Some non-financial counterparties (NFCs) are unaware of impending reporting obligations under the Securities Financing Transactions Regulation (SFTR), according to market participants.
“Financial firms really need to be reaching out to their non-financial counterparties to help educate them, get them comfortable with the regulatory requirements, and potentially for the financial firm – they might have the reporting obligation themselves,” says Simon Davies, senior consultant at The Field Effect.
For Quinn Perrott, general manager at TRAction Fintech, there was similar ambiguity with the Market in Financial Instruments Directive (Mifid II).
“With Mifid II we saw quite a few firms come to us in the last month and say that original they had had advice that the products that they were doing were out of [Mifid II] scope, but then that advice had changed,” says Perrott.
“I think that will happen to a degree with SFTR, probably not with the main firms where it is really clear cut, but there are some firms on the side line where it could go either way.”
The period for the European Council to object to the European Commission’s recommended RTS was extended in January for a further month. The new deadline is February 14.
At the end of this period of scrutiny, the acts will be published in the Official Journal of the European Union, and will subsequently come into force on the twentieth day post-publication.
SFTR reporting deadlines are staggered for different market segments - based largely on size - from the expected go-live date which is 12 months after the publication of the rules in the official journal.
Non-financial counterparties – defined as all counterparties not classified as financial firms that have financial counterparts and whose main mode of business is not financial in nature – will have 21 months to prepare for the reporting requirements after the regulation enters into force.
Further delays to SFTR implementation are likely to occur later this year, according to Andrew Kouloumbrides, CEO at data-centric intelligent automation software firm Xceptor, and partner of the Depository Trust and Clearing Corporation (DTCC) for SFTR reporting.
“We’ve seen it in previous regulations, a deadline is set for when the regulation actually comes into play, but we know that - through the experience of the reporting and the analysis of the reporting - those regulations are either delayed further in the initial deployment or subsequently revised,” says Kouloumbrides.
For Jonathan Lee, senior regulatory reporting specialist at Kaizen, there could be considerable difficulties for firms that have never had to report before under the two most recent reporting regulations to hit Europe, the European Market Infrastructure regulation (Emir), or Mifid II.
“On the one hand, they have a lot more time to play with because they are not due to start reporting until 2021, but, nonetheless, this is completely alien to most of them. I don’t think that many of these organisations will have ever had any regulatory reporting obligations anywhere near this scale or complexity,” says Lee.
Non-financial counterparties will still have the legal obligation to meet the reporting requirements, so they will still want to make sure that whoever they’ve delegated their reporting to is reporting completely, accurately, and on time, according to Lee.
“In the case of the larger non-financial organisations, they will be able to serve the banks with something of an ultimatum. Basically: ‘If you don’t sort our reporting out for us, then we will use another broker or investment bank.’
SFTR relies on the EU Accounting Directive to define small NFCs, whereas Emir distinguishes NFCs by the clearing threshold. In March 2018, Esma said that this misalignment between Emir and SFTR “further hampers the entities’ possibilities to use the same reporting infrastructures and operational processes under both regimes.”
According to Esma’s final SFTR technical standards report, a small financial counterparty is one which does not exceed the limits of at least two of three criteria: a balance sheet total of €20m, net turnover of €40m, and average number of 250 employees during the financial year.
Both Lee and Davies agree there remains ambiguity surrounding when calculations to distinguish between small and large NFCs will take place, and what this will mean with regards to delegated reporting.
Under SFTR, small NFC’s reporting obligations are automatically delegated to their financial counterparty, which is then required to provide two-sided reporting - that is both for itself and the small NFC.
In November 2016, Deutsche Bank in a letter to Esma argued that NFCs should be responsible for notifying financial counterpartiesif they are defined as a small NFC. Otherwise financial counterparties would assume they do not fall into that category. Davies argues greater transparency is required.
“It needs to be clarified in terms of how you measure the criteria to define whether they are small or not, and particularly, the timing for the test and also who is responsible for that test – whether it is the financial counterparty or it’s the non-financial that needs to advise the financial counterparty. There are a number of open questions that the industry bodies are liaising with the regulators around defining who, what, and where that test takes place, to remove that ambiguity,” says Davies.
This also could be troublesome with regards to the distinction between large and smaller NFCs, according to Lee.
"There is a real possibility that a firm essentially falls in between – for some months of the year it’s a small NFC, and for other months it’s not a small NFC, it’s a larger one,” he says.
“The problem from a banking perspective is that, whilst there are quite specific criteria for how you establish a small NFC in the day to day running of business, it is not going to be that straight forward to establish somebody who is borderline, whether they are a smaller NFC or not.”