Act on Securities Financing Transactions and Draft Central Bank Rules

6 December 2023
Ref.: 2110199

Circular no.: 34/2023
Circular to supervised entities and other parties concerned

Subject: Entry into force of the Act on Securities Financing Transactions and the draft rules of the Central Bank of Iceland.

On 1 January 2024, Act no. 41/2023 on Securities Financing Transactions enters into force, implementing Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions (SFTR).

The Central Bank has issued Discussion Paper no. 17/2023, which contains draft new rules on securities financing transactions. The rules are intended to implement seven sub-delegations of the SFTR and will be adopted pursuant to points 1-3 and 6 of the second paragraph of Article 17 of Act no. 41/2023 on Securities Financing Transactions, and point 5 of the second paragraph of Article 15 of Act no. 15/2018 on derivative transactions, central counterparties and trade repositories. The aim is for the rules to enter into force on 1 January 2024. Recipients of this circular are given the opportunity to submit comments on the draft. The documents are published on the Central Bank of Iceland's website: https://www.fme.is/log-og-tilmaeli/umraeduskjol.

Securities financing transactions can lead to the accumulation of leverage, increased volatility and interconnectedness in financial markets. With the SFTR, supervisors gain enhanced information on securities financing transactions so that they can monitor the risks associated with such transactions.

According to the eleventh paragraph of Article 3 of the SFTR, the following transactions are considered securities financing transactions:

• repurchase transactions,

• securities or commodities lending and securities or commodities borrowing,

• buy/sell-back or sell/buy-back,

• margin lending against securities,

Definitions of the aforementioned types of securities financing transactions can be found in the seventh, eighth, ninth and tenth paragraphs of Article 3 of the SFTR.

According to Article 4 of the SFTR, counterparties to securities financing transactions shall report to a trade repository, registered in accordance with Article 5 or recognised in accordance with Article 19, details of any securities financing transaction they have concluded and any modification or termination thereof. The details shall be reported no later than the working day following the conclusion, modification or termination of the transaction.

Further information on the reporting obligation pursuant to Article 4 of the SFTR can be found in EU delegated regulations 2019/356 and 2019/363, cf. the draft rules in the attached discussion paper, and the guidelines of the European Securities and Markets Authority (ESMA) issued on 29 March 2021.

Counterparties may be financial and non-financial. Financial counterparties may, for example, be investment firms, credit institutions, insurance undertakings, UCITS and alternative investment funds. A non-financial counterparty is an undertaking other than a financial counterparty.

A counterparty subject to the reporting obligation may delegate the reporting of details of securities financing transactions to another party. Counterparties shall keep a record of all securities financing transactions they have entered into, modified or terminated for at least five years after the transaction has ended.

Attention is drawn to the fact that UCITS management companies, UCITS investment companies and alternative investment fund managers shall inform investors of their use of securities financing transactions and total return swaps, cf. Articles 13 and 14 of the SFTR.

A counterparty receiving collateral under a collateral arrangement with a right of reuse of financial instruments shall inform the counterparty providing the collateral, in writing and duly, of the risks and consequences, cf. Article 15 of the SFTR.

The provisions of Articles 4 and 15 of the SFTR do not apply to central banks within the EEA, other bodies performing similar functions or other public bodies responsible for or involved in the management of public debt. Furthermore, the provisions of Article 4 of the SFTR do not apply to transactions to which central banks within the EEA are counterparties.

The Financial Supervisory Authority of the Central Bank of Iceland urges supervised entities and other parties that may be concerned to familiarise themselves with the content of Act no. 41/2023 and the SFTR. Inquiries can be sent to the email address sftr@sedlabanki.is.

Comments from consultation parties on the attached discussion paper are requested no later than 15 December this year. Comments are requested to be written on the consultation form provided for this purpose, which can be found on the Central Bank of Iceland's website, cf. further explanations in the discussion paper. The consultation form shall be sent to the email address skjalasafn@sedlabanki.is.

Yours faithfully,
CENTRAL BANK OF ICELAND

Linda Kolbrún Björgvinsdóttir
Managing Director
Conduct Supervision
Hörður Tulinius
Specialist
Conduct Supervision

Attachment: Discussion Paper – Rules on Securities Financing Transactions Attachment: Consultation Form