Title transfer collateral arrangement (TTCA)
According to Article 2(1)(b) of the Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangement 'title transfer financial collateral arrangement' (TTCA) means an arrangement, including repurchase agreements, under which a collateral provider transfers full ownership of, or full entitlement to, financial collateral to a collateral taker for the purpose of securing or otherwise covering the performance of relevant financial obligations.
The above definition is cross-referenced by Article 3(13) of the 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 (SFTR), which additionally stresses that SFTR do not in any way diminish the protections afforded to TTCAs under Directive 2002/47/EC (Article 15, Recital 23).
SFTs are secured (i.e. collateralised) transactions that involve the temporary exchange of cash against securities, or securities against other securities. If the collateral giver defaults, the collateral taker retains the collateral to cover the potential losses.
Collateralisation in the EU is defined in the Directive on financial collateral arrangements (FCD). Two types of financial collateral arrangements are defined in Articles 2(1)(b) and 2(1)(c). The first one is "title transfer financial collateral arrangement" in which a collateral provider transfers full ownership of the collateral to the collateral taker (this includes repos and securities lending arrangements). The second one is "security financial collateral arrangement" where a collateral provider provides financial collateral by way of security to a collateral taker, but the full ownership of the financial collateral remains with the collateral provider when the security right is established. In that second case, a right-of-use clause might apply. In that context right of use means the right of the collateral taker to use and dispose of financial collateral.
Report on securities financing transactions and leverage in the EU Report prepared under the mandate in Article 29(3) SFTR, 4 October 2016, ESMA/2016/1415, p. 12
Prohibition on Title Transfer Collateral Arrangements (TTCAs) with retail clients
MiFID II contains a prohibition against entering into title transfer collateral arrangements) with retail clients (Article 16(10) of the MiFID II). Investment firms must ensure that their external auditors report at least annually to the competent authority of the home Member State of the firm on the adequacy of the firm's arrangements for respecting the above requirement (Article 8 of the Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits). A TTCA allows a client to agree that their monies or assets will be treated as collateral in respect of their existing or future obligations.
MiFID II, Article 16(10)
An investment firm shall not conclude title transfer financial collateral arrangements with retail clients for the purpose of securing or covering present or future, actual or contingent or prospective obligations of clients.
As a result of a TTCA a client transfers full ownership of this collateral to the firm, and, if the firm fails, the client is generally an unsecured creditor for the value of their collateral. A TTCA means that the client takes credit risk against the firm, i.e. the risk that the firm cannot pay the client back. The rationale for Article 16(10) of the MiFID II was that retail clients are less likely to have the resources to understand and quantify this risk. Historically, most TTCAs with retail clients related to contracts for difference (CFDs), spreadbetting and rolling spot forex.
Inappropriate use of TTCAs
MiFID II requires firms to consider non-retail client TTCA appropriateness (Article 6 of the MiFID II Implementing Directive) including:
- the relationship between the TTCA and the client’s liability,
- ensuring the quantum of client funds or assets subject to the TTCA does not vastly exceed the client’s liability,
- preventing automatic, blanket use of TTCAs for all clients, without considering their liabilities.
Commission Delegated Regulation (EU) 2017/565 of 25 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council as regards organisational requirements and operating conditions for investment firms and defined terms for the purposes of that Directive in Article 63(2)(d) requires that the statement of client assets, which investment firms holding client financial instruments or client funds send to the client at least on a quarterly basis, must include, amongst others, a clear indication of the assets or funds which are subject to the rules of MiFID II Directive and its implementing measures and those that are not, such as those that are subject to Title Transfer Collateral Agreement.
Directive 2002/47/EC of the European Parliament and of the Council of 6 June 2002 on financial collateral arrangements
'title transfer financial collateral arrangement' means an arrangement, including repurchase agreements, under which a collateral provider transfers full ownership of, or full entitlement to, financial collateral to a collateral taker for the purpose of securing or otherwise covering the performance of relevant financial obligations
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)
Although the scope of the rules concerning reuse in this Regulation is wider than that of Directive 2002/47/EC of the European Parliament and of the Council, this Regulation does not amend the scope of that Directive but should, rather, be read in addition to that Directive. The conditions subject to which counterparties have a right to reuse and to exercise that right should not in any way diminish the protection afforded to a title transfer financial collateral arrangement under Directive 2002/47/EC. Against that background, any infringement of the transparency requirements of reuse should not affect national law concerning the validity or effect of a transaction.
'title transfer collateral arrangement' means a title transfer financial collateral arrangement as defined in point (b) of Article 2(1) of Directive 2002/47/EC concluded between counterparties to secure any obligation
Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing Directive 2014/65/EU of the European Parliament and of the Council with regard to safeguarding of financial instruments and funds belonging to clients, product governance obligations and the rules applicable to the provision or reception of fees, commissions or any monetary or non-monetary benefits
Inappropriate use of title transfer collateral arrangements
1. Member States shall require that investment firms properly consider, and are able to demonstrate that they have done so, the use of title transfer collateral arrangements in the context of the relationship between the client's obligation to the firm and the client assets subjected to title transfer collateral arrangements by the firm.
2. When considering, and documenting, the appropriateness of the use of title transfer collateral arrangements, investment firms shall take into account all of the following factors:
(a) whether there is only a very weak connection between the client's obligation to the firm and the use of title transfer collateral arrangements, including whether the likelihood of a clients' liability to the firm is low or negligible;
(b) whether the amount of client funds or financial instruments subject to title transfer collateral arrangements far exceeds the client's obligation, or is even unlimited if the client has any obligation at all to the firm; and
(c) whether all clients' financial instruments or funds are made subject to title transfer collateral arrangements, without consideration of what obligation each client has to the firm.
3. Where using title transfer collateral arrangements, investment firms shall highlight to professional clients and eligible counterparties the risks involved and the effect of any title transfer collateral arrangement on the client's financial instruments and funds.
Recitals 6 - 8
(6) Directive 2014/65/EU requires investment firms to safeguard client assets. Article 16(10) of Directive 2014/65/EU prohibits firms from concluding title transfer collateral arrangements (TTCAs) with retail clients for the purpose of securing or covering present or future, actual or contingent or prospective obligations. Investment firms are, however, not prohibited from concluding TTCA with non-retail clients. There is therefore a risk that without further guidance investment firms could use TTCA more often than reasonably justified when dealing with non-retail clients, undermining the overall regime put in place to protect client assets. Therefore, in light of the effects of TTCAs on firms' duties towards clients and in order to ensure the safeguarding and segregation rules pursuant to Directive 2014/65/EU are not undermined, investment firms should consider the appropriateness of title transfer collateral arrangements used with non-retail clients by means of the relationship between the client's obligations to the firm and the client assets subject to TTCA. Firms should be allowed to use TTCA with non-retail client only if they demonstrate the appropriateness of TTCA in relation to that client and disclose the risks involved as well as the effect of the TTCA on his assets. Firms should have a documented process of their use TTCA. The ability of firms to enter into TTCAs with non-retail clients should not reduce the need to obtain clients' prior express consent to use client assets.
(7) Demonstrating a robust link between collateral transferred under a TTCA and client's liability should not preclude taking appropriate security against a client's obligation. Investment firms could thus continue to require a sufficient collateral and where appropriate, to do so by a TTCA. That obligation should not prevent compliance with requirements under Regulation (EU) No 648/2012 of the European Parliament and of the Council and should not prohibit the appropriate use of TTCAs in the context of contingent liability transactions or repos for non-retail clients.
(8) While some securities financing transactions may require the transfer of title of clients' assets, in that context investment firms should not be able to effect arrangements prohibited under Article 16(10) of Directive 2014/65/EU.
Exemplary provisions in the agreement regarding the TTCA