequences that may:

  • be involved in granting consent to a right of use of collateral; or
  • be involved in concluding a title transfer collateral arrangement; and
  • arise in the event of the default of the receiver

The provider must have:

  • granted its prior express consent, as evidenced by its signature in writing or in a legally equivalent manner to a security collateral arrangement; or
  • expressly agreed to provide collateral by way of a title transfer collateral arrangement.

Moreover, the reuse of collateral must be in accordance with the terms of the relevant collateral arrangement and involve the transfer of the financial instruments received under the relevant collateral arrangement from the account of the provider (unless the provider is established in a third country and its account is maintained in and subject to the law of a third country whereby the reuse can also be evidenced by other appropriate means).

How is the SFTR enforced?

Member State authorities are responsible for enforcing the SFTR. Sanctions exist for breach of the obligation to report or provide transparency in relation to reuse of collateral.

However, any failure to report will not affect the validity or enforceability of an SFT or give rise to any claim of compensation from a party to an SFT.

Sanctions range from cease and desist orders to censure to fines of up to 10% of turnover and extended to the members of the management body of a legal person. Firms must have in place appropriate internal procedures for their employees to report any breaches.

Will transitional periods apply?

Yes, although note the position for new sub-funds as discussed above.  Some requirements of the SFTR will not need to be put in place immediately.

  • In respect of reporting and safeguarding, the transitional periods span from 12 to 21 months after the 12 January 2016 depending on the entity involved.
  • Annual reports will need to comply with the SFTR from 13 January 2017.
  • Pre-contractual disclosures will need to be updated with effect from 13 July 2017 – further to our comments above, any new fund, and sub-fund, applications either with the FCA at 12 January 2016 or going into the FCA from 12 January will need to include compliant documents.
  • For the disclosure of reuse arrangements, compliance is required by 13 July 2016.