The European Securities and Markets Authority (ESMA) has recommended that the market regulators in EU Member States combine trade data generated from the Securities Finance Transaction Regulation (SFTR) with local surveillance data to empower tax authorities to catch and indict tax abusers. The ESMA proposal enables tax authorities to leverage SFTR trade data in collaboration with national surveillance datasets to identify and pursue suspected withholding tax abuses.
Entities found to be non-compliant may face increased scrutiny unless they have implemented adequate defenses or reporting frameworks.
News Report: ESMA Appeals to EC on behalf of Member States’ NCAs and Tax Authorities
Everyone in securities finance has been working on the specification and implementation of the SFTR reporting. But compliance is catching up. And, worse, the regulators have moved the bar. ESMA’s new rules, if approved by the European Parliament, will subject lending programs to audits by the tax authorities, enacted by and subject to the criminal enforcement authorities.
To legitimate lenders, the news will be received with thoughts like, “Ok, can I work within these new rules?” Chief Investments Officers will ask, “What effect does it have on my lending income?”
Their agents should ask, “What effect will this have on my and career, especially if my firm cannot meet the higher disclosure standards implied by the prospect of tax audits?
Future regulatory reporting requirements may exceed the current capabilities of some internal systems. This could prompt service providers to reassess the costs and benefits of continued participation in securities lending markets, particularly if substantial investment in compliance infrastructure is required.
Long term, compliance will require infrastructure changes. But there’s a workaround. In effect, compliance in securities finance should require KYC-equivalent rules. The question is: Who are you lending these shares to, end of day? What are the shares being used for?
No lender can answer that today. But answers will be necessary tomorrow.
And there will be even more questions tomorrow. So, you, as the IT planner for a service provider in securities finance, now have to decide, should you invest to:
- stay up to date and find a way to come up with tough answers, no matter the cost; or,
- get ahead of the tough questions, before the questions are asked.
Firms that proactively adapt to emerging standards may gain a competitive advantage, while those unable to keep pace may face operational and career-related challenges.
Just my opinion …
Ed Blount