Delegation versus Liability in SFTR reporting

Institutional lenders have 18 months after the ‘entry into force’ before they have a requirement to report themselves and NFC’s have a further 3 months after that.  So with the current timeframe that means October 2020 and January 2021, in order.

However the nature of securities finance and the complexities of non-disclosed lending mean that investment firms and credit institutions (essentially the borrowers) that have a reporting obligation from April 2020 will have to rely on their counterparties (the lenders), to deliver them certain information in order to meet their obligations. The industry working groups often refer this to as the SFTR minimum data provision file.

Whilst there is no regulatory requirement to report themselves until the later deadline, if these lenders cannot provide the data from the first then the borrowers will have no choice but to quickly move to other lenders that can do so.

What does this mean for SFTR?

This means that agent lenders and managers of non-disclosed lending programs, in particular, have had to deliver solutions to SFTR much earlier than their clients may require.  Most are aiming to be ready to report any underlying beneficial owner by the first deadline regardless of the regulatory obligation so the data can be shared with the borrower and then when the deadlines arrive, they can simply switch on the specific client reports to the trade repository.

From the beneficial owners perspective, most have been happy to delegate the reporting responsibility and of course it will become a must-have part of the agent lenders service.  However, the underlying funds need to recognise that delegating reporting responsibility does not mean delegating liability, and indeed if the agent reports incorrectly, the regulation is very clear that the liability stays with the reporting entity.  So this cannot be a case of simply leaving it with the agent.

Beneficial owners now need to start considering how they oversee regulatory reporting undertaken in their name and how they can verify the data being reported.  Of course many will be familiar with transaction reporting and may undertake their own reporting for EMIR, so will have experience of challenging deadlines and the need for accurate data, but SFTR reporting is both more voluminous and complex with a significant increase in contingent data fields and matching requirements.

ISLA and four other associations have recently jointly published The Master Regulatory Reporting Agreement (MRRA) to govern the delegation of voluntary and mandatory regulatory reporting responsibility including SFTR and the transfer of data between counterparties in the market, but this cannot transfer liability when the regulation is specific on the topic.

Even if the reporting obligation has been delegated, beneficial owners need to be able to review and verify that the data is accurate and complete prior to delivery.