The practical issue, maybe obvious, but I would like to know for certain: do SFTR apply to title transfer collateral arrangements in emission allowances?
In general, Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (SFTR) applies to commodities and securities (see the SFTs' definition) and I used to think emission allowances are neither of them.
I have found support in the article The SFTR – new EU rules for securities financing transactions and collateral where it is explicitly mentioned (p. 3) that emission allowances are not commodities in the meaning used in the SFTR.
However, in the ESMA's Discussion Paper on the draft RTS and ITS under SFTR of 11 March 2016 emission allowances are included in Table 13 dealing with the "Commodities classification" (page 171).
Although the said Table is used for the purposes of the reporting SFTs to trade repositories, but I suppose there are no reasonable grounds to differentiate in that regard between Article 4 (where the reporting obligation is regulated) and Article 15 (on the reuse of financial instruments received under a collateral arrangement).
Emission allowances are also not securities, securities are financial instruments and emission allowances will become financial instruments as from 3 January 2018 only (i.e. when the MiFID II enters into force).
In conclusion, I think it would be risky to exclude emission allowances from the scope of new requirements prescribed in the SFTR.
It would entail, in particular, that title transfer collateral arrangements (TTCA) using emission allowances need to meet new requirements in Article 15 of the SFTR (see box) as from 13 July 2016.
Reporting of the SFTs to trade repositories will start later on, as the regulatory standards are in the drafting stage right now.
Hence, the SFTs' reporting in this case is not an urgent issue, which can't be equally concluded as regards the text of Article 15 of the SFTR (on the requirements for reuse of financial instruments received under a collateral arrangement).
To be clear, I think there are no ambiguities after the MiFID II entry into force, but what about the period from 13 July 2016 till 3 January 2018?
Is it completely riskless to conclude, in the aforementioned time span, title transfer collateral arrangement in emission allowances ignoring the existence of Article 15 of the SFTR?
If the regulators explicitly referred to this issue, it would give more comfort given drastic penalties envisioned for the SFTR's non-compliance.
SFTR Article 15 Reuse of financial instruments received under a collateral arrangement
1. Any right of counterparties to reuse financial instruments received as collateral shall be subject to at least both of the following conditions:
(a) the providing counterparty has been duly informed in writing by the receiving counterparty of the risks and consequences that may be involved in one of the following:
(i) granting consent to a right of use of collateral provided under a security collateral arrangement in accordance with Article 5 of Directive 2002/47/EC;
(ii) concluding a title transfer collateral arrangement;
(b) the providing counterparty has granted its prior express consent, as evidenced by a signature, in writing or in a legally equivalent manner, of the providing counterparty to a security collateral arrangement, the terms of which provide a right of use in accordance with Article 5 of Directive 2002/47/EC, or has expressly agreed to provide collateral by way of a title transfer collateral arrangement.
With regard to point (a) of the first subparagraph, the providing counterparty shall at least be informed in writing of the risks and consequences that may arise in the event of the default of the receiving counterparty.
2. Any exercise by counterparties of their right to reuse shall be subject to at least both of the following conditions:
(a) reuse is undertaken in accordance with the terms specified in the collateral arrangement referred to in point (b) of paragraph 1;
(b) the financial instruments received under a collateral arrangement are transferred from the account of the providing counterparty.
By way of derogation from point (b) of the first subparagraph, where a counterparty to a collateral arrangement is established in a third country and the account of the counterparty providing the collateral is maintained in and subject to the law of a third country, the reuse shall be evidenced either by a transfer from the account of the providing counterparty or by other appropriate means.
3. This Article is without prejudice to stricter sectoral legislation, in particular to Directives 2009/65/EC and 2014/65/EU, and to national law that aims to ensure a higher level of protection for providing counterparties.
4. This Article shall not affect national law concerning the validity or effect of a transaction.