SFTR reporting updates – hedge fund relief, industry guidance and potential delays
1. Hedge fund relief
The European Commission and ESMA have confirmed that non-EU AIFs (i.e. AIFs not established in the EU), are not subject to the reporting obligations in Article 4(1) of SFTR, even if their AIFM is authorised or registered under AIFMD, “except in respect of SFTs concluded in the course of the operations of a branch in the Union of the non-EU AIF”, which will rarely apply. This is welcome news for the hedge fund industry and places a significant number of hedge funds out of scope for the SFTR reporting obligation.
The result is that, in respect of AIFs and AIFMs (assuming that only the AIF enters into the SFT), the SFTR reporting obligation applies as follows:
| EU AIF | Non-EU AIF | |
EU AIFM authorised in accordance with AIFMD |
The AIF is subject to the reporting obligation; The obligation may be |
The AIF is not subject to the reporting obligation; except in respect of SFTs booked through an EU branch (this will rarely apply, as few AIFs have branches). If the exception does apply, the AIFM is responsible for reporting on its behalf and, as with EU AIFs, the obligation may be further delegated but the AIFM will retain regulatory responsibility. The AIF is a “financial counterparty” for the purposes of SFTR (see below for the potential impact of this). |
EU AIFM registered (but not authorised) in accordance with AIFMD |
As above, save that the regulatory obligation is and remains with the AIF rather than the AIFM. The AIF may delegate the obligation, but will retain regulatory responsibility. The AIF is a “financial counterparty” |
As above, save that for SFTs booked through an EU branch, the regulatory obligation is and remains with the AIF (though, as above, it can be delegated). The AIF is a “financial counterparty” for the purposes of SFTR (see below for the potential impact of this). |
Non-EU AIFM not authorised or registered in accordance with AIFMD |
As above, save that the regulatory obligation is and remains with the AIF, unless the AIF (a) is marketed in below for the potential impact of this). Note that this contrasts with the position under EMIR where, post EMIR Refit, an EU AIF with a third country AIFM would be a financial counterparty (with some very narrow exceptions). |
As above, save that for SFTs booked through an EU branch, the regulatory obligation is and remains with the AIF (though, as above, it can be delegated). The AIF is generally considered a “third country non-financial counterparty” for the purposes of SFTR (see below for the potential impact of this). Note that this contrasts with the position under EMIR where, post EMIR Refit, a third country AIF with a third country AIFM would be a third country financial counterparty (with some very narrow exceptions). |
Impact of SFTR counterparty status on reporting
Reporting obligation phase-in date
The financial counterparty or non-financial counterparty status of an AIF impacts the date from which it becomes subject to the SFT reporting obligation.
- AIFs that are financial counterparties will be subject to the reporting obligation from 11 October 2020 (in reality, this will be from Monday 12 October 2020, to allow for the weekend).
- AIFs that are considered to be non-financial counterparties are subject to the reporting obligation from 11 January 2021.
In addition, following the relevant phase-in date, the AIF will become subject to the reporting obligation in respect of live SFTs concluded before the relevant phase-in date if, either:
- the remaining maturity of fixed-term SFTs as at the relevant phase-in date exceeds 180 days (i.e. where the maturity exceeds 9 April 2021 (for AIF financial counterparties) or 10 July 2021 (for AIF non-financial counterparties)); or
- those SFTs have an open maturity and remain outstanding 180 days after the relevant phase-in date (i.e. those SFTs that remain outstanding on 9 April 2021 (for AIF financial counterparties) or 10 July 2021 (for AIF non-financial counterparties)).
Trades caught by this so-called “backloading” obligation must be reported within 190 days of the relevant phase-in date.
Reporting obligation responsibility
From 11 January 2021 (i.e. when the SFTR reporting obligation starts in respect of non-financial counterparties), the financial counterparty or non-financial counterparty status of an AIF may also impact which counterparty to an SFT is responsible for reporting.
- Where a financial counterparty concludes an SFT with a small non-financial counterparty, the financial counterparty alone is responsible for reporting on behalf of both counterparties. A small non-financial counterparty is a non-financial counterparty that does not exceed the limits of at least two of the three criteria below:
- balance sheet total: €20m;
- net turnover: €40m; or
- average number of employees during the financial year: 250.
- Where a third country financial counterparty (even if acting through an EU branch) enters into an SFT with a small non-financial counterparty, the third country financial counterparty is not obliged to report the SFT for the small non-financial counterparty. Instead, the small non-financial counterparty must make its own report or delegate the reporting.
- Where two non-financial counterparties conclude an SFT, both should report it (although they may delegate the reporting to one of them or to a third party).
In addition, where the European Commission has deemed a third country to have equivalent rules (through an implementing act under Article 21 of SFTR ) then for counterparties from such third country, reporting in accordance with the rules in that third country should remove the need for reporting under SFTR.
It is also worth noting that, even if a counterparty falls within the scope of the SFTR reporting obligation, this does not necessarily mean every SFT entered into by such counterparty is reportable. For example, transactions concluded between two branches of the same legal entity, even when the counterparty is subject to the reporting obligation, are not reportable (following ESMA guidance) – a potentially helpful form of relief in respect of corporates.
Please note that it is possible that the above dates may change – see “Potential delays”, below.
2. Industry guidance
ICMA has released its recommendations for reporting under SFTR which provides helpful guidance on SFTR reporting, and ISLA has published its updated SFTR report modeller.
Furthermore, in December 2019, ISDA, AFME, FIA, ICMA and ISLA published the Master Regulatory Reporting Agreement, which is designed to simplify reporting by giving market participants an option to use a single template to help them manage regulatory obligations and provide services related to reporting under EMIR and SFTR.
3. Potential delays
ICMA and ISLA have also sent a joint letter, dated 16 March 2020, to ESMA requesting that ESMA commence the process of delaying the go-live date of the SFTR reporting obligation from 11 April 2020 to 11 October 2020. It is noteworthy that, whilst the request is made to ESMA, it is the European Commission that decides whether the implementation timetable of SFTR may be changed (following a recommendation from ESMA). In the absence of a formal delay, regulatory forbearance is sought by ICMA and ISLA.
The letter does not seek to correspondingly postpone the dates from which the SFT reporting obligation will apply to buy-side entities. Indeed, following a statement circulated by ESMA on 19 March 2020, at this stage it appears that ESMA (amongst other things) expects national competent authorities to exercise forbearance with respect to SFT reporting obligations until 13 July 2020 only (i.e. the period during which only credit institutions and investment firms will be subject to the SFT reporting obligation). As such, it appears that a postponement or forbearance with respect to buy-side firms is not yet being considered.
We will continue to monitor the situation.
Next steps
Buy-side firms should consider whether they will be subject to the SFTR reporting obligation and liaise with their counterparties regarding any delegated reporting arrangements.
Please see our note on SFTR for further guidance and please speak to your usual Macfarlanes contact if you have any questions.
