Recently, Sian caught up with Robert Keane, Product Manager at Pirum to find out more about SFTR and some of its complexities for market participants. This first post introduces the main elements of the SFTR and we will follow up with another post discussing the impacts and implications for market participants.
Can you explain what the SFTR is and why it is only now starting to attract attention from firms’ regulatory teams?
Securities Finance Transaction Regulation (SFTR) is an EU regulation that first came into effect on 12th January 2016. Much of the focus of the securities market has been on other major regulatory changes such as multiple EMIR rewrites, MiFID II, Brexit and GDPR but with the SFTR requirements becoming clearer and the deadlines approaching, there is now more focus on SFTR in the market.
What is the objective of the SFTR?
The regulation is part of the EU’s approach to meet the objectives set out by the Financial Stability Board (FSB) aimed at increasing transparency since the financial crisis, particularly with respect to shadow banking. Under Article 4, SFTR includes a requirement for in scope market participants to report all securities financing transactions (SFTs) to a registered Trade Repository (TR) on a T+1 basis. The SFTs that are reportable include repos, margin lending transactions (including those under a Prime Brokerage agreement) stock loans, buy/sell backs and commodity loans.
What is the scope of application of the SFTR?
The SFTR reporting obligations apply to any counterparty to an SFT that is established in the EU (including their branches, wherever they are located) or any counterparty established outside the EU transacting SFTs through an EU branch.
Companies that need to report include:
- Investment firms and Credit institutions
- Central counterparty’s (CCPs) and Central securities depository (CSD) participants
- UCITS, AIFMs, Insurance companies and Pension funds
- Corporates and Non-Financial Counterparties (NFCs)
Securities financing transactions can be quite complex in terms of principal and agent relationships and lending and borrowing across jurisdictions. How does this affect the scope of application?
It is the principal to the trade that is in scope. In the example below where an agent lender faces off to a borrower in the EU, it is the EU Lender (UCIT, Insurance, pension etc) who has the obligation to report and not the agent lender. In addition, if there are three lenders – the Central Bank, an EU Lender and a US Lender, then only the EU lender has to report under SFTR. The Central bank is out of scope for SFTR but in scope for MiFID II and the US lender is out of scope altogether. The EU borrower is fully in scope, so they would have to report all three allocations (from the Central Bank, the EU Lender and the US Lender) they had borrowed:
Are there any other obligations other types of market participants should be aware of?
Yes – UCITS Management companies and Alternative Investment Fund Managers must report on behalf of their funds. Similarly, if a securities financing transaction takes place between a financial counterparty and non-financial counterparty (as defined by EMIR) then the financial counterparty is obligated to perform delegated reporting on behalf of the non-financial counterparty (if the latter meets certain criteria relating to their balance sheet). Counterparties can also optionally choose to delegate the reporting exercise to other parties, but the associated liabilities remain with the in-scope counterparty.
Are there any types of transactions that can be excluded from the SFTR reporting obligation?
Yes – so the main one is for transactions with EU member central banks, other EU public bodies managing public debt or the Bank for International Settlements but these transactions would then become reportable under MiFID II.
Can you give examples of some of the main reporting requirements?
The key points relating to the SFTR requirements are:
- SFTR reporting will be on a T+1 basis in line with existing regulatory reporting regimes.
- The SFTR is a two-sided reporting requirement, with both collateral provider and collateral taker required to report their side of the SFT to a registered TR.
- As part of the two-sided reporting obligation a Unique Transaction Identifier (UTI) must be included by participants in their reports to the TRs. This value will be used by the TRs to match separately received reports from each counterpart to an SFT.
- Participants must also use Legal Entity Identifiers (LEIs) to identify their counterparts along with a number of other parties involved in the SFT (e.g. Agent Lenders, CSDs, CCPs).
- For agency loans with multiple underlying principals both borrower and lender will need to report each allocation to a principal as an individually reportable transaction.
- The SFTR reporting must also include any collateral linked to the SFTs including the LEI of the counterparty with whom the collateral was exchanged and the master agreement under which it was agreed.
So – how long do firms have to implement this new reporting regime?
The reporting deadline will vary depending on the type of firm as there is a phased timeline for in-scope firms:
- First Phase: Investment Firms and Credit Institutions report on Day One
- Second Phase: CCPs and CSDs – three months later
- Third Phase: Insurance, UCITS, AIF, Pension funds – six months later
- Fourth Phase: Non-financial counterparties – nine months later
The big question is to when Day One will be and whilst there are ongoing negotiations between the EC and ESMA with regards to the draft RTS and ITS it is looking increasingly likely that the Level 2 legislation will enter into force towards the end of January 2019 with the first reporting go-live in Q1 2020.
Our special thanks to Robert Keane, Product Manager at Pirum. Pirum offers a secure, centralised automation and connectivity hub for global securities finance transactions, enabling complete automation of the post-trade and collateral lifecycle. Our position within the securities financing market enables clients to seamlessly access counterparts, tri-party agents, trading venues, market data companies and central counterparties as well as assisting regulatory adherence.