Securities Financing Transactions Regulation (SFTR)
What is Securities Financing Transactions Regulation?
The European Commission want to increase the transparency of Securities Financing Transactions markets, which are not currently covered through other regulations. As such this regulation will require firms to report their SFTs to an approved EU trade repository.
Securities financing transactions (SFTs), broadly speaking, are any transaction where securities are used to borrow cash, or vice versa. Practically, this mostly includes repurchase agreements (repos), securities lending activities, and sell/buy-back transactions. In each of these, ownership of the securities temporarily changes in return for cash temporarily changing ownership. At the end of an SFT, the change of ownership reverts, and both counterparties are left with what they possessed originally, plus or minus a small fee depending on the purpose of the transaction. In this regard, they act like collateralised loans.
What is the timeline for SFTR?
On 29 January 2014 the European Commission published a proposal to regulate SFTs, setting out a timeline for its publication and implementation. The Commission anticipates that it will be published and enter into force towards the end of 2015. Following this, ESMA will draft regulatory and implementing technical standards. Finally, the Commission expects the SFT regulation to enter into application in 2017, following which many firms will have a requirement to report the SFTs which they engage in to a trade repository. ESMA have released the following key dates on their timeline:
2015 Q4 - Regulation finalised
2016 Q4 - Level 2 technical regulatory standards
2018 Q1 - Go live
Which firms will be affected?
The proposed regulation would cover SFTs conducted by any firms established in the EU, regardless of where the individual branch is. It would also include those SFTs conducted by EU branches of non-EU firms, and any SFT where the securities used are issued by an EU issuer or by an EU branch of a firm. The proposal also explicitly identifies UCITS funds and AIFM funds as being subject to the regulation in its final form. Ultimately, the scope of the proposed regulation is very broad, and if you are a firm engaging in SFTs, it would be well worth reviewing whether this regulation will be applicable to your current business activities.
How will SFTR affect you?
Although full details have yet to be published, SFTR will require firms to report all of their SFTs to an EU trade repository.
This may pose operational challenges in trade data generation and submission, and may also entail changes in internal accounting practices in order to properly identify SFTs. Furthermore, the European Commission proposal on SFTs also recommended that firms be required to store details of SFTs for at least 10 years after their completion, as well as a T+1 timeframe for reporting. With these proposed requirements, the case for an efficient, accurate and timely reporting mechanism for firms is clear, to avoid falling foul of the coming regulation.
From a regulatory standpoint, SFTs are also problematic because the re-use of the collateral securities in other SFTs can lead to complex collateral chains, whereby a default on one transaction can cause a domino effect with other counterparties defaulting on their respective SFTs if the same collateral has been used in all of these. This process of reusing collateral securities, known as rehypothecation, is expected to be one of the key points of contention for this regulation. At the minimum, the proposal outlines requirements for SFT agreements to explicitly state rehypothecation rights if rehypothecation of collateral is to take place, although further requirements on rehypothecation are yet to be outlined.
Finally, the proposal also aims to introduce minimum standards for collateral valuation, to ensure proper accounting practice, and eliminate the possibility of SFTs being used to obscure weaknesses in financial institutions’ balance sheets.
How UnaVista can help with SFTR
UnaVista is an award winning European Trade Repository, so when SFTR begins you will be able to report all of your SFTs via UnaVista.
UnaVista's Rules Engine can take in data from multiple internal sources and validate it using our own reference data and rule logic. The rules engine will then normalise, convert and format imported information as desired. UnaVista's Rules Engine has the logic built in to assist you with multiple regulations as well as SFT regulation, for more details see our regulation page here