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.
    UPDATE: due to the ongoing impact of the COVID-19 pandemic, regulatory authorities deferred this initial phase to 13 July 2020 in line with Phase 2
  • 13 July 2020 – CCPs and CSDs.
  • 12 October 2020 – Insurance, UCITS, AIFs.
  • 11 January 2021 – Non-Financial Companies (EU SFTR only, not applicable to UK SFTR)

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.

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

SFTR 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.

Visit the HSBC SFTR Delegated Reporting page to discover its benefits and how to register.

SFTR in the UK following Brexit

The European Union (Withdrawal) Act 2018 (EUWA) creates a new body of UK law, known as retained EU law, based on the EU law that applied in the UK on 31 December 2020. That retained law may have been amended under EUWA powers to ensure that it operates appropriately after Brexit. These amendments are not intended to make policy changes, other than to reflect the UK’s new position outside the EU, and to smooth the transition to this situation. As a result and from January 2021, there will be an EU version of SFTR and a UK version of SFTR containing substantially the same rights and obligations. On this page, references to “SFTR” include the EU and UK versions of SFTR, unless stated otherwise.

Whilst the substance of SFTR obligations are largely unchanged as a result of onshoring in the UK, a number of practical impacts on SFTR provisions arise as a result of the UK’s exit from the EU.

In particular, since the UK will become a non-EU (“third”) country, counterparties will need to ensure they report to a trade repository that is authorised under the applicable EU or UK SFTR regime. Trade repositories have created bifurcated reporting arrangements to facilitate this.

Further, while the SFTR reporting requirement for non-financial counterparties is expected to apply in the EU from 11 January 2022, the EUWA will not onshore the regime in the UK as those rules will not have applied in the UK on 31 December 2020. On 23 June 2020, the UK Chancellor also announced the UK will not, following Brexit, implement a reporting obligation for UK non-financial counterparties.

The issues arising in relation to SFTR as a result of Brexit have been the subject of much discussion in the press, by regulators and by trade associations. HSBC Global Banking & Markets has been working to establish arrangements to ensure we continue to service our clients through Brexit and beyond. For specific questions about your relationship and transactions with HSBC please speak to your usual HSBC contact in the first instance.

 

Last updated: 21 December 2020