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The Securities Financing Transactions Regulation (SFTR) is
the EU’s answer to the Financial Stability
framework for addressing shadow banking risks in securities
lending and repo. The regulation is centred largely on
transaction reporting, and impacts firms in the EU and
What is SFTR?
"The introduction of reporting for SFTs is significant,"
says Pauline Ashall, capital markets partner at Linklaters.
The SFTR regime is equivalent to derivatives reporting
introduced under the European Market Infrastructure Regulation
(Emir) in 2012. There was no prior requirement to report these
transactions. "It covers a very broad range.," adds Ashall.
This includes securities lending, repurchase agreements
(repos), and collateralised operations that consist of a
transfer of ownership.
SFTR will apply to the counterparty of any SFT established
in the EU – including branches that fall outside of
the region – if the transaction takes place in a
branch based in a member state. It also covers the management
companies of undertakings for collective investments in
transferable securities (Ucits), Ucits investment companies and
alternative investment fund managers (AIFMS).
Non-EU parties are also subject to the regulation if any
part of the transaction involves work within an EU branch or
using a financial instrument in the EU.
"SFTR is unique in that it introduces big changes around
systems and controls," says Catherine Talks, product manager at
UnaVista, referencing the transparency requirements for
investor protection. "SFTR requires firms to report in an
accurate, complete way."
As noted in Article 13 of the regulation, Ucits management
companies, Ucits investment companies and AIFMs are obliged to
inform investors on their use of SFTs and total return swaps.
Information to be included in the Ucits prospectus and AIF
disclosure to investors includes a general description of the
SFTs and total return swaps used by the collective investment
undertaking and the rationale for their use, as well as the
overall data to be reported for each type of SFT and total
EXCLUSIVE: Coronavirus could cause SFTR
Counterparties will also have to disclose the criteria used
to select counterparties, collateral that is acceptable,
collateral valuation and risk management. Inevitably, this
makes for a lot of reporting.
How will this impact the market?
Ashall warns that, at present, the regime’s
scope is grey around the edges, with questions remaining for
commodity lending and margin loans in particular.
"Reporting requires an enormous system-build with a lot of
repapering and documentation to agree on, as it’s
not always clear who is responsible for what – for
example, generating the unique transaction identifier (UTI),"
Regardless, Ashall does not think the legislation will
change what people are doing significantly in terms of driving
market practice. "It’s more of a cost issue," she
adds, speculating that at the margin, the costs could push some
smaller participants out of the market.
SFTR guidelines: too little, too
Effectively, firms will have to provide reports on a daily
basis during the life of the transaction as changes occur, and
adjust to 155 reporting fields," she says.
UnaVista’s Talks thinks data is the biggest
issue. "SFTR is written in a way that you won’t
just need to know what you’re doing but also what
your counterparty is doing," she says. "It means that, in a
number of circumstances, firms will have to reach out to
counterparties and understand what they are doing. This ranges
from UTI generation and dissemination to backloading
What is the industry doing?
"I think the industry has evolved quite quickly," says
Talks, who adds that the European Securities and Markets
Authority (ESMA) has been explicit about reporting action but
not delegation, which although not ideal, does mean that firms
have been able to adapt infrastructure to prepare for the
"In Emir we saw firms delegating to their counterparties
– they may have eight or nine counterparties reporting
to numerous trade repositories," she says. "Oversight of that
data held in so many different places can be complex.
I’ve found that firms aren’t talking
about electing to delegate their reporting for SFTR as they do
not want to add additional fragmentation."
There’s a general feeling that these rules are
cumbersome. Jonathan Lee, senior regulatory reporting
specialist in SFTR at Kaizen Reporting pointed out that firms
are genuinely doing their best but have been repeatedly
frustrated by rules that don’t reflect how the
market functions and a lack of clarity and instruction about
how to report certain transactions and lifecycle events.
What have been the key challenges for
Ashall points out that the reporting of reuse of collateral
received under SFTs is the source of many problems.
"This is especially the case where a financial counterparty
is facing a small non-financial counterparty and is obliged to
report for both parties," she says. "The financial counterparty
may not have access to the data on the non-financial
counterparty that the financial counterparty needs to
This is indicated in Article 4 (3), where the regulation
states that the financial counterparty shall be responsible for
reporting on behalf of both counterparties for an SFT, should
the non-financial counterparty not exceed the limits of at
least two of the three criteria as defined by Article 3 (3) of
2013 Accounting Directive. These limits are: a balance
sheet total of €20,000,000 ($21,945,100); a net turnover
of €40,000,000 ($43,889,400); or a maximum average of 250
employees during the financial year.
Ashall adds that there are also issues relating to the
timing for reporting lifecycle events. For example, if there is
an amendment to a transaction, do you have to report at the
time you agree the amendment, or when it becomes effective?
"In other words, whether you report on a contractual basis
or an actual basis," she explains. "One example is if the
return leg of a SFT fails to settle on the day it should have
settled. Esma says the SFT is to be reported as continuing,
whereas the industry would say it has matured."
What is the timeline?
As with other regulations, such as initial margin and Basel
III, implementation has been spread out over different dates
for different sized firms.
"SFTR is written in a way
that you won’t just need to know what
you’re doing but also what your
counterparty is doing"
On April 11 2020, credit institutions, investment firms and
relevant third country firms were originally required to start
reporting SFTs. However,
due to the Covid-19 outbreak, this has now been shifted to
what was provisionally the phase two reporting start date of
July 11 2020, when central securities depositories (CSD)
and central clearing parties (CCP) will also need to begin
reporting. Other financial counterparties will be expected to
comply from October 11 2020; nonfinancial counterparties from
January 11 2021.
By this time, the Brexit transition period will have come to
an end. While no one is realistically expecting major
divergence, some have their concerns.
"Most transaction documentation is based on English law, and
that has not changed [as a result of Brexit]," says Dentons
partner Michael Huertas. "However, French and German
documentation may have to catch up to the standard of
English-law governed documentation. This has not yet been the
case, and there needs to be more dialogue between London and
the rest of the EU."
This is evidenced by the fact that, on the continent, there
have been moves to create English law courts to maintain
normality in the EU’s financial sector. In 2018
, the International Chamber within the Paris Court of Appeal
was formally created. It is speculated that the chamber has
been opened to lure EU banks and financial services who would
have previously settled commercial disputes in London. It will
be a case of wait and see as to whether this is a success.
PRIMER: Emir refit
With this level of reporting being so new, it will take time
before it’s business-as-usual (BAU).
"Given the lack of reporting and full end-to-end
reconciliation today across much of the industry, only once
common standards, practices and processes are adopted widely
will this seem BAU," says Lee. "When firms execute the same
transactions, book and apply lifecycle events to these
transactions in the same way, then we can start to see
reporting become more of a formality."