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Buy-side perspective: Issues with delegation of SFTR reporting cause a headache

  • United Kingdom
  • Financial services and markets regulation
  • Financial services


Sell-side reluctance to accept delegation of reporting under the Securities Financing Transaction Regulation (“SFTR”) is causing a headache for buy-side firms.  If buy-side firms are unable to establish delegation arrangements they are likely to incur the cost and operational burden of reporting details of the securities financing transactions (“SFT”) that they enter into to a trade repository.

See our previous briefing summarising the reporting requirements under SFTR and the steps that in-scope entities should take to comply with them “Detailed SFTR reporting requirements published”.

Buy-side expectations

The sell-side widely accepted delegation of reporting of derivatives transactions under the European Market Infrastructure Regulation (“EMIR”).  It had been generally expected by buy-side participants in the SFT markets that the approach taken by the sell-side in relation to delegation of reporting under EMIR would be followed for the purposes of reporting under SFTR.  This assumption was not an unreasonable one given that:

1. The SFTR reporting requirements broadly track the equivalent requirements in respect of derivatives transactions under EMIR.

2. Industry bodies[1] recently published a combined Master Regulatory Reporting Agreement (“MRRA”) that deals with delegated reporting of both derivatives transactions and SFTs under EMIR and SFTR respectively.

3. SFTR contains additional legal protections for reporting delegates which are not contained in EMIR.  For example, SFTR specifies that a delegate will not be considered to infringe any legal or contractual restriction on disclosure of information.  This legislative protection is not available for delegates when reporting under EMIR and arguably demonstrates that widespread delegation was anticipated by those drafting SFTR. 

Why are parts of the sell-side not accepting delegation?

The sell-side may be willing to accept delegation under EMIR but not SFTR for a number of reasons.  For example:   

1. There are differences between the derivatives and SFT markets.  The range of buy-side market participants in the derivatives market is much more diverse than in the SFT markets.  In general, SFT market participants might be assumed to possess an adequate level of sophistication and financial resources to comply with regulatory reporting obligations themselves which may not be the case across the buy-side in the derivatives market.

2. EMIR was part of a global initiative in relation to the derivatives market and derivatives reporting regimes therefore exist across multiple jurisdictions.  As reporting of SFTs is localised to the EU, it might be that sell-side entities outside of the EU regard reporting of SFTs as an issue for their EU buy-side counterparties.

3. Financial counterparties are required under SFTR to report on behalf of non-financial counterparties that fall below a specified threshold.[2]  This obligation may have created a perception that only delegation arrangements for certain non-financial counterparties should be provided by the sell-side. 

Why the absence of a workable delegation regime is an issue for the buy-side  

The absence of widespread delegation to sell-side counterparties, which are much better placed to report given their sophistication and resources, will create a disproportionate administrative burden for buy-side entitles.  It is likely that buy-side entities with lower trade volumes will have less leverage to insist that their sell-side counterparties establish delegation arrangements which is likely to result in smaller counterparties facing greater burden than larger buy-side entities.

The dual-reporting requirements for derivatives transactions under EMIR (where both parties to a transaction are subject to a separate obligation to report details of that transaction to a trade repository) have been subject to much criticism from the buy-side.  An established delegation regime has however, to an extent, ensured that the administrative burden created by reporting under EMIR is manageable.  In the absence of a workable delegation regime for SFTs, we expect criticism of dual reporting to grow stronger in the context of reporting under SFTR.

Why the problem will only get worse 

For smaller banks and investment firms, the implementation date for reporting is 13 April 2020.  Those firms that are unable to establish appropriate delegation arrangements ahead of that deadline will need to make arrangements to report to a trade repository directly as soon as possible.

A large number of buy-side entities will be affected on 12 October 2020 which is the implementation date for in-scope: 

  • insurance and reinsurance firms
  • undertakings for the collective investment in transferable securities
  • alternative investment funds
  • pensions schemes

In the absence of wide-spread delegation to the sell-side, it is possible that there could be a buy-side bottle-neck with on-boarding at trade repositories and in-scope firms should therefore make arrangements to facilitate reporting well ahead of the 12 October 2020 deadline.

Action that the buy-side should take

Buy-side entitles should establish whether there is scope to delegate reporting to their counterparties as soon as possible.  If delegation is not possible, in-scope firms will need to make arrangements to report to a trade repository.  Those entitles that are relying upon their brokers, securities lending agents or investment managers to report on their behalf should clarify the position with them directly.

Buy-side entities may also raise issues with SFT reporting to relevant industry bodies and/or their regulator.

How Eversheds Sutherland can assist

We can work with clients in order to scope their reporting obligations and review the documentation associated with their engagement with trade repositories.

We can also work with clients to ensure that their reporting delegation arrangements are appropriate and legally robust.

[1]  The Association of Financial Markets in Europe (AFME), Futures Industry Association (FIA), International Capital Market Association (ICMA), International Swaps and Derivatives Association, Inc. (ISDA) and International Securities Lending Association (ISLA)

[2]   Being a non-financial counterparty which on its balance sheet date does not exceed the limits of at least two of the three criteria laid down in Article 3(3) of Directive 2013/34/EU of the European Parliament and of the Council.