SFTR (Securities Financing Transaction Regulation)

SFTR Reporting

The EU has introduced the Securities Financing Transaction Regulation (SFTR) to increase transparency in the Securities Finance markets following policies introduced by the Financial Stability Board in the wake of the Financial Crisis.

Although the EU is the first to implement rules in this space, other regulatory bodies are expected to follow. The UK’s FCA will enact an equivalent domestic regulatory regime in the event of the UK leaving the EU.

Overview

SFTR establishes a detailed reporting regime over the following securities financing transactions (SFT):

  • Repurchase Agreements (commonly known as "Repos").
  • Securities Borrowing & Lending ("SBL") including Commodities Lending.
  • Buy-Sell Back or sell-buy back transactions.
  • Margin Lending (in a Prime Finance context).

Timeline

SFTR obliges in-scope counterparties to report details of a SFT to a trade repository.

The reporting obligations phase in over a 9-month period for different types of market participants (the dates below are the first working days by when the obligations apply):

  • 13 April 2020 – Investment and Credit Institutions.
  • 13 July 2020 – CCPs and CSDs.
  • 12 October 2020 – Insurance, UCITS, AIFs.
  • 11 January 2021 – Non-Financial Companies.

In-scope counterparties

Note that "counterparty" means financial and non-financial counterparties.

  • A counterparty to a securities financing transaction that is established:
    • In the EU, including all its branches irrespective of where they are located.
    • In a third country, if the SFT is concluded by an EU branch of that counterparty.
  • Management companies of undertakings for the collective investment in transferable securities (UCITS) and UCITS investment companies, in accordance with Directive 2009/65EC.
  • Managers of alternative investment funds (AIFMs) authorised in accordance with Directive 2011/61/EU.
  • A counterparty engaging in reuse that is established:
    • In the EU, including all its branches irrespective of where they are located.
    • In a third country, where either:
      • The reuse is effected by an EU branch of that counterparty; or
      • The reuse concerns financial instruments provided under a collateral arrangement by a counterparty established in the EU or a branch in the EU of a counterparty established in a third country.

In-scope transactions

The reporting obligation covers all SFTs that are:

  • Concluded on or after the reporting start date detailed above
  • Were concluded before, and remained outstanding on the reporting start date and either:
    • Have a remaining maturity exceeding 180 days after the reporting start date; or
    • Have an open maturity and actually remain outstanding for 180 days after the reporting start date.

What is the impact on the financial services industry?

The Securities Finance industry is investing heavily to meet the demands of the regulation.

Key areas of focus are ensuring all parties in the market have a Legal Entity Identifier (LEI) code and that all transactions can be assigned a mutually agreed Unique Trade Identifier (UTI) which both parties recognise and include on their submissions.

These data elements are necessary for reporting the processes to create and manage them, SFTs are new to all firms.

The regulation stipulates 155 reporting data fields covering trade information, legal agreements, reference and relationship values.

Sourcing all of the requirements and managing the data quality is the focus for firms preparing to meet the standards.

What is the impact on clients?

Large banks and investment firms are generally aware of their obligations and have established programmes of work to ensure they meet them.

A range of industry vendors and technology providers have put packages together to assist them in meeting these objectives.

Non-Financials counterparties have longer to prepare than Financial counterparties.

The Reporting Obligation

Specific details of any SFT entered into, as well as any modification or termination thereof, must be reported to a trade repository.

Trade activity reports must be submitted before the end of day on T+1.

Submissions detailing collateral supporting trades must be submitted by the end of the day following settlement of the SFT.

In addition to comprehensive trade and collateral reporting, in-scope firms must report on Collateral Re-Use, Funding Sources, Margin Data and Cash Reinvestment.

Regulators are expected to pay close attention to reporting accuracy and inter-firm matching rates with the potential for penalties being applied to firms who do not meet minimum standards.

Delegated Reporting

Similar to EMIR, trade reporting is dual-sided (for eligible parties) with a data matching requirement enforced by the Trade Repositories.

SFTR does, however, recognise delegated reporting and the ability of financial counterparties to report on behalf of a small non-financial counterparty and UCITS managers and AIFMs to report on behalf of their funds.

Non-Financial counterparties are more likely to sign up to Delegated Reporting services with brokerage firms, such as HSBC, in order to ensure they remain compliant.

Smaller Non-Financials (Non-Financial Companies with modest balance sheets, turnover and employee thresholds) have lighter obligations since their SFT activity must be reported by the Financial Counterparty they transact with. They will need to provide any information required by their Financial Counterparties to enable them to accurately report their transactions.


Last updated: 31 October 2019