Monday, November 9, 2020

EU Tax Officials to Audit Securities Finance

Search for WHT Abusers Will Upend Regulatory Infrastructure

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 so as to empower tax authorities to catch and indict tax abusers. To the abusers, that is like saying that the Sheriff and Posse are closing in on their SFTR trails.

(No kidding. What did they think? And if the abusers haven’t created defenses by this time, it’s already too late.)

News Report: ESMA Appeals to EC on behalf of Member States’ NCAs and Tax Authorities

Everyone in securities finance has been working on 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?

Soon, it’s possible that governments will require reporting that is beyond the technical capability of current internal systems. And, if possible, that today’s service providers will exit the industry rather than invest in the necessary compliance systems.

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.

Those who can’t get ahead may find themselves retired early, with a fraction of their hoped-for nesteggs. Those who can get ahead will be seen as visionaries.

Just my opinion ...

Ed Blount


Journal Commentaries


Keep Regulation Functional (October 2008)

CSFME’s Executive Director Ed Blount interviews SEC Chairman Chris Cox.
American Banking Association Banking Journal


The Bear Market Posse, or Counterparty Risk Management during the Recent Turmoil (Sept.  2008)

by Ed Blount
The RMA Journal, v91n1, 28-32, 5 pages Sep 2008.


Searching for New Paradigms at BIS (July 2008)

by Ed Blount
Unexpected deficiencies in bank capital after recent market turmoil has regulators rethinking aspects of Basel II and “value at risk.”  
American Banking Association Banking Journal


Will Basel II Affect The Competitive Landscape? (September 2003)

By Ed Blount
Newly elected Basel Committee Chairman Caruana, Governor of the Bank of Spain, gives his views on the revised Basel capital accord, relative to its potential effects on competition and risk management in banking markets.
American Banking Association Banking Journal​