On 1 January 2018, FINMA’s new circular 2018/2 on the reporting of securities transactions (“FINMA Circular 18/2”) entered into effect. The purpose of FINMA Circular 18/2 is to implement the reporting obligations set out in the Swiss Financial Market Infrastructure Act (“FMIA”) and to further regulate technical aspects of the reporting obligations. Compared to the previously existing reporting obligations, the FMIA and FINMA Circular 18/2 will bring about a number of significant changes, including the reporting of certain derivatives transactions and reporting of beneficial owners.
By Patrick Schleiffer / Patrick Schärli (Reference: CapLaw-2018-14)
1) Trade and transaction reporting obligations and to whom they apply
Swiss law provides for trade and transaction reporting requirements according to which securities dealers and other participants of Swiss trading venues have to report sufficient information so as to ensure transparency in the markets. The respective reporting obligations are set forth in the Swiss Stock Exchange and Securities Trading Act (“SESTA”) and the FMIA, the latter of which regulates, inter alia, trading venues and their participants. Historically, the trade reporting obligations were limited to securities listed on a Swiss stock exchange. As further described below, with the enactment of the FMIA in the beginning of 2016, the reporting obligations have been expanded to cover any and all securities admitted to trading on a Swiss trading venue as well as certain derivatives (irrespective of them being admitted to trading on a Swiss trading venue). The expanded reporting obligations were subject to certain transitional periods.
Under the SESTA, the FMIA, its implementing ordinances and FINMA Circular 18/2, the following financial services firms are subject to the trade and transaction reporting obligations:
- Swiss licensed securities dealers, i.e. Swiss incorporated entities licensed as a securities dealer by FINMA;
- Swiss FINMA-licensed branches of foreign securities dealers; and
- non-Swiss participants of a Swiss trading venue (so-called remote members).
In parallel to the amended scope of the trade and transaction reporting obligations, the FMIA also introduced wider transaction documentation obligations. Under these obligations, Swiss securities dealers, Swiss FINMA-licensed branches of foreign securities dealers and foreign participants of a Swiss trading venue have to record their securities transactions in a securities journal. As a rule, transactions that need to be reported under the trade and transaction reporting obligations also have to be recorded in the securities journal of the relevant securities dealer or participant. In light of the expanded trade and transaction reporting obligations, the Swiss law securities journal obligations have thus been amended accordingly and FINMA has also amended the corresponding circular 08/4 on the securities journal.
2) Amended scope of trade and transaction reporting obligations
a) Reporting of certain OTC derivatives
In addition to securities admitted to trading on a Swiss trading venue, under the new Swiss trade and transaction reporting rules, Swiss securities dealers and foreign participants now also have to report transactions in derivatives whose underlying is admitted to trading on a Swiss trading venue, further provided that such Swiss underlying has a weighting of 25% or more. FINMA Circular 18/2 clarifies that if such 25% threshold is exceeded by the sum of several Swiss underlyings, but not by one single Swiss underlying, the duty to report does not apply.
Acknowledging that it may be difficult to assess whether complex and dynamic derivative products may or may not end up having a Swiss underlying with a weighting of 25% or more, FINMA stated in FINMA Circular 18/2 that participants of a Swiss trading venue are entitled to report derivatives that at the time of the reporting do not exceed the 25% threshold.
This new derivative reporting obligation is in addition to the derivative transaction reporting that already exists under applicable derivative trading rules. Thus, a participant of a Swiss trading venue may end up reporting an OTC derivative transaction to a trade repository (i.e. pursuant to the reporting obligations under FMIA or EMIR) and also to the disclosure office of the relevant Swiss trading venue.
b) Reporting of beneficial ownership
In addition to the derivative reporting obligation described above, the new Swiss trade and transaction reporting rules now also provide for an obligation to provide transaction-specific beneficial ownership information. FINMA Circular 18/2 states that for purposes of the reporting obligation, the beneficial owner is generally to be identified in accordance with the rules set out in the Swiss anti-money laundering laws and regu-lations. By way of exception to this principle, however, operating legal entities, foundations and collective investment schemes are to be reported as beneficial owners, i.e. one does not have to look through to controlling persons and the like. In addition, FINMA Circular 18/2 states that in the case of trusts, the trustee needs to be reported as the beneficial owner.
With respect to the beneficial ownership information, FINMA Circular 18/2 further specifies the type of information and the format in which the beneficial ownership information needs to be submitted to the relevant disclosure office.
c) Exemptions, substituted compliance and alternative means of reporting
The Swiss reporting rules provide for certain exemptions from the reporting requirements and alternative means of reporting. In particular, the following transactions do not have to be reported to the relevant Swiss trading venue, provided such transactions are executed outside of Switzerland and further provided that these transactions are either:
- transactions in non-Swiss securities (or derivatives thereon) admitted to trading on a trading venue in Switzerland that are executed on a recognized foreign trading venue; or
- transactions in securities (or derivatives thereon) admitted to trading on a trading venue in Switzerland, provided the reportable information is communicated to the Swiss trading venue by other means (i.e. agreement between trading venues or information exchange between regulators), and if:
– the transaction was executed by a non-Swiss participant of a Swiss trading venue; and
– such non-Swiss participant is authorized to trade by the relevant foreign supervisory authority and is subject to trade reporting obligations in the relevant jurisdiction or in its home jurisdiction;
With respect to the latter exemption, SIX Swiss Exchange has recently entered into an agreement with the London Stock Exchange Group allowing non-Swiss participants of SIX Swiss Exchange to submit their transaction reports through the London Stock Exchange Group’s UnaVista reporting platform.
In addition to the reporting through a non-Swiss trade reporting service, FINMA Circular 18/2 explicitly allows that a participant of a Swiss trading venue may submit its trade and transaction reports in the format as it is set out in the European regulatory technical standard 22 on the reporting of transactions to competent authorities (“RTS 22”) under MiFIR, provided the reporting office of the relevant Swiss trading venue can handle such RTS 22 reports. SIX Swiss Exchange accepts RTS 22 reports (see also the respective notes in paragraph 3 below). Being able to use the already established RTS 22 report should lower the compliance related costs for foreign participants that have to report transactions in Switzerland and in an European jurisdiction.
3) When do the amended rules start to apply?
The amended trade and transaction reporting rules were subject to certain transitional periods, the first of which expired by the end of 2017. Accordingly, starting from 1 January 2018, the amended trade and transaction reporting obligations are being phased in as follows:
- Swiss securities dealers (including Swiss branches of foreign securities dealers): While the amended scope of the reporting obligations formally came into force on 1 January 2018, Swiss securities dealers have to submit complete reports (i.e. including beneficial ownership information) and reports on relevant derivatives only from 1 October 2018. With respect to transactions executed between 1 January 2018 and 30 September 2018 there is, however, a back loading requirement, i.e. these transactions have to be reported in full by no later than 31 December 2018.
- Foreign participants of a Swiss trading venue: The amended reporting obligations, i.e. derivatives transactions and beneficial ownership reporting, will take effect as of 1 January 2019. Unlike Swiss securities dealers, foreign participants of a Swiss trading venue are not subject to a back loading obligation.
Irrespective of the above statutory deadlines, participants of SIX Swiss Exchange should keep in mind that when they are reporting by way of a RTS 22 report, SIX Swiss Exchange requires such participants to include beneficial ownership information already as of 1 January 2018.
4) Conclusion
While Swiss securities dealers have to be ready to record and eventually report all of their transactions executed after 1 January 2018, foreign participants of Swiss trading venues can still benefit from a transitional period until 1 January 2019 with respect to the additional reports that will be required under Swiss law. Nonetheless, foreign participants need to assess now whether (i) their existing systems capture the additional required data, (ii) they may benefit from exemptions, or (iii) they want to make use of alternative ways of reporting.
Patrick Schleiffer (patrick.schleiffer@lenzstaehelin.com)
Patrick Schärli (patrick.schaerli@lenzstaehelin.com)