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The Securities Financing Transactions Regulation (SFTR) 2.0 is coming to Europe for non-banking intermediaries and could face a number of changes in the pipeline for SFT reporting, according to Farrah Mahmood, director of regulatory affairs at ISLA.
SFTR 2.0 is likely to be rolled out when there is a new mandate from the European Commission in 2025.
An SFTR consultation, which is likely to commence before the end of Q2 2024, was announced as part of the European Commission’s report on a macro prudential framework for non-bank financial intermediaries in January.
Industry participants discussed the latest updates on Basel III Endgame and considered the key regulatory requirements facing the market, including 10c-1a and SFTR, as well as regional APAC regulatory developments at the Pan Asia Securities Lending Association (PASLA) conference.
According to Mahmood, the updated regulation could incorporate a tax element, following tax abuse scandals across Europe.
In addition, she anticipated that an environmental, social and governance (ESG) element could take root in the revised rules, with other regulatory initiatives such as MiFID also expected to incorporate sustainability preferences.
The International Securities Lending Association (ISLA) believes that principle-based rules may be included in the regime as part of the review.
SFTR came into effect in 2016 with the objective to increase transparency of securities financing transactions (SFTs) — particularly between non-banks and banks — to aid identification of potential risks and to understand if SFTs contributed to a build-up of leverage in the financial system.
It is one of the largest reporting frameworks with more than 150 data fields. Mahmood anticipated that additional reporting fields are likely to be introduced during a future review of the regulation.
This engages with an ongoing focus on data quality, and the type of data that is being collected, to ensure that reporting is accurate and meets with the regulation’s objective to promote transparency and effective risk monitoring of securities financing transactions.
In her conclusion, Mahmood highlighted five key themes for market participants to focus on over the next two years.
The first theme is capital requirements. Mahmood indicated that conversations are being had around incorporating ESG risk into capital requirements and how digital assets exposures should be treated under Basel regulation.
Mahmood says ESG is “making a comeback” with the continual creation of green taxonomies in Europe and in the APAC region.
A second theme is the digital agenda; ISLA is working to produce an annex to facilitate the borrowing and lending of digital assets.
Operational resilience and cyber security are also key themes, “there is a huge focus from regulators on the threat of cyber security on the stability of the financial system”, Mahmood added. This will be kept top of mind for evolving legislation.
The Association indicates that market participants should be aware of consumer protection and regulation for the retail space. Mahmood explained: “At ISLA, we are looking to engage more with the retail aggregator side of the market, as they are increasingly becoming involved in running securities lending programmes.”
Finally, there will be discussions on increased cross-border regulatory convergence at an international level.
