Increasing transparency in financial markets : extending the reporting obligations set out in EMIR to securities financing transactions

Abstract

This work aims to analyse the reporting paradigm introduced in the European Market Infrastructure Regulation (EMIR) and how this was transposed into the regulatory overhaul of the securities market, in particular the Securities Financing Transactions Regulation (SFTR). These Regulations are part of the wide-ranging overhaul of financial regulation following the 2008 financial crisis. This event which brought the world economy to its knees highlighted major shortcomings in the supervisory frameworks governing different sectors of finance. This work therefore examines the regulatory failures exposed by the financial crisis before assessing the efficacy of this reporting paradigm in addressing these failures. EMIR is a pivotal Regulation because it not only introduced new regulatory safeguards in the derivatives market which until then, had been largely self-regulated but it introduced a new transparency requirement through transaction reporting. This became a core requirement under SFTR. In particular, the reporting of transactional details to trade repositories allows regulators to have an accurate view of the size the market and the volume of transactions. More pertinently, it also allows regulators to detect risky behaviour and thus be in a better position to monitor systemic risk. This has become of paramount importance in a post-crisis era as many transactions are carried out by institutions which do not fall within the scope of banking regulations. This shift has led to the development of a parallel banking system, or as it is commonly referred to, shadow banking. SFTR however also builds upon transaction reporting under EMIR as it also includes a requirement to disclose pertinent information to investors, thereby also ensuring transparency from an investor perspective as well as a macroeconomic one. The growth of shadow banking activities, within which broad category SFTs are classified, has raised serious concerns regarding market transparency which legislation such as SFTR seeks to address. This work therefore analyses the systemic risks associated with shadow banking and SFTs and the way in which the measures introduced under EMIR seek to address these issues and their efficacy in increasing market transparency and stability.