Guidance

The Transparency of Securities Financing Transactions and of Reuse (Amendment) (EU Exit) Regulations 2019: explanatory information

Updated 8 August 2019

1. Context

The European Union (Withdrawal) Act 2018 (EUWA) repeals the European Communities Act 1972 on the day the UK leaves the EU and converts into UK domestic law the existing body of directly applicable EU law. The purpose of the EUWA is to provide a functioning statute book on the day we leave the EU.

The EUWA also gives Ministers powers to make Statutory Instruments (SIs) to prevent, remedy or mitigate any failure of EU law to operate effectively, or any other deficiency in retained EU law. We refer to these contingency preparations for financial services legislation as ‘onshoring’.

HM Treasury is using these powers to ensure that the UK continues to have a functioning financial services regulatory regime in any scenario.

This SI is part of the wider work the government is undertaking to prepare for the UK’s withdrawal from the EU. It is not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition. The changes made in this SI would not take effect on 29 March 2019 if, as expected, we enter an implementation period.

2. Notice

The attached draft SI is intended to provide Parliament and stakeholders with further details on our approach to onshoring financial services legislation. The draft instrument is still in development. The drafting approach, and other technical aspects of the proposal, may change before the final instrument is laid before Parliament.

3. Policy background and purpose of the SI

3.1 What does the underlying EU regulation and UK law do?

Securities financing transactions (SFTs) are any transactions where securities are used to borrow cash, or vice versa, which includes repurchase agreements (repos), securities lending activities, and sell/buy-back transactions. SFT markets were not covered by other legislation before 2015, and there are ongoing concerns that SFTs allow the build-up of leverage, pro-cyclicality and interconnectedness in the financial markets.

In response to these concerns, the Financial Stability Board issued recommendations to address the potential risks of SFTs. The EU’s Securities Financing Transactions Regulation (Regulation (EU) 2015/2365) (SFTR) was introduced to bring these recommendations into force, enhancing the transparency of securities financing markets and therefore of the wider financial system following the financial crisis.

SFTR increases the transparency of SFTs by requiring all SFTs, except those concluded with central banks, to be reported to central databases known as Trade Repositories (TRs). SFTR also requires information on the use of SFTs by investment funds to be disclosed to investors in the regular reports and pre-investment documents issued by the funds. Furthermore, SFTR also sets minimum transparency conditions to be met when collateral is reused, such as disclosure of the risks and the obligation to acquire prior content.

3.2 Deficiencies this SI remedies

This SI identifies and amends deficiencies within the EU text to ensure that the SFTR can remain operative in a UK-only context post-exit. Details of specific changes are:

Treatment of branches

Under the EU SFTR, branches of UK firms in the EU and vice versa would be able to consolidate their reporting to a single TR based in the EU (including the UK). This simplifies the reporting process for firms under SFTR.

Post-exit, in the absence of a reciprocal agreement with the EU, these branches would have to report to both UK and EU TRs and this SI enacts that change in reporting process. While this would create a dual reporting burden on firms as an inevitable consequence of the UK leaving the EU without a deal, evidence indicates that this additional burden is not expected to be significant as firms would be reporting the same data, using the same templates, to both TRs.

This requirement extends to EU branches in the UK – this SI does not exempt these branches from the requirement to report to UK TRs, even if they also report to EU TRs. This is in line with the Government’s policy on third country treatment of the EU in the event of no deal– UK branches in the EU would still be subject to dual reporting requirements by the EU post-exit.

Article 12(2) requirements

Article 12(2) of the EU SFTR contains an exhaustive list of EU entities that have the right to access TR data. This SI amends that list to make it UK-specific – removing those EU entities that will no longer be relevant post-exit. This is in line with the Government’s wider approach to EU entities through onshoring.

In order for future reciprocal data access agreements to be made with third countries, there is a need to create a new power for regulators to specify which third-country entities can access TR data directly. This power is necessary to ensure the continued functioning of SFTR post-exit. The power envisaged does not currently exist in the Financial Services and Markets Act 2000, therefore this SI includes a bespoke power for the UK implementation of the SFTR.

To note: Article 4(1) reporting requirements

Article 4(1) of the EU SFTR sets out the primary reporting obligations for firms to ensure that the overall legislation can be effectively applied. While Article 4(1) is in force (i.e. it is included in SFTR), it only becomes applicable between 12 and 21 months (depending on the type of firm in question) from the date that the EU publishes the Regulatory Technical Standards associated with the Article. The EU are yet to publish this RTS, meaning that Article 4(1) will definitely not become applicable before March 2019 (given the minimum 12 month lag post-publication). The EU (Withdrawal) Act provides the power to amend EU legislation that is ‘operative’ on Exit Day – however, ‘operative’ is defined as being both ‘in force’ and ‘applicable’, meaning that Article 4(1) will not be incorporated into domestic law by the Act.

As this SI therefore does not include the onshoring of Article 4(1) of the EU SFTR, these reporting obligations for firms cannot be addressed in a UK context through this SI. The Government is acting to explore alternative means to ensure that SFTR is able to function in the UK as intended in all exit scenarios.

Transfer of functions relating to registration requirements

This SI transfers ESMA’s functions relating to the requirements for the registration of trade repositories to the FCA, amending these functions as appropriate to ensure they operate in a domestic context.

Trade Repository Supervision

This SI omits the provisions of the SFTR relating to supervision and enforcement in respect of trade repositories and replaces them with provisions that align with equivalent provisions already contained in the Financial Services and Markets Act 2000. This corresponds to the approach for the Over the Counter Derivatives, Central Counterparties and Trade Repositories (Amendment, etc., and Transitional Provision) (EU Exit) Regulations 2018, as set out by HM Treasury on 22 October 2018.

Supervisory cooperation

When the UK is no longer part of the single market, it would not be appropriate for UK supervisors to be unilaterally obliged to share information or cooperate with EU authorities, without any guarantee of reciprocity. As such, provisions in legislation relating to cooperation and information sharing have been removed. However, this will not preclude UK supervisors from sharing information with EU authorities where necessary, as the existing domestic framework for cooperation and information sharing with countries outside the UK already allows for this on a discretionary basis.

Equivalence

In SFTR, a third country’s regulatory or supervisory regime may be deemed by the European Commission to be equivalent to the approach set out in SFTR. When the UK leaves the EU, the UK will no longer fall under the jurisdiction of the European Commission or regulatory procedures of the European Supervisory Authorities (ESAs). To ensure that SFTR can continue to operate at the point of exit, the functions of the Commission and the ESAs in making equivalence decisions will need to be transferred to UK authorities. HM Treasury will take on the Commission’s function of determining the equivalence of third country jurisdictions with respect to UK law, while the FCA and PRA will adopt ESA functions of providing technical assessments of third country regimes. This transfer of functions transposes the current split between the decision-making powers of the Commission and the regulatory/advisory role of the ESAs.

3.3 Relevant Rulebook and Binding Technical Standard changes

The FCA and the Bank of England will be updating their Handbook/Rulebook and relevant Binding Technical Standards to reflect the changes introduced through this SI, and to address any deficiencies due to the UK leaving the EU. Find the details of the FCA’s approach, and details of the Bank of England’s approach.

3.4 Stakeholders

The key stakeholders for this SI are the firms that are currently regulated under SFTR and the TRs who are responsible for the reporting of SFTs. As already noted, the intention of this SI is not to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this position. HM Treasury are engaging with industry bodies to ensure awareness of these changes.

This SI does not include provisions that will be necessary to ensure Gibraltarian financial services firms’ continued access to UK markets in line with the UK Government’s Statement in March 2018, and other provisions dealing with Gibraltar more generally. Provisions covering Gibraltar will be included in future SIs.

4. Next steps

HM Treasury plans to lay this instrument before Parliament before exit.

5. Further information

Read HM Treasury’s approach to financial services legislation under the European Union (Withdrawal) Act 2018.

6. Enquiries

If you have queries regarding this instrument, email FSlegislationEUWA@hmtreasury.gov.uk.