Monday, November 9, 2020

EU Tax Officials to Audit Securities Finance

Search for WHT Abusers Will Upend Regulatory Infrastructure

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 and 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? So if the abusers haven’t created defenses by this time, it’s already too late.) To the legitimate lenders, it’s like, ok, can I work within these new rules? Institutional lenders will ask, "What effect does it have on my lending income?" Their agents will 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?

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 we’ve got a workaround. In effect, compliance will require KYC-equivalent rules. 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 a service provider, have to decide: stay up, find a way to come up with answers, no matter the cost; or get ahead, 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.


ESMA has Enlisted 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.

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