Collateral reuse requirements under the EU’s Securities Financing Transactions Regulation (SFTR) enter into force this week.

Starting on Wednesday, the new rule requires market participants to inform counterparties of the risks and consequences of reuse arrangements.

In basic terms, when applied to collateral, reuse is where securities delivered in one transaction are used to collateralise another trade.

The ‘Reuse Disclosure Requirement’ is set out in Article 15 of the SFTR, which applies to all securities finance trades, including securities lending, repo and derivatives.

“For many funds, this will be the first SFTR obligation which requires action to be taken,” said Lucian Firth, managing associate at Simmons & Simmons in a note to clients.

Industry bodies, including ISLA and ISDA, have drawn up guidelines to help firms understand the general risks and consequences that may be involved in consenting to a right of use of collateral.

Tax treatment, voting rights and dividends are all mentioned in an information statement, published earlier this year in April.

Re-use requirements form just one part of SFTR.

The regulation will also eventually bring an EMIR-style transaction reporting regime to securities lending, requiring firms to report securities financing transactions to a trade repository.

ISLA, the securities lending trade body, has warned in advance that SFTR inaction will prove costly to market participants.

George Bollenbacher, head of regulatory reform practice at Capital Markets Advisors, recently suggested that not enough attention was being given to the new rules.

“In the never-ending stream of market regulations coming from the EU, the one that has been overlooked, like a bear in hibernation, is the SFTR."

Although full implementation may be a little further off than MiFID II or MAR, Bollenbacher said SFTR it will soon wake up and “rear its ugly head”.

“To be sure, the biggest impact of the SFTR will fall on the unsuspecting asset manager, as it has seemed to for many EU regulations,” he added in a blog post on TabbForum.

Who is subject?

Experts at law firm Sidley Austin have previously pointed out that although the majority of the SFTR’s requirements apply to European entities and European branches of non-EU entities, the Reuse Disclosure Requirement has a broader reach

It applies where the receiving party is completely non-EU provided that it faces a posting party that is itself established in the EU or operating from an EU branch.

This means that a non-EU fund with a non-EU manager may still be within the scope of this requirement.

Matthew Dening, partner at Sidley Austin, provided an example in a recent post.

“A Cayman hedge fund that has a US based manager and is entitled to receive securities collateral from a European dealer under a New York law-governed ISDA Credit Support Annex containing a right of rehypothecation will be subject to the Reuse Disclosure Requirement,” he said.

The disclosure rule is also retroactive in effect and applies to all collateral reuse arrangements that are in existence on 13 July, 2016.