EN Official Journal of the European Union C 336/5

OPINION OF THE EUROPEAN CENTRAL BANK

of 24 June 2014

on a proposal for a Regulation of the European Parliament and of the Council on reporting and transparency of securities financing transactions

(CON/2014/49)

(2014/C 336/04)

Introduction and legal basis

On 18 March 2014 and on 27 March 2014, the European Central Bank (ECB) received requests from the European Parliament and from the Council, respectively, for an opinion on a proposal for a Regulation of the European Parliament and of the Council on reporting and transparency of securities financing transactions (1) (hereinafter the ‘proposed regulation’).

The ECB’s competence to deliver an opinion is based on Articles 127(4) and 282(5) of the Treaty on the Functioning of the European Union as the proposed regulation contains provisions affecting the contribution of the European System of Central Banks (ESCB) to the smooth conduct of policies relating to the stability of the financial system, as referred to in Article 127(5) of the Treaty. In accordance with the first sentence of Article 17.5 of the Rules of Procedure of the European Central Bank, the Governing Council has adopted this opinion.

1. General observations

The ECB broadly welcomes the proposed regulation, which is aimed at increasing the safety and transparency of the financial market, in line with recommendations issued by the Financial Stability Board (FSB) and endorsed in September 2013 by the G20 leaders (2). The proposed regulation introduces measures in three areas: (1) transaction details must be reported to trade repositories, and competent authorities and relevant Union bodies must have direct and immediate access to these details in order to facilitate monitoring of the build-up of systemic risks related to the use of securities financing transactions (SFTs), which for the purposes of the proposed regulation include repurchase transactions, securities or commodities lending and borrowing, and other transactions with equivalent economic effect and posing similar risks, in particular buy-sell back and sell-buy back transactions; (2) information on SFTs must be disclosed to the investors whose assets are employed in these transactions or in other financing structures that have effects equivalent to SFTs; and (3) there must be contractual transparency of rehypothecation activities. The ECB considers that the new uniform rules on reporting and transparency of SFTs, as well as the provisions on rehypothecation, may play an important role in enhancing financial stability in the Union. Moreover, the proposed regulation should consider the work of the FSB data experts group on securities financing markets, which was established to take forward recommendations on data collection and aggregation at the global level in accordance with the FSB Recommendations, and which will develop proposed standards and processes by the end of 2014 (3). In addition, the ECB makes the following specific comments.

2. Specific observations

2.1 Exemption for central bank transactions from reporting and transparency obligations

The proposed reporting and transparency framework does not provide an exemption with regard to transactions to which an ESCB central bank is a counterparty (4).

The ECB notes in this respect that, whilst the reporting and transparency of transactions performed by central banks as part of their respective statutory objectives and tasks would not achieve greater transparency for the market, the effectiveness of these operations, namely in the field of monetary policy or foreign exchange operations, and consequently the performance by the central banks of these tasks, which relies on timeliness and confidentiality, could be severely compromised by reporting or transparency of information on such transactions.

Requiring the counterparties to transactions, to which a member of the ESCB is a party, to report all related details to trade repositories may interfere with the confidentiality regimes of the ECB and national central banks (NCBs) and defeat the purpose of the immunities granted to the ECB under the Treaty, in particular the inviolability of the ECB’s archives and official communications (5). For these reasons, SFTs to which an ESCB central bank is counterparty should be exempt from the reporting and transparency obligations.

The ECB would strongly recommend including a transaction-based exemption in the proposed regulation (6). Failure to include such an exemption would have the same effect as imposing such reporting and transparency obligations on the ESCB itself.

2.2 Clarification of the Commission’s power to amend the list of exemptions

In addition, it is necessary to clarify Article 2(3) of the proposed regulation, which gives the Commission power to amend the list of exemptions under Article 2(2) by means of a delegated act. The ECB considers that Article 2(3) should contain a direct reference to the possibility of extending the list of exemptions to include central banks of third countries (7).

2.3 Rehypothecation

For the purposes of the proposed regulation, rehypothecation means ‘the use by a receiving counterparty of financial instruments received as collateral in its own name and for its own account or for the account of another counterparty’ (8). The proposed regulation provides that a counterparty receiving financial instruments as collateral will be allowed to rehypothecate them only with the express consent of the providing counterparty and only after the collateral has been transferred to its own account (9).

The ECB welcomes the reporting obligations for SFTs under Article 4, including the obligation to report details of collateral provided, in particular where it is available for rehypothecation or if it has been rehypothecated. Moreover, the ECB welcomes the contractual transparency requirements under Article 15 of the proposed regulation. However, in order to ensure consistency, the ECB proposes aligning the terminology under the proposed regulation as far as possible with the FSB Recommendations (10), and thus applying the term ‘reuse’ instead of ‘rehypothecation’, which better reflects the broad scope of transactions covered by the proposed regulation and will provide legal certainty to market participants. The ECB provides drafting suggestions for that purpose (11).

With regard to contractual transparency requirements, the proposed regulation does not make a distinction between financial collateral transferred under a ‘title transfer financial collateral arrangement’ and provided under a ‘security financial collateral arrangement’ within the meaning of Directive 2002/47/EC (12). Under the title transfer financial collateral arrangement, the collateral provider transfers full ownership of, or full entitlement to, financial collateral to a collateral taker. By contrast under the security financial collateral arrangement the collateral provider provides financial collateral by way of security to or in favour of a collateral taker, and thus the full or qualified ownership of, or full entitlement to, the financial collateral remains with the collateral provider when the security right is established. From a financial stability perspective, the wide scope of the proposed regulation should, in principle, be welcomed. However, bearing in mind the provisions of Directive 2002/47/EC, a collateral taker should not be restricted from enjoying full ownership or full entitlement to the financial collateral, once a title transfer financial collateral arrangement has been entered into. While the receiving counterparty should nevertheless be obliged to comply with the other requirements under Article 15 of the proposed regulation, it should be clarified that entering into a title transfer financial collateral arrangement already implies a consent to reuse and that any breach of requirements under Article 15 will not affect the validity or enforceability of the SFT, and the receiving counterparty could only be subject to administrative sanctions under the proposed regulation. The ECB provides drafting suggestions for that purpose (13).

The ECB notes that the proposed regulation focuses only on introducing reporting and transparency requirements. However, the recent financial crisis has shown that significant financial stability risks may arise from the practices of reuse and rehypothecation of client assets: they may increase contagion risk, potentially lead to the build-up of excessive leverage in the financial system and may also increase the risk of runs on individual institutions. In this context, it is noted that recommendations have been made at international level by the FSB to introduce limits as regards: (1) the rehypothecation of client assets for the purpose of financing the intermediary’s own-account activities; and (2) the entities allowed to engage in the rehypothecation of client assets (14). Moreover, further measures may also be warranted in the Union. Therefore, the ECB considers that it is important for the Commission to assess the need for further regulatory measures, which go beyond the proposed reporting and transparency requirements, including quantitative limits on reuse and on rehypothecation of client assets, which could be implemented in a future legal act. A thorough cost-benefit analysis should be conducted to ensure such quantitative limits do not have an adverse impact on securities financing markets.

2.4 Modalities for the reporting of data on SFTs

In order to perform ESCB tasks and to monitor the financial markets and financial activities within the euro area and the Union as a whole, the ECB, assisted by the NCBs, needs to collect high quality statistical information (15). Therefore, the transaction details reported to trade repositories and, in certain circumstances, to the European Securities and Markets Authority (ESMA) under the proposed regulation are vital for the ESCB to fulfil its tasks: (1) to contribute to the stability of the financial system in accordance with Article 127(5) of the Treaty by monitoring the build-up of systemic risks related to SFTs; (2) to implement monetary policy; (3) to analyse the monetary policy transmission mechanism; (4) to conduct oversight of financial market infrastructures (16); and (5) to provide analytical and statistical support to the European Systemic Risk Board (ESRB) in accordance with Regulation (EU) No 1096/2010 (17).

For these reasons, and in order to minimise the reporting burden on financial market participants, the details on the specific types of SFTs that must be reported and the format and frequency of those reports should facilitate the use of such information for the ESCB’s tasks. The ECB welcomes the opportunity to cooperate closely with ESMA to develop draft technical standards and stands ready to support ESMA in its task.

Moreover, the ECB recommends that the SFT details should be reported, compiled and made accessible to the ESCB with the maximum degree of granularity and in a fully standardised form. With regard to the data items to be reported, the ECB recommends that the technical standards prepared under Article 4(7) of the proposed regulation require details of the individual assets being used as collateral and the principal amount, currency, type, quality and value of each asset to be reported. This will help to determine the assets that are available for rehypothecation or have been rehypothecated, and will facilitate automatic procedures to compile such information. The technical standards should also allow reporting of individual assets subject to securities or commodities lending or borrowing. Individual assets should also be reported where transactions are collateralised by pools of assets, for example on a portfolio basis or via triparty collateral management services (18). The technical standards should take into account the technical specificities of such pools of assets and their dynamic nature, particularly where the composition of the pool changes frequently. The manner in which individual assets are reported should be adjusted accordingly. For example, one option to ease reporting of triparty repurchase transactions could be to allow for the reporting of the end-of-day individual assets composition of the collateral pool securing the transactions. Reporting via the relevant financial market infrastructures may facilitate the technical feasibility of reporting (including of individual collateral assets details) and would be consistent with Article 4(1) of the proposed regulation, which permits counterparties to delegate the reporting of SFTs.

In addition, the ECB suggests that the technical standards should require counterparties to report additional items to facilitate more comprehensive monitoring for financial stability purposes and for the fulfilment of the ESCB tasks outlined above, taking into account, inter alia, international developments such as the ongoing work of the FSB.

The proposed regulation requires details of the SFT to be reported no later than the working day following the conclusion, modification or termination of the transaction. In order to ensure the quality of data, and to ensure that all details are correct and complete, the ECB recommends examining whether requirements for additional, less frequent reporting of all transactions which have not yet matured should be imposed on counterparties. Such additional reporting requirements would be aimed at mitigating the accumulation, over time, of errors in the details of SFTs reported and would be in line with the FSB’s recommendation to collect regular snapshots of outstanding balances (19).

The ECB strongly recommends that technical standards under the proposed regulation require the reported data to include appropriate identifiers by using current and forthcoming internationally agreed standards. ESMA should make the use of such identifiers obligatory for all counterparties which fall within the scope of the proposed regulation, in particular, the international securities identification number (ISIN), the global legal entity identifier (LEI) and a unique trade identifier (20).

First, the ISIN, which is assigned to securities and uniquely identifies a securities issue, should be referred to when non-cash collateral instruments are reported.

Second, to ensure consistency and to provide a tool for appropriate data compilation, all parties to financial transactions should be identified by a unique code. For that purpose, the ECB supports the use of the global LEI system, as endorsed by the European Banking Authority (EBA) and ESMA (21), in a manner which is compatible with the FSB Recommendations (22). Although the global LEI system is not yet fully operational, Article 4(8) of the proposed regulation should refer to the need to apply LEIs in the technical standards, particularly in light of the use of pre-LEIs under the interim global LEI system, which is currently operational (23). The use of the LEI or pre-LEI system will facilitate data collection and aggregation at the global level, in particular to correct double counting for international transactions reported in different jurisdictions.

Third, the ECB strongly recommends the development by ESMA of a unique trade identifier at European level, in the absence of an agreed framework at international level. This is particularly important in order to match information on the same transaction reported by two or more counterparties as well as a necessary condition to ensure the integrity of the information provided by a counterparty, for example, to avoid gaps and double counting.

It is also important to ensure that the ESCB has proper access to complete, fully standardised, granular information collected by trade repositories in formats that facilitate the exercise of ESCB tasks (24). Where ESMA considers it necessary and appropriate, it should have the possibility to include, in the draft technical standards, procedures for trade repositories to verify the completeness and correctness of the data reported to them, in particular where the trade repository detects missing, incomplete or inconsistent information (25). This is without prejudice to the powers of competent authorities to impose administrative sanctions and measures on counterparties in accordance with Chapter VIII of the proposed regulation.

Following the adoption of these technical standards in accordance with the procedure in Regulation (EU) No 1095/2010 (26), it is important that they are periodically updated in order to adequately reflect market developments, to enhance the regulatory framework and to give full effect to the European Single Rulebook.

Technical standards adopted under other Union financial services legislation, such as Regulation (EU) No 648/2012, may also need to be aligned with the technical standards adopted under the proposed regulation. This will help to reduce the reporting burden on counterparties, while ensuring that such reports effectively contain the details required under Article 4 of the proposed regulation. Such alignment should seek to ensure comprehensive monitoring of SFTs, in particular the consistency of the details and formats of SFTs reported in accordance with Article 4(6) of the proposed regulation.

Done at Frankfurt am Main, 24 June 2014. The President of the ECB Mario DRAGHI

(1) COM(2014) 40 final.

(2) See ‘Strengthening Oversight and Regulation of Shadow Banking: Policy Framework for Addressing Shadow Banking Risks in Securities Lending and Repos’ (hereinafter the ‘FSB Recommendations’), 29 August 2013, available on the FSB’s website at http://www.financialstabilityboard.org/

(3) See Recommendations 2 and 3 of the FSB Recommendations.

(4) Article 2(2) of the proposed regulation only provides a subjective exemption for the members of the ESCB, other Member States’ bodies performing similar functions, other Union bodies charged with or intervening in the management of public debt and the Bank for International Settlements. Counterparties of ESCB central banks’ transactions are not clearly exempt from the reporting and transparency obligations under Articles 4, 13, 14 and 15 of the proposed regulation.

(5) See Article 343 of the Treaty and Article 39 of the Statute of the European System of Central Banks and of the European Central Bank (hereinafter the ‘Statute of the ESCB’) as well as Articles 2, 5 and 22 of the Protocol on the Privileges and Immunities of the European Union.

(6) See Amendment 7 in the Annex to this Opinion. Cf. paragraph 7.2 of Opinion CON/2012/21 and Article 1(6) to (8) of Regulation (EU) No 600/2014 of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments and amending Regulation (EU) No 648/2012 (OJ L 173, 12.6.2014, p. 84). All ECB opinions are published on the ECB’s website at www.ecb.europa.eu

(7) See Amendment 8 in the Annex to this Opinion. This clarification would be consistent with Article 1(6) of Regulation (EU) No 648/2012 of the European Parliament and of the Council of 4 July 2012 on OTC derivatives, central counterparties and trade repositories (OJ L 201, 27.7.2012, p. 1) and Article 1(9) of Regulation (EU) No 600/2014.

(8) Article 3(7) of the proposed regulation.

(9) Article 15 of the proposed regulation.

(10) See Recommendation 7 of the FSB Recommendations.

(11) See Amendment 10 in the Annex to this Opinion. See also Amendments 2 to 6, 11 and 16.

(12) Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements (OJ L 168, 27.6.2002, p. 43).

(13) See Amendments 10 and 19 in the Annex to this Opinion.

(14) See Recommendation 7 of the FSB Recommendations.

(15) Article 5 of the Statute of the ESCB.

(16) See Opinion CON/2011/1.

(17) Council Regulation (EU) No 1096/2010 of 17 November 2010 conferring specific tasks upon the European Central Bank concerning the functioning of the European Systemic Risk Board (OJ L 331, 15.12.2010, p. 162).

(18) See Amendment 11 in the Annex to this Opinion.

(19) See Recommendation 2 of the FSB Recommendations.

(20) See Amendment 12 in the Annex to this Opinion.

(21) See EBA Recommendation on the use of the Legal Entity Identifier (LEI) (EBA/REC/2014/01), 29 January 2014, available on the EBA’s website at http://www.eba.europa.eu/, and ESMA Questions and Answers document, ‘Implementation of the Regulation (EU) No 648/2012 on OTC derivatives, central counterparties and trade repositories (EMIR)’ (ESMA/2013/1527), 22 October 2013, p. 45, available on ESMA’s website at http://www.esma.europa.eu/

(22) See ‘A Global Legal Entity Identifier for Financial Markets’, 8 June 2012, available on the FSB’s website at http://www.financialstabilityboard.org/

(23) See ‘LEI Regulatory Oversight Committee (ROC): 1st progress note on the Global LEI Initiative’, 8 March 2013, available on the LEI ROC’s website at http://www.leiroc.org/. The Interim Global LEI System was launched in January 2013, whereby the LEI ROC accepted as globally compatible any pre-LEI issued by a pre-LOU (Local Operating Unit).

(24) See Amendment 15 in the Annex to this Opinion.

(25) See Amendment 13 in the Annex to this Opinion.

(26) Regulation (EU) No 1095/2010 of the European Parliament and of the Council of 24 November 2010 establishing a European Supervisory Authority (European Securities and Markets Authority), amending Decision No 716/2009/EC and repealing Commission Decision 2009/77/EC (OJ L 331, 15.12.2010, p. 84).