Securities Financing Transactions Regulation (SFTR)
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What is Securities Financing Transactions Regulation?
Following the recommendation by the Financial Stability Board (FSB) and European Systemic Risk Board (ESRB) to mitigate the inherent risks in shadow banking and increase transparency in the use securities lending and repo (repurchase), the European Commission published the Securities Financing Transactions Regulation (SFTR) in January 2016. The regulation will require firms to report their SFTs to a trade repository registered by ESMA following Art. 5 Regulation (EU) 2015/2365.
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?
- January 2014 - the European Commission published a proposal to regulate SFTs
- January 2016 -SFTR regulation entered into force
- March 2017 – ESMA's Final Report on standards implementing the SFTR was published
- Q4 2017 – European Commission’s review of the Final Report in progress
- Q1/Q2 2018 - Expected endorsement of final draft RTS by the European Commission
- Q2 2019 – Estimated phased go-live of the SFTR Transaction Reporting obligation to begin (12 months following anticipated endorsement by the EC)
Time to comply depends on counterparty type:
- for credit institutions, investment firms and relevant third country firms, 11 April 2020
- for CCPs and CSDs, 11 July 2020
- for other FCs, 11 October 2020
- for NFCs, 11 January 2021
Which firms will be affected?
The proposed regulation would cover:
- SFTs conducted by any counterparty established in the EU, regardless of location of the individual branch
- SFTs conducted by EU branches of non-EU firms
- SFTs includes those traded by an EU branch of a firm
- SFTs reused by EU counterparties, including their branches, irrespective of their location
- SFTs reused by third country counterparties, whose transactions are operated from an EU branch or are provided under a collateral arrangement by a counterparty established in the EU, or by an EU branch of that third-country counterparty
Types of firms affected include banks, investment firms, CCPs, CSDs, insurance, reinsurance undertakings, pension funds, UCITs, AIFs and non-financial counterparties. SFTR excludes SFTs in which a member of the ESCB (European System of Central Banks) is counterparty, other EU public bodies managing public debt or the Bank for International Settlements
The proposal also explicitly identifies UCITS funds and AIFs as being subject to the regulation in its final form. Where the SFT counterparty is a UCITS fund or an AIF, the reporting obligation applies to its management company instead of the fund itself.
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.
Key requirements covered by SFTR
Securities Financing Transactions Regulation covers three key requirements; transaction reporting, disclosure obligations and collateral reuse obligations.
When SFTR transaction reporting goes live in 2019 firms will be able to report all of their SFTs to UnaVista. UnaVista is already an EU-registered Trade Repository for EMIR and will be extending our capabilities to cover SFTR reporting.
SFTR transaction reporting requires financial and non-financial counterparties as previously highlighted to report their SFTs to approved registered EU trade repository. SFTR transaction reporting is structurally identical to EMIR reporting in that it requires two-sided T+1 reporting, there are similar counterparty classifications and requirement by counterparties to send one report containing the complete data set to ESMA (European Securities and Markets Authority). Read more on similarities between SFTR and EMIR.
Other requirements of SFTR include disclosure requirements to investors and collateral reuse obligations.
Expected industry challenges of implementing SFTR
The final draft of the SFTR technical standards is yet to be endorsed by the European Commission, based on the final report, the industry is expecting challenges highlighted below.
The European Commission proposal on SFTs recommends that firms be required to store details of SFTs for at least 5 years after their completion, modification and termination 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 challenging 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 and eliminate the possibility of SFTs obscuring potential 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 SFTR solution page here.
Watch our summary of SFTR here.