James Day, Business Executive for Securities Finance, EMEA, BNY Mellon, and Charles Morris, Senior Associate, Clifford Chance, hosted a call on the impact of the Securities Financing Transactions Regulation (SFTR).
Under this regulation, securities financing transactions (“SFTs”) cover a broad array of transactions including repos, stock loans, certain commodities lending/borrowing and margin lending (which includes transactions in which one counterparty extends credit in connection with the purchase, sale, carrying or trading of securities).
During the call, James and Charles discussed the SFTR’s three principal requirements:
With collateral reuse, it’s important to understand the different methods under which collateral can be taken. In many markets, collateral can either be taken on a title transfer basis or pursuant to a security interest arrangement. With title transfer, the collateral taker becomes the actual owner of the collateral securities and can reuse these securities as collateral in other transactions. With a security interest arrangement, the collateral remains the property of the collateral provider, but relatively recent EU-derived laws have allowed the collateral receiver to reuse collateral securities in other transactions.
SFTR’s Article 15 places conditions around the reuse of debt and equity securities received as collateral. Under SFTR, before a collateral receiver may reuse collateral securities, it must obtain the collateral provider’s express written agreement to one of the following:
In addition, Article 15 requires that the collateral receiver notify the collateral provider of the risks relating to collateral reuse. The jurisdictional scope of this notification requirement is quite broad and applies whenever there is even a tangential nexus with the European Union. In practical terms, this SFTR requirement may result in a market participant receiving hundreds of reuse notifications from their counterparties.
How BNY Mellon Can Help
BNY Mellon has worked closely with the International Securities Lending Association (ISLA) to create an industry standard reuse notification, and ISLA, along with other industry bodies, have now issued a reuse notification document to be used by market participants. If BNY Mellon acts in an agency capacity, we will send and receive these reuse notifications on behalf of clients that contract with BNY Mellon institutional bank, the London branch of The Bank of New York Mellon or CIBC Mellon. If a securities borrower wishes to send BNY Mellon notification letters for the transfer of collateral, BNY Mellon will collect those letters on the clients’ behalf, store them and post them on the Workbench client portal. If BNY Mellon acts as a principal to a collateralized trade, we will send out the required reuse notice to the appropriate counterparty.
The SFTR also addresses concerns that fund investors weren’t aware of the extent to which SFTs were being used and thus didn’t fully understand their investment and the implicit risks. To help combat these issues, the SFTR introduces disclosure and transparency requirements that will come into effect over the next few years.
Under SFTR Article 13, UCITS and alternative investment fund (AIF) managers must make detailed disclosure of their funds’ use of SFTs and total return swaps. These disclosures must be made on a regular basis in annual reports and, for UCITS, in their half-yearly reports as well. Details listed in these annual reports and half-yearly reports would include the top ten counterparties for each type of SFT and the funds’ total return swaps. UCITS and AIFs will also have to comply with SFTR Article 14 which requires that prospectuses and offering memoranda disclose whether the fund will enter into SFTs and total return swaps, and if so, the types of deals they plan to pursue. Disclosure details in these documents will include acceptable collateral, collateral valuation and the criteria used to select counterparties.
How BNY Mellon Can Help
As an agent lender, BNY Mellon has SFT information which can help clients with this disclosure requirement. Clients can obtain this information during regular review sessions with the BNY Mellon relationship management team.
This requirement stems from concerns around the “shadow banking” sector and how SFTs potentially increase risk in ways that the prudential regulators could not monitor. Under SFTR, counterparties will need to report full details of each SFT to a registered EU trade repository, and this trade repository reporting obligation gives prudential regulators the ability to collect information on systemic risk. SFT details must be reported by the end of the next working day after the transaction is entered into, modified or terminated. If both parties to a SFT are within the scope of SFTR, both will need to report the transaction. This reporting may also be delegated to a third party.
How BNY Mellon Can Help
The SFTR trade repository reporting requirement is still being finalized, and BNY Mellon will work with the industry on its impact on the securities finance industry, especially with regard to the T+1 reporting deadline. As a tri-party collateral management provider, BNY Mellon has the information that can help our clients report SFT details, and, as we learn more about this requirement, we will work with our clients to help them with this new reporting obligation.
SFTR requirements introduce significant changes and present challenges for the securities finance industry. BNY Mellon will continue to work closely with industry bodies and our peers to understand these challenges as we all move forward in implementing these regulatory reforms.
The views expressed in this webinar are solely those of the webinar participants, and do not represent the views of their employers, or its representatives. The material is for general information purposes only and is not intended to provide or be construed as legal, tax, accounting, investment, financial or other professional advice on any matter.
BNY Mellon is the corporate brand of The Bank of New York Mellon Corporation and may be used as a generic term to reference the corporation as a whole and/or its various subsidiaries generally. This material and any products and services may be issued or provided under various brand names in various countries by duly authorized and regulated subsidiaries, affiliates, and joint ventures of BNY Mellon, which may include any of the following. The Bank of New York Mellon, at 225 Liberty St, NY, NY USA, 10286, a banking corporation organized pursuant to the laws of the State of New York, and operating in England through its branch at One Canada Square, London E14 5AL, UK, registered in England and Wales with numbers FC005522 and BR000818. The Bank of New York Mellon is supervised and regulated by the New York State Department of Financial Services and the US Federal Reserve and authorized by the Prudential Regulation Authority. The Bank of New York Mellon, London Branch is subject to regulation by the Financial Conduct Authority and limited regulation by the Prudential Regulation Authority. Details about the extent of our regulation by the Prudential Regulation Authority are available from us on request. The Bank of New York Mellon SA/NV, a Belgian public limited liability company, with company number 0806.743.159, whose registered office is at 46 Rue Montoyerstraat, B-1000 Brussels, Belgium, authorized and regulated as a significant credit institution by the European Central Bank (ECB), under the prudential supervision of the National Bank of Belgium (NBB) and under the supervision of the Belgian Financial Services and Markets Authority (FSMA) for conduct of business rules, and a subsidiary of The Bank of New York Mellon. The Bank of New York Mellon SA/NV operates in England through its branch at 160 Queen Victoria Street, London EC4V 4LA, UK, registered in England and Wales with numbers FC029379 and BR014361. The Bank of New York Mellon SA/NV (London Branch) is authorized by the ECB and subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority. Details about the extent of our regulation by the Financial Conduct Authority and Prudential Regulation Authority are available from us on request The Bank of New York Mellon SA/NV operating in Ireland through its branch at 4th Floor Hanover Building, Windmill Lane, Dublin 2, Ireland trading as The Bank of New York Mellon SA/NV, Dublin Branch, is authorized by the ECB and is registered with the Companies Registration Office in Ireland No. 907126 & with VAT No. IE 9578054E. The Bank of New York Mellon, Singapore Branch, subject to regulation by the Monetary Authority of Singapore. The Bank of New York Mellon, Hong Kong Branch, subject to regulation by the Hong Kong Monetary Authority and the Securities & Futures Commission of Hong Kong. If this material is distributed in Japan, it is distributed by The Bank of New York Mellon Securities Company Japan Ltd, as intermediary for The Bank of New York Mellon. If this material is distributed in, or from, the Dubai International Financial Centre (“DIFC”), it is communicated by The Bank of New York Mellon, DIFC Branch, regulated by the DFSA and located at DIFC, The Exchange Building 5 North, Level 6, Room 601, P.O. Box 506723, Dubai, UAE, on behalf of The Bank of New York Mellon, which is a wholly-owned subsidiary of The Bank of New York Mellon Corporation. This material is intended for Professional Clients only and no other person should act upon it. Not all products and services are offered in all countries.
The information contained in this material is intended for use by wholesale/professional clients or the equivalent only and is not intended for use by retail clients. If distributed in the UK, this material is a financial promotion.
This material, which may be considered advertising, is for general information purposes only and is not intended to provide legal, tax, accounting, investment, financial or other professional advice on any matter. This material does not constitute a recommendation by BNY Mellon of any kind. Use of our products and services is subject to various regulations and regulatory oversight. You should discuss this material with appropriate advisors in the context of your circumstances before acting in any manner on this material or agreeing to use any of the referenced products or services and make your own independent assessment (based on such advice) as to whether the referenced products or services are appropriate or suitable for you. This material may not be comprehensive or up to date and there is no undertaking as to the accuracy, timeliness, completeness or fitness for a particular purpose of information given. BNY Mellon will not be responsible for updating any information contained within this material and opinions and information contained herein are subject to change without notice. BNY Mellon assumes no direct or consequential liability for any errors in or reliance upon this material.
This material may not be distributed or used for the purpose of providing any referenced products or services or making any offers or solicitations in any jurisdiction or in any circumstances in which such products, services, offers or solicitations are unlawful or not authorized, or where there would be, by virtue of such distribution, new or additional registration requirements.
Neither BNY Mellon nor any of its respective officers, employees or agents are, by virtue of providing the materials or information contained herein, acting as an adviser to any recipient (including a “municipal advisor” within the meaning of Section 15B of the Securities Exchange Act of 1934, as amended, “Section 15B”), do not owe a fiduciary duty to the recipient hereof pursuant to Section 15B or otherwise, and are acting only for their own interests.
All references to dollars are in US dollars unless specified otherwise.
This material may not be reproduced or disseminated in any form without the prior written permission of BNY Mellon. Trademarks, logos and other intellectual property marks belong to their respective owners.
The Bank of New York Mellon, member FDIC.
© 2016 The Bank of New York Mellon Corporation. All rights reserved.
Managing Director & Business Executive for Securities Finance in EMEA
BNY Mellon Markets
James is a Managing Director of BNY Mellon and Business Executive for Securities Finance in EMEA for BNY Mellon Markets, which includes Securities Lending.View Profile