In March of this year we alerted you to two European Commission regulatory proposals in the fields of (i) structural reforms of EU banks and (ii) reporting and transparency of securities financing transactions ("SFTs") – click here to see our previous alerter.
On 24 October 2014, the European Council published a compromise proposal that subtly alters the second of the original proposals in a number of respects. The three broad requirements remain (i.e. reporting of SFTs to repositories, disclosure to investors and prior consent to rehypothecation) but, among other things, the compromise proposal suggests:
- that the reporting obligation should extend beyond the entry into SFTs to their subsequent amendment or termination;
- that reporting exemptions should exist for certain non-financial counterparties and in relation to SFTs entered into with the European System of Central Banks in the performance of monetary policy;
- that the general term "reuse" should be employed instead of the original, narrower term "rehypothecation";
- that the requirement for prior consent to be obtained before collateral can be re-used should be deemed fulfilled where collateral is provided by way of title transfer pursuant to the Directive on Financial Collateral Arrangements (implemented into English law by the Financial Collateral Arrangements (No.2) Regulations 2003 (as amended, the "FCA Regulations")); and
- that a phase-in period should apply in relation to all three requirements to give, respectively, repositories, investment funds and collateral recipients sufficient time to comply.
It is common ground that assets transferred pursuant to standard repo and stock-loan arrangements constitute financial collateral pursuant to the FCA Regulations and that, accordingly, consent to their re-use should be deemed fulfilled under the compromise proposal. An interesting question, however, is whether assets transferred pursuant to transactions having an economically equivalent effect to SFTs (examples being certain types of total return swaps, liquidity swaps and collateral swaps) also constitute financial collateral. We suspect that the answer will turn on how individual transactions are documented but, where the parties' intention is that re-use will occur, a precautionary step might be to insert an express 'consent to re-use' provision in the relevant documentation.
In conclusion, the compromise proposal is to be welcomed as a step in the right direction. It is more closely aligned with both EMIR and the FSB's Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos published in August 2013. We will keep you advised of developments in this area.
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