SFTR: What is ESMA’s Role in 2020?
The Securities Financing Transaction Regulation (SFTR) went into effect in April 2019. Now that 2020 is in full swing, a lot has changed… At the beginning of 2020, we began hearing about some updates that will likely be made to the SFTR guidelines, specifically related to reporting hubs and necessary fields, as well as ESMA’s role.
However, with the spread of the COVID-19 virus, ESMA is now currently focused on how the pandemic is and will affect the European Union (EU) financial markets and providing recommendations to market participants.
In this article, we will dive into more detail about ESMA’s response to COVID-19 as well as recommendations for financial market participants.
What is SFTR?
SFTR was originally proposed by the European Commission in January 2014. Following the most recent economic downturn in modern history, the purpose of SFTR was to improve and increase the transparency of all trade and post-trade transactions as well as derivatives contracts.
All financial firms and institutions that operate within and outside the European securities financing markets would essentially report their securities finance transactions (SFTs) to an assigned and approved trade repository under SFTR.
SFTR went into effect officially in April 2019, which as created a number of challenges for financial firms, institutions, and trade repositories, specifically related to the following:
- Data reporting and submission processes
- Data fragmentation risks
- Data quality risks
- Increased costs
- Lack of resources
- Difficult implementation
- Fragmented internal coordination
ESMA’s Response to COVID-19
ESMA and the National Competent Authorities (NCAs) are working together to closely monitor the ever-changing situation of the COVID-19 pandemic and its continuing impact on EU financial markets.
On March 11th, 2020, ESMA made the following recommendations for all financial market participants to help them cope with current market changes:
- Business Continuity Planning – All financial market participants and infrastructures should have business continuity plans in place and ready to implement them in order to continue operations and to ensure compliance with regulations.
- Market disclosure – Firms and organisations are encouraged to disclose any relevant information related to the impacts of COVID-19 on the business, prospects, or financial situation. This is in line with the transparency obligations under the Market Abuse Regulation.
- Financial Reporting – Firms and organisations are encouraged to provide transparent reports after performing both a qualitative and quantitative assessment on their business activities, financial situations, and economic performance, as they related to the impact of COVID-19.
- Fund Management – Asset managers are encouraged to apply the necessary risk management requirements and take the necessary actions.
ESMA and Market Performance, Regulatory Actions, and Risk Assessment
On March 23rd, ESMA publicly announced its views on the impact of COVID-19 on EU financial markets.
In summary, ESMA wants to ensure that markets are in operation as much as possible as it is crucial for the economy. ESMA and NCAs have also clarified communication requirements, provided some deadline relief (including SFTR), and implemented short-selling measures for various member states.
Furthermore, on April 2nd, 2020, ESMA has also updated its risk assessment for EU financial markets, which shows current risk intensity as a result of the COVID-19 impact.
ESMA: Responding to Change and Moving Forward in 2020
As we all know, COVID-19 has completely changed our world. As a result, organisations, firms, suppliers, and enterprises must adapt to the ever-changing climate in order to remain relevant through such difficult times.
In summary, although ESMA’s focus for 2020 has changed from what was initially reported in their Work Programme for 2020, the expectations surrounding financial market participants regarding the transparency of business activities and transaction reporting are still priorities. Firms are encouraged to adjust their operations accordingly in order to continue to meet these expectations to the best of their abilities.
On April 20th, 2020, ESMA published a dedicated web page and newsletter specifically for COVID-19 updates to help keep financial market participants informed with up-to-date news and provide helpful resources.
