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Executive Summary

Description

TBC

Best Practice

This guide provides details of the work carried out by the ISLA Securities Financing Transaction Regulation (SFTR) Corporate Actions Working Group, for use by SFT developers and operations subject matter experts. This guide does not attempt to explain how corporate actions are processed, or provide extensive detail on corporate actions themselves. However it does explain how the transition to SFTR compliant reporting will require changes to corporate actions' operational processing. (COAC-122 FOR ISLA REVIEW)

Introduction

Description

TBC

Best Practice

The SFTR Corporate Actions Working Group, formed in May 2019, was tasked with clarifying and resolving the challenges of processing and reporting corporate actions under the Securities Financing Transactions Regulation. The working group consisted of both lenders and borrowers, corporate actions and operational experts. ISLA advised on it's understanding of SFTR and thereby its unique position within the industry, to bring together market consensus on corporate actions processing. Recognising that no two participants would follow identical booking procedures and timelines, matching breaks at the trade repository (TR) were likely to be high, presenting an area of ambiguity for the industry.

As of January 2020, the European Securities Markets Authority (ESMA) have not provided significant guidance for corporate actions. To assist the market in reporting SFT related corporate actions, ISLA's SFTR CA working group have agreed a comprehensive set of practices which member firms can use.

This has been achieved by:
1) Defining an agreed universe of Corporate Actions (CAs).
2) Determining which CAs have effects on the lifecycle events of SFTs and are therefore reportable under SFTR.
3) Agree a standard approach (best practice) for the industry in the CA scenarios discussed in this guide. (COAC-131 FOR ISLA REVIEW)

Key SFTR Reporting Requirements for Corporate Actions

Description

TBC

Best Practice

- SFTR is a two-sided reporting requirement: both borrower (collateral provider) and the lender (collateral receiver) are required to report their side of the SFT to an approved trade repository (TR) on Trade Date +1 (T+1).

- All new SFTs, modifications of open SFTs and terminations of existing SFTs, must be reported daily. - Collateral is reported on T+1 or Value Date +1 (VD+1) dependent on method of collateralisation used.

- As part of the two-sided reporting obligation, a Unique Transaction Identifier (UTI) must be included by participants in their reports to the TRs. This value will be used by the TRs to match reports from each counterpart.

- Participants must also use Legal Entity Identifiers (LEIs) to identify their counterparts and a number of other parties involved in the transaction (e.g. Agent Lenders, CSDs, CCPs).

- For agency loans with multiple underlying principals, both borrower and lender will need to report each allocation to a principal, as an individual transaction.

- SFTR reporting must also include any collateral linked to the SFTs, including the LEI of the counterparty with whom the collateral was exchanged, and the master agreement under which it was agreed. (COAC-125 FOR ISLA REVIEW)

Overall Scope and Plan Define Corporate Actions Universe

Description

TBC

Best Practice

Define Corporate Actions Universe

- Form a distinct list of all Corporate Actions Align with the ISO 15022 (SWIFT) and 20022 (STP) standards

- Determine attributes and effects of each CA on SFTsStratify the CAs into clusters by their effects on SFTs & booking models- Review groups of CAs which can be processed similarly - Identify CAs which have no material effect on SFTs

- Agree the booking model methodology for each cluster

- Define the SFTR reports that each cluster of CAs affectAgree a best practice under SFTR, for each CA Cluster

- Agree on specific booking models, that enable SFTR compliant reporting

- Determine best practice for processing and communicating CAs on SFTs

Connect the SFTR Corporate Actions Working Groups (CA WGs) output with wider industry standards and ensure best practice alignment

- Engage with the Securities Lending industry to form a non SFTR specific corporate actions working group (COAC-123 FOR ISLA REVIEW)

ESMA Guidance

Description

TBC

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 (i) 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 (i) 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 FOR ISLA REVIEW)

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