ESMA Guidance

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Status: Best Practice Finalised, Last Updated: 28/01/2022

Description:
What guidance is available from ESMA regarding Corporate Actions?

Best Practice:
The European and Securities Markets Authority (ESMA), refers to Corporate Actions under its May 2019 consultation paper: Guidelines for reporting under Articles 4 and 12 of SFTR as below:

Many types of corporate actions that involve a corporate loan may potentially fall under the definition of an SFT, such as:

a. Mergers, acquisitions and takeovers
b. Joint Ventures
c. Spin-offs and carve-outs
d. Divestiture
e. Reduction of capital
f. Share buy-backs

It also released the below, as part of the level 3 guidance in January 2020: "Procedure when a counterparty undergoes a corporate action:

The entity with the new LEI (e.g. merged or acquiring entity – further "new entity") should notify the TR(s) to which it reported its SFTs about the change and request an update of the identifier in the outstanding SFTs as per paragraph 162 below. If the change of the identifier results from a merger or acquisition, the merged or acquiring entity should also duly update the LEI record of the acquired/merged entity. Where applicable, the counterparty should also provide information about the change of country.

In the case of corporate restructuring events affecting all outstanding SFTs, the TR should identify all the outstanding SFTs where the entity is identified with the old LEI in any of the following fields: reporting counterparty ID, ID of the other counterparty, and replace the old LEI with the new one.

Other corporate restructuring events, such as, but not limited to, partial acquisitions, spin-offs, may affect only a subset of outstanding SFTs, in which case the new entity should accordingly provide the TR with the UTIs of the SFTs impacted by that event.

Paragraph 162: This is done through the following controlled process:

a. The new entity should submit written documentation to the TR(s) to which it reported its SFTs and requests the change of the LEI due to a corporate event. In the documentation, the following information should be clearly presented:

the LEI(s) of the entities participating in the merger, acquisition or other corporate event,
(ii) the LEI of the new entity,
(iii) the date on which the change takes place and
(iv) the UTIs of the outstanding SFTs concerned. In case of a merger or acquisition, the documentation should include evidence or proof that the corporate event has taken or will take place and be duly signed.

To the extent possible, the entity should provide the required information in advance so that the change is not done retrospectively, but as of the date specified in (iii). It should be noted that failure to update the new LEI on time would result in rejection of the reports submitted by the entity in case where it has been previously identified with the old LEI with an appropriate status (i.e. "Issued", "Pending transfer" or "Pending archival") and that status has subsequently been changed to "Merged".

b. The TR should broadcast this information to all the other TRs through a specific file, where the

old LEI(s),
(ii) the new LEI(s) and
(iii) the date as of which the change should be done, are included.

To the extent possible, the file should be broadcasted in advance so that the change is not done retrospectively, but as of the date specified in (iii).

c. Each of the counterparties to the SFTs, where any of the merged entities is identified, should be informed of the modification by the TR to which they report.

d. TR(s) should also notify the regulators who have access to the data relating to the SFTs that have been updated.

e. Where applicable, the TR should update Field 1.12 "Country of the other counterparty".

f. The changes should be kept in the reporting log maintained by each of the TRs.

Subsequent reports should be validated against GLEIF as usual and rejected if the validation fails.

Therefore, it is not expected that an entity submits a report as a result of a new LEI.

The aforementioned procedure should not be followed when counterparties identify themselves wrongly. In that case, they should submit an SFT report with action type "EROR", agree on a new UTI with the other counterparty and report complete and accurate details of the SFT."

Observations

ISLA's analysis and best practice considers the ESMA guidance however, please note that ESMA has not specified any reporting fields which could identify specific corporate actions or events, nor do they require any flags which denote that an SFT activity, is the downstream consequence of a corporate action.

What is clear from examination of the SFT Corporate Actions landscape, is that the differences in processing these events from one firm to another, will likely cause downstream breaks for a number of reasons, as detailed in the analysis sections below. The objective of the working group is to define best practice which will ensure firms are prepared to distribute matching reports, even if their booking methods remain different. (COAC-129)