LEI Requirements in the EU Securities Financing Transactions Regulation (SFTR)

Through a regulation going live on 13 April 2020, the European Union (EU) will increase the transparency of Securities Financing Transactions (SFTs), resulting in greater monitoring abilities and better risk identification of this market. The LEI is an essential part of this new regulation, called the Securities Financing Transaction Regulation (SFTR).

What are Securities Financing Transactions?

When investors and entities use financial assets--such as bonds or shares that they own--to secure funding for other activities, they are conducting a “securities financing transaction” (SFT). The most common SFTs are repurchase transactions and securities lending.

What does the SFTR require firms to do?

Under the regulation, firms are required to timely report details of SFTs, including their own LEI and the LEI of their counterparty, to a registered or recognised trade repository (TR). The reported LEIs must be valid and active to be compliant with reporting obligations.

The LEI requirement applies to all SFT parties that are legal entities.[1]

Who is affected and where?

In short, all EU financial and non-financial entities are required to report their SFTs and use the LEI to identify themselves. The requirement applies to any party established in the EU, including all of its branches irrespective of where they are located, and any EU branches of non-EU parties.

The regulation covers a wide range of firms, including but not limited to:[2]

  • Banks
  • Brokers
  • Funds and alternative funds
  • Pension funds
  • Investment firms
  • Central Counterparty Clearinghouses (CCPs)
  • Central Security Depositories (CSDs)
  • Insurance companies and reinsurance undertakings
  • Undertakings for Collective Investment in Transferable Securities (UCITs)
  • Accredited Investment Fiduciaries (AIFs), and non-financial counterparties.

Small and medium enterprises do not have to report their transactions with financial entities themselves because these transactions will be reported by their financial counterparty. However, they still need to have an LEI for reporting purposes.

When does the regulation take effect for each SFT participant category?

The reporting requirements are going live between April 2020 and July 2021, and will gradually apply to successive tranches of firms categories. The first group is required to comply by 13 April 2020 (with a risk-based supervisory action postponement until 13 July 2020 due to COVID-19).

Reporting obligation start date  Entities under reporting obligation
 13 April 2020
(Note: reporting deadline 13 July 2020 due to COVID-19)
 Investment Firms;
 Credit Institutions;
 Relevant third country entities
 13 July 2020  Central Counterparties (CCPs);
 Central Security Depositories (CSDs);
 Relevant third country entities
 13 October 2020  Insurance companies;
 Funds;
 Institutions for Occupational Retirement Provision (IORP);
 Relevant third country entities
 13 April 2021  Third-country issuers [3]
 13 July 2021  Non-financial counterparties
 

[3] In order to ensure a smooth introduction of the LEI requirements under the SFTR reporting regime, the European Securities and Markets Authority (ESMA) will allow, for a period of up to twelve months following the activation of SFTR reporting requirements, submission of reports that omit the LEI of third-country issuers (that do not have an LEI) regarding securities that are lent, borrowed or provided as collateral in an SFT . The partial relaxation of the validation rules only applies to the LEIs of third-country issuers, and the temporary measure will be in place only until 13 April 2021.

Exemptions

The European System of Central Banks (ESCB), the Bank for International Settlements, and public bodies managing public debt are exempted from reporting. The ESCB represents central banks of 28 European countries (both Euro and non-Eurozone constituents), in addition to the European Central Bank (ECB).

 

[1] https://www.esma.europa.eu/sites/default/files/library/esma70-145-238_lei_briefing_note.pdf

[2] Pursuant to Article 2 Commission Delegated Regulation 2019/363 the following entities shall be identified with the LEI: beneficiaries, brokers, CCPs, clearing members, agent lenders, CSD participants, tri-party agents, report submitting entities and entities responsible for reporting.

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