Voluntary and Mandatory Delegated Reporting

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Status: Best Practice Finalised, Last Updated: 26/04/2021

Question:
1) If an in-scope NFC is trading with an out-of-scope participant who is not obliged to report under SFTR, whose responsibility does it become to report this transaction?

2) Whose responsibility is it to determine which counterparties are NFCs?

3) Who should determine when an NFC becomes an FC and therefore automatically stop reporting under the mandatory delegated report requirement?

4) Currently there is a mandatory delegated reporting act in place for SME-NFCs which passes the obligation to the counterparty in the SFT. What happens if their status changes when the stock is still on loan? Do they automatically reassume responsibility to report? Do they have to inform the counterparty that their status has changed? Or is this an annual event, declared only the authorities during the company returns.

5) If an in-scope NFC is trading with an out-of-scope participant and ordinarily therefore not obliged to report the SFT, whose responsibility does it become to report this transaction?

6) Is it our responsibility to work out which of our counterparties are NFC, or is it our counterparties responsibility to inform us?

7) Do we have to work out when an NFC becomes an NFC and therefore automatically stop reporting, or is it the counterparties responsibility to inform us?

8) Does Brexit change the mandatory delegation process?

Best Practice:
In the context of EMIR, there is an analogous situation, since a party may change from NFC+ to NFC- or vice versa. Following the changes in EMIR REFIT, a NFC needs (annually) to calculate whether it is above or below the clearing threshold, so once an entity has calculated it is NFC-, that determination remains good for the next 12 months.

As regards the party facing a NFC, the ESMA Q&As on EMIR indicate that representations should be obtained as to its status. If a NFC makes a representation that it is NFC+ or NFC-, the agreement under which such representation is made would usually impose an obligation on the NFC to notify the other party if its status changes - see for example ISDA's Master Regulatory Disclosure Letter. Therefore, it should be possible to rely on the representation unless and until the NFC notifies that its status has changed. It is however possible that regulators would expect a financial counterparty to check from time to time whether the status of its NFC counterparty has changed, as part of more general KYC processes.

Turning to SFTR, whether a NFC is a SME (i.e. small NFC) is to be determined as at its balance sheet date, so if an entity was a small NFC at that date, it remains as such unless and until its next annual balance sheet is produced, even if, for example, its number of employees and turnover increases in the interim.

The MRRA caters for the Client representing, in the SFT Annex or elsewhere, that it is a small NFC. Once that representation has been made, the financial counterparty facing the small NFC could continue to rely on that representation, though as mentioned above, regulators may expect the FC periodically to refresh its information on the small NFC as part of general KYC processes.

If the small NFC ceases to be a small NFC, based on its most recent balance sheet, it would be in the interests of the FC to reclassify the NFC as soon as possible, because mandatory SFT reporting, and the attendant risk of liability, would cease to apply to the FC. In the draft MRRA, provision of an option for the reporting arrangement to switch automatically from mandatory reporting to delegated reporting once the NFC notifies the FC of its change of status (or, if so elected, the FC "otherwise becomes aware" of the change). However, if there are SFTs that were entered into when mandatory reporting applied, and still outstanding, that mandatory reporting would continue to apply to those transactions until terminated.

In the context of agency lending, the position is complicated since if the lender is a small NFC, and assuming the borrower is a FC, the mandatory reporting obligation will fall on the borrower.

If the lender ceases to be a small NFC then, for new transactions, mandatory reporting would cease to apply to the borrower, and presumably the lender would want to delegate its reporting obligation to the agent lender.

The position is also complicated by Brexit since, if a French small NFC lender lends to a UK borrower, in light of ESMA's draft Guidelines para 5.3.2, once the UK has left the EU, the UK borrower (even if acting through a French branch) would not have any responsibility to report the transaction for the lender.

The MRRA does not cater for borrower having mandatory reporting obligation for small NFC lender and wanting to delegate the reporting to agent lender or (ii) small NFC ceasing to be small NFC and agent lender starting to report as delegate of NFC. These should be very rare scenarios.

ESMA Guidelines Reporting under Articles 4 and 12 SFTR: 06 January 2020

58. NFC should communicate with FC whether they qualify as small NFC or not, as well as update the FC on any potential changes in their status.

60. Regarding SFTs concluded between an TC-FC outside the scope of application of SFTR (i.e. not covered by Article 2(1)(a)(ii) of SFTR) and an SME NFC, such SFTs should either be reported directly by the SME NFC to a TR, or otherwise make use of the possibility for delegation included in Article 4(2).

69. When the SFT is concluded between two NFCs, both of them should report it to a TR, though they can make use of the possibility to delegate the reporting under Article 4(2) to one of them or to a third party.

A SME-NFC is defined as a small financial entity which is a legal entity with a balance sheet that does not exceed two of following three levels:
1) balance sheet total of EUR 20 million;
2) net annual turnover of EUR 40 million; and
3) average number of employees of 250. (SFTR-164)