ESMA concedes – third-country issuer LEIs only where they exist
ESMA has published a third statement on the requirement to provide the Legal Entity Identifier (LEI) of the issuer of securities loaned or used as collateral, in instances in which the issuer is domiciled outside the European Economic Area (in a third country) for SFTR reports. They have decided that it is only mandatory to provide the issuer LEI for securities from third country issuers where it exists. ESMA has requested that Trade Repositories (TRs) will not reject SFTR reports without a third country issuer LEI for securities lent, borrowed or provided as collateral in an SFT.
Backtracking
This concession backtracks somewhat on the second statement published in April 2021 that indicated “No LEI, No trade” by October 2022. ESMA reflects that at present, around 14% of all open SFTs still do not have an issuer LEI. The fundamental problem is that holders of collateral (in many cases a very fleeting relationship) or securities lenders and borrowers have very little leverage over securities issuers to compel them to obtain an issuer LEI when they are established in third countries outside Europe. It is very different to the amount of leverage firms had over their counterparties to a transaction when this requirement for counterparty LEIs was mandated under MiFID II.
ESMA to monitor situation
ESMA has taken the decision that instead of rolling forward the deadline for a third time, they will continue to monitor the situation and give six months’ notice prior to changing the validation rules to mandate issuer LEIs. In the meantime, ESMA expects counterparties and other parties to a transaction (such as agent lenders and triparty agents) to encourage third country issuers to adhere to SFTR requirements and obtain an issuer LEI. We anticipate that the UK FCA will provide very similar guidance shortly, having taken a more pragmatic view from the outset.
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