On February 10, the UK Financial Markets Law Committee (FMLC) published a letter to the Director-General for Financial Stability, Financial Services and Capital Markets Union of the European Commission.

The letter discusses the proposed Regulation on Reporting and Transparency of Securities Financing Transactions. The proposed regulation would introduce a transparency regime in the context of securities financing transactions (typically repurchase agreements (repos), securities lending activities, and sell/buy-back transactions) by requiring their reporting to trade repositories and disclosure to fund investors.

The FMLC is concerned that the proposed regulation fails adequately to reflect the difference between a title transfer financial collateral arrangement (TTFCA) and a security financial collateral arrangement (SFCA), pointing out that such failure adequately to differentiate had been flagged in comments by the ECB. To allay these concerns the FMLC recommends that the proposed regulation is amended to make it explicit that TTFCAs are excluded from Article 15 of the proposed regulation which states that counterparties shall have the right to rehypothecation only if the counterparty is informed in writing of the potential risks and has granted its prior express consent. Since a TTFCA (unlike a SFCA) involves the transfer to the receiving counterparty of the ownership of the assets in question, it is incongruous to say that the receiving counterparty has the right to use the assets transferred to him only if certain conditions are satisfied because the right to use them is a necessary incident of the ownership of the assets. Similarly, the FMLC points out that only assets transferred by means of a SFCA constitute “client assets” for the purposes of the receiving party as the transferor retains an equitable interest.  Letter.