The European Commission welcomes today's adoption by the European Parliament of the Regulation on Transparency of Securities Financing Transactions (known as SFTR). This new law, proposed by the European Commission in January 2014, significantly improves the transparency of securities financing transactions in the shadow banking sector. These new rules also help identify the risks associated with these financial transactions, as well as their magnitude. This regulation is in line with the G20 leaders' commitment to ensure more transparency on financial markets.
Securities financing transactions (SFTs) allow market participants to access secured funding, i.e. to use assets, such as the shares or bonds they own, to secure financing for their activities. This involves the temporary exchange of assets as a collateral for a funding transaction (e.g. the lending or borrowing of securities, repurchase or reverse repurchase transactions, buy-sell back or sell-buy back transactions, or margin lending transactions).
Commissioner Jonathan Hill, responsible for Financial Stability, Financial Services and Capital Markets Union said: "Today's rules will increase transparency in securities financing markets. They will allow market participants to use them for financing the economy, while making it easier to monitor and assess the risks involved. This is another element in making our system more resilient in the wake of the financial crisis. I am grateful to the European Parliament, and in particular rapporteur Renato Soru, for their hard work in reaching this agreement."
The Regulation enhances transparency in three ways:
- First, it introduces the reporting of all SFTs, except those concluded with central banks, to central databases known as trade repositories. Depending on their category, firms should start reporting at different stages from 12 to 21 months after the entry into force of the relevant regulatory technical standards;
- Second, investment funds will have to start disclosing information on the use of SFTs and total return swaps to investors in their regular reports and in their pre-contractual documents from the entry into force of the Regulation, while the existing funds will have 18 months to amend them; and
- Finally, the Regulation introduces some minimum transparency conditions that should be met on the reuse of collateral, such as disclosure of the risks and the need to grant prior consent. These will apply 6 months after the entry into force of the Regulation.
Shadow-banking is often used as a term for non-bank credit activities. Such activities can be useful for the economy since they diversify sources of financing. Following the financial crisis, there is international consensus that such activities should be transparent and subject to appropriate regulation. The text agreed today is an important step to reach that objective.
Following the Parliament's vote, the Regulation will be formally adopted by the EU Council of Ministers in the near future. The Regulation will then be published in the Official Journal of the EU.