SFTR – Commission will adopt ESMA’s RTS/ITS BUT…

SFTR – Commission will adopt ESMA’s RTS/ITS BUT…

For many months we have been writing both publicly and privately to our clients inviting them to ignore industry gossip about a greatly changed SFTR being privately concocted by the Commission (EC). We have posited that firms really do need to crack on as the draft level II legislation will not change in any significant way.

Perhaps the most prominent of our advice was reported in the press, when we informed the industry of the these points following our private discussions with the EC as part of the ongoing enforcement action we launched against the Commission.

Well, now, for the first time, the EC has publicly confirmed the same:

“The [EC intends] to endorse with amendments those draft RTS and ITS submitted by ESMA.” However…

“it was therefore necessary to make a number of clarifications and slightly restructure parts of the draft standards”

But these clarifications are “not considered as changing the substance of the draft standards.”

That the Commission intends to adopt ESMA’s draft level II RTS/ITSs as is with insignificant changes should not have come as a surprise as Regulation 1095/2010 states:

“The Commission should endorse those [ESMA’s] draft regulatory technical standards by means of delegated acts under Article 290 TFEU in order to give them binding legal effect. They should be subject to amendment only in very restricted and extraordinary circumstances, since [ESMA] is the actor in close contact with and knowing best the daily functioning of financial markets.” Recital 23

Simply put, the EC must have a compelling reason to overrule ESMA’s market expertise.


So what’s the EC’s problem?

The EC intends to adopt the RTS/ITSs as is. So what’s the fuss?

In common parlance this is called a turf war. (To non-native English speakers a turf war is where two factions fight over the rights to a particular territory or sphere of influence.) ESMA has stated that it reserves the right to make a particular change in the future to mandate branches to use LEIs whereas the EC states that only it has such a right.

What are the practical implications for the industry? None.

To market participants, it matters not a jot whether it is ESMA or the EC that instructs us (as long as it is legally binding).

For the avoidance of doubt, the EC’s request for amendment is an entirely legalistic debate over which EU body has the right to do something.

The EC intends to adopt ESMA’s draft level II legislation which the industry has had for the last 16 months. No changes. As is. As has been for 16 months.


Details of Legal dispute

For the lawyers interested in the details, a discussion follows.

“specifically, the draft technical standards submitted by ESMA provide for the mandatory use of potentially forthcoming industry standards [LEIs for branches & UTIs for transactions] for reporting to TRs once these standards would be ‘endorsed by ESMA’ in the future.”

The Commission takes issue with ESMA arrogating for itself an empowerment where none is found in law.

“the right to introduce changes to the reporting requirements due to potentially forthcoming industry standards remains with the Commission”

I agree with the Commission.

We discussed ESMA’s empowerments under SFTR previously. There is no such empowerment in law, thus the matter returns to the EC’s endogenous empowerments found in SFTR itself. (To this should be added the normal legislative procedure whereby the Commission proposes legislation and upon the Parliament and Council’s approval, the Commission then drafts legislation and passes it back to the Parliament and the Council for adoption.)

The principle that actors can only act where a competence has been provided is a fundamental cornerstone of the European Union. The Treaty of the Functioning of the European Union (as amended) stresses this in Article 2.


So what happens next?

ESMA and the Commission’s empowerments and timescales to act are set out in the Regulation that founded ESMA at the end of 2010: http://data.europa.eu/eli/reg/2010/1095/oj

Article 10 states ESMA has six weeks to rework and deliver its ‘formal opinion’ to the EC. (If ESMA fails to within 6 weeks, the Commission can proceed with its own intended adoption.) After receiving ESMA’s amended draft regulatory technical standard within the six-week period, the Commission may amend the draft regulatory technical standard on the basis of the Authority’s proposed amendments or adopt the regulatory technical standard with the amendments it considers relevant.

In other words, the Commission has ultimate say in what it adopts, however it is duty bound by article 10 to adhere to this formal process.

The EC must immediately forward the adopted legislation to the Parliament and Council for final approval.

Article 13(1) states: The European Parliament or the Council may object to a regulatory technical standard within a period of 3 months from the date of notification of the regulatory technical standard adopted by the Commission.

“If, on the expiry of the [3 months], neither the European Parliament nor the Council has objected to the regulatory technical standard, it shall be published in the Official Journal of the European Union and shall enter into force on the date stated therein.” 13(2)



Get cracking! SFTR level II is now all but official. There are no unknowns.

SFTR is the most complex and arduous reporting regime ever imposed on the industry by some considerable margin. The measure will be adopted by Q1 2019 making Q1 2020 the go-live date.

Market FinReg is the only firm to have produced an accredited SFTR training course (since March 2018). We are in regular contact with ESMA and the Commission and Trade Repositories discussing SFTR developments.

Our SFTR London conference on 5 September is being attended by all the major investment banks, bodies and funds.

Book now at www.marketfinreg.com



EC letter to ESMA: http://ec.europa.eu/transparency/regdoc/rep/3/2018/EN/C-2018-4730-F1-EN-MAIN-PART-1.PDF
EC letter to ESMA, annex: https://ec.europa.eu/transparency/regdoc/rep/3/2018/EN/C-2018-4730-F1-EN-ANNEX-1-PART-1.PDF
Regulation founding ESMA: http://data.europa.eu/eli/reg/2010/1095/oj


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