SFTR delayed until July, legal explainer
19 March 2020 Paris
Image: Shutterstock
The European Securities and Markets Authority has asked national competent authorities (NCAs) 鈥渘ot to prioritise their supervisory actions鈥� towards entities in-scope for the first phase of the Securities Financing Transactions Regulation (SFTR) until 13 July.
The first phase of SFTR is due to come into effect on 11 April for investment firms and credit institutions but NCAs are now expected to allow some leniency for firms struggling to meet the deadline amid the business disruption driven by the COVID-19 outbreak.
As a result, phase-one entities will now be able to re-set their sights on the phase two deadline in July, which will also bring in central counterparties and central securities depositories.
In a statement on the delay, ESMA has requested that market regulators 鈥済enerally apply their risk-based approach in the exercise of supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner鈥�.
Moreover, ESMA says it does not consider it necessary to register any trade repositories ahead of 13 April.
Instead, TRs will be registered by the next phase of the reporting regime in July.
The EU markets watchdog says that it is 鈥渁ware of the pressure on the financial industry to comply with the new regulatory obligations under SFTR in a situation where it is already facing significant challenges due to the COVID-19鈥�.
ESMA adds that it will continue to closely monitor the evolution of the implementation by the relevant market participants as well as the impact of the relevant measures taken with regards to COVID-19.
The delay comes days after the International Securities Lending Association (ISLA) and the International Captial Market Association (ICMA) to outline how the pandemic had left their members 鈥渃ritically compromised鈥� in their effort to meet next month鈥檚 SFTR deadline.
The associations further requested a formal delay to SFTR phase one until October 鈥渁s a matter of urgency鈥� adding that the new deadline should be 鈥渁n appropriate date that falls well outside the expected critical phase of the pandemic鈥�.
The associations鈥� suggested date of 11 October would have aligned with the current deadline for the third phase of SFTR reporting, which includes buy-side members.
In the letter, the trade bodies said that if a delay was not possible, they then advocated that ESMA and NCAs should 鈥減rovide forbearance and sufficient reassurance鈥� to those in-scope that they would not face heavy fines as a consequence of being crippled by the COVID-19 outbreak.
Today鈥檚 delay has been welcomed by all corners of the market, including ISLA, ICMA and securities finance service providers IHS Markit, Pirum Systems and EquiLend.
Commenting on the delay, ICMA says that while this move is "broadly welcome", it is consulting with its European Repo and Collateral Council's SFTR Task Force, which represents a cross-section of the industry to discuss the practical impacts of this delay for the markets.
Pierre Khemdoudi, global co-head of equities, data and analytics at IHS Markit, says: 鈥淕iven the combined challenge of managing COVID-19 workplace arrangements and volatile global markets, it is our view that this delay will allow all market participants more time to effectively test and prepare for SFTR reporting.鈥�
Laurence Marshall, COO at EquiLend, further notes: "We welcome this delay, which will allow parties to focus on the immediate priorities in these challenging times and ensure that the start of SFTR proceeds more smoothly."
However, Sunil Daswani at MarketAxess notes that "there is still further clarification on what this will mean for phase one firms".
"ESMA鈥檚 statement still indicates that they expect firms falling under scope on 13 April to continue to be preparing for SFTR and ready to report as soon as repositories are approved. This could take place even before the 13 July".
Was a formal delay ever possible?
The ISLA/ICMA letter to ESMA could only request that the 鈥減rocess be started鈥� to push back SFTR鈥檚 first phase implementation as the authority does not have the power to unilaterally grant any such reprieve.
Due to SFTR鈥檚 implementation timetable being enshrined in EU law, the decision to allow a delay lies with the European Parliament and Council, but ESMA is able to recommend to the commission that a delay is needed on the market鈥檚 behalf.
Most recently, in relation to the Central Securities Depositories Regulation鈥檚 settlement discipline regime, which was re-scheduled to go live in February 2021, from September, following wide-spread market concerns and lobbying efforts from ISLA, ICMA and other industry bodies.
In this instance, however, ESMA has instead opted to enter the legal grey area of requesting that NCAs turn a blind eye to those that may not achieve full compliance by April.
This falls short of the associations鈥� request for a 鈥渇ormal delay鈥� but, as Seb Malik head of financial law at Market FinReg, notes, several issues existed related to the viability of any legislative mechanism for amending Article 33 of SFTR, which outlines the date of application.
Speaking to SLT, Malik notes that the EU鈥檚 parliamentary calendar did not appear to allow for the multi-step process for a formal amendment to SFTR to be proposed and ratified before 11 April.
With a formal delay no longer viable, Malik argues that the only options left were for the Commission to reach for one of the few tools remaining to it under SFTR. Either it could either have utilised Article 2(4) to descope all entities for phase one and reinstate them later or it could subvert the EU Parliament by issuing a delay without its consent.
In the end, ESMA opted for the least worst path, says Malik, who notes that by the letter of the law, ESMA might be left 鈥渆xposed to claims that it had acted ultra vires鈥� (beyond its mandate).
As a result, ESMA was left with little option but to unofficially request a no-action by NCAs.
In his latest memo in , Malik notes that this legal conundrum is one of the EU鈥檚 own making as the top-down approach to enacting changes to regulations is not the only way to do things.
Under the Markets in Financial Instruments Regulation, the European Commission was empowered by parliament to make amendments as needed. It did this in the final months before go-live to clarify lingering ambiguity around certain definitions of in-scope entities.
As a result of Brexit, Malik argues, the UK has an opportunity to inject fresh 鈥渄ynamism鈥� into its regulatory oversight and avoid placing its market overseers in the same legal straight-jacket in the future.
The first phase of SFTR is due to come into effect on 11 April for investment firms and credit institutions but NCAs are now expected to allow some leniency for firms struggling to meet the deadline amid the business disruption driven by the COVID-19 outbreak.
As a result, phase-one entities will now be able to re-set their sights on the phase two deadline in July, which will also bring in central counterparties and central securities depositories.
In a statement on the delay, ESMA has requested that market regulators 鈥済enerally apply their risk-based approach in the exercise of supervisory powers in their day-to-day enforcement of applicable legislation in this area in a proportionate manner鈥�.
Moreover, ESMA says it does not consider it necessary to register any trade repositories ahead of 13 April.
Instead, TRs will be registered by the next phase of the reporting regime in July.
The EU markets watchdog says that it is 鈥渁ware of the pressure on the financial industry to comply with the new regulatory obligations under SFTR in a situation where it is already facing significant challenges due to the COVID-19鈥�.
ESMA adds that it will continue to closely monitor the evolution of the implementation by the relevant market participants as well as the impact of the relevant measures taken with regards to COVID-19.
The delay comes days after the International Securities Lending Association (ISLA) and the International Captial Market Association (ICMA) to outline how the pandemic had left their members 鈥渃ritically compromised鈥� in their effort to meet next month鈥檚 SFTR deadline.
The associations further requested a formal delay to SFTR phase one until October 鈥渁s a matter of urgency鈥� adding that the new deadline should be 鈥渁n appropriate date that falls well outside the expected critical phase of the pandemic鈥�.
The associations鈥� suggested date of 11 October would have aligned with the current deadline for the third phase of SFTR reporting, which includes buy-side members.
In the letter, the trade bodies said that if a delay was not possible, they then advocated that ESMA and NCAs should 鈥減rovide forbearance and sufficient reassurance鈥� to those in-scope that they would not face heavy fines as a consequence of being crippled by the COVID-19 outbreak.
Today鈥檚 delay has been welcomed by all corners of the market, including ISLA, ICMA and securities finance service providers IHS Markit, Pirum Systems and EquiLend.
Commenting on the delay, ICMA says that while this move is "broadly welcome", it is consulting with its European Repo and Collateral Council's SFTR Task Force, which represents a cross-section of the industry to discuss the practical impacts of this delay for the markets.
Pierre Khemdoudi, global co-head of equities, data and analytics at IHS Markit, says: 鈥淕iven the combined challenge of managing COVID-19 workplace arrangements and volatile global markets, it is our view that this delay will allow all market participants more time to effectively test and prepare for SFTR reporting.鈥�
Laurence Marshall, COO at EquiLend, further notes: "We welcome this delay, which will allow parties to focus on the immediate priorities in these challenging times and ensure that the start of SFTR proceeds more smoothly."
However, Sunil Daswani at MarketAxess notes that "there is still further clarification on what this will mean for phase one firms".
"ESMA鈥檚 statement still indicates that they expect firms falling under scope on 13 April to continue to be preparing for SFTR and ready to report as soon as repositories are approved. This could take place even before the 13 July".
Was a formal delay ever possible?
The ISLA/ICMA letter to ESMA could only request that the 鈥減rocess be started鈥� to push back SFTR鈥檚 first phase implementation as the authority does not have the power to unilaterally grant any such reprieve.
Due to SFTR鈥檚 implementation timetable being enshrined in EU law, the decision to allow a delay lies with the European Parliament and Council, but ESMA is able to recommend to the commission that a delay is needed on the market鈥檚 behalf.
Most recently, in relation to the Central Securities Depositories Regulation鈥檚 settlement discipline regime, which was re-scheduled to go live in February 2021, from September, following wide-spread market concerns and lobbying efforts from ISLA, ICMA and other industry bodies.
In this instance, however, ESMA has instead opted to enter the legal grey area of requesting that NCAs turn a blind eye to those that may not achieve full compliance by April.
This falls short of the associations鈥� request for a 鈥渇ormal delay鈥� but, as Seb Malik head of financial law at Market FinReg, notes, several issues existed related to the viability of any legislative mechanism for amending Article 33 of SFTR, which outlines the date of application.
Speaking to SLT, Malik notes that the EU鈥檚 parliamentary calendar did not appear to allow for the multi-step process for a formal amendment to SFTR to be proposed and ratified before 11 April.
With a formal delay no longer viable, Malik argues that the only options left were for the Commission to reach for one of the few tools remaining to it under SFTR. Either it could either have utilised Article 2(4) to descope all entities for phase one and reinstate them later or it could subvert the EU Parliament by issuing a delay without its consent.
In the end, ESMA opted for the least worst path, says Malik, who notes that by the letter of the law, ESMA might be left 鈥渆xposed to claims that it had acted ultra vires鈥� (beyond its mandate).
As a result, ESMA was left with little option but to unofficially request a no-action by NCAs.
In his latest memo in , Malik notes that this legal conundrum is one of the EU鈥檚 own making as the top-down approach to enacting changes to regulations is not the only way to do things.
Under the Markets in Financial Instruments Regulation, the European Commission was empowered by parliament to make amendments as needed. It did this in the final months before go-live to clarify lingering ambiguity around certain definitions of in-scope entities.
As a result of Brexit, Malik argues, the UK has an opportunity to inject fresh 鈥渄ynamism鈥� into its regulatory oversight and avoid placing its market overseers in the same legal straight-jacket in the future.
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