ESMA and the European Commission clarify treatment of Alternative Investment Funds (AIFs) under SFTR

The European Commission and ESMA have both dispelled any concerns that non-EU AIFs were being brought into scope for SFTR reporting if their AIFMs were EU-based.

A paragraph in the Final Report that accompanied the Level 3 Guidelines on SFTR reporting on 6 January, raised concerns as it appeared to bring non-EU AIFs into scope for SFTR reporting if their Alternative Investment Fund Manager (AIFM) was based in the EU. This statement, while apparently contradicting elements of SFTR Level 1 (the regulation itself), Level 2 (the regulatory and implementation technical standards (RTS & ITS)) and other elements of the guidelines, nevertheless raised fears that extra territoriality was sought by EU regulators.

In response to trade association concerns, both ESMA and the Commission have responded in letters stating that non-EU AIFs will not come into scope for SFTR reporting regardless of where their AIFM is based.

Furthermore, ESMA provides further clarification about the nature of the Final Report and how to distinguish it from the Guidelines themselves. The Final Report provides feedback on the consultation responses, a summary of proposals in the consultation paper and an assessment of the feedback. They hasten to add that while some of the feedback resulted in amendments to the guidelines, other elements were discarded. They further emphasise that reporting parties should focus on the Guidelines and not the Final Report as it is the Guidelines that contain all the clarifications and examples to enable reporters to be compliant with the Level 1 SFTR regulation.

The Commission in its response, re-states that SFTR Article 2(1) limits the application of the regulation to “(a) a counterparty to an SFT that is established (i) in the Union, including all its branches irrespective of where they are located; (ii) in a third country, if the SFT is concluded in the course of the operations of a branch in the Union of that counterparty.” Therefore, an AIF not established in the Union is not subject to the obligations set out in Article 4(1) SFTR.    

Now we can only hope for such definitive feedback from the Commission and ESMA in relation to settlement finality and the reporting of bilateral variation margins…to be continued!

You can read the letters here.

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