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The European Commission (EC) published the Securities Financing Transactions Regulationin response to recommendations made by the European Systemic Risk Board (ESRB) and Financial Stability Board (FSB). Put in place to increase transparency in securities lending and repurchase (repo) and mitigate risks in shadow banking, SFTR covers more ground than the European Market Infrastructure Regulation (EMIR), which is limited to OTC and listed derivatives’ reporting. It requires 155 data fields be reported, covering trade information, legal agreements, relationship and reference values. Reporting this information completely and accurately is a priority for firms looking to comply with the regulation.

What is a Securities Financing Transaction?

A Securities Financing Transaction (SFT) is where securities are used to borrow, not unlike a collateralised loan. For instance, repurchase agreements (repos), buy/sell-back transactions and lending. In each of these cases ownership of the securities changes hands in exchange for cash. The SFT concludes when each counterparty receives what they originally possessed, minus (or in addition to) a fee depending on the type of transaction. 

SFTR

Whom does SFTR affect?

SFTR

The regulation covers the following SFTs:

  • Those that involve any counterparty based in the EU, irrespective of the counterparty’s branch location
  • Those conducted or traded by EU-based branches of non-EU firms
  • Those that are reused by EU-based counterparties, regardless of their branches’ location
  • Those that are reused by a third-country counterparty, with transactions operated from an EU branch, or are provided a collateral arrangement by an EU-based counterparty or by that third-country counterparty’s EU-based branch

Key dates for implementation

The regulation's implementation is being rolled out in phases with reporting start days differing by type of firm:

March 2019
EC endorses the final draft of SFTR standards

June 2019
Non-objection period for the European Parliament and European Council comes to an end

11 July 2020
In addition to investment firms and credit institutions for which the initial start date was delayed by 3 months due to covid19, the regulation comes into effect for central securities depositories and central counterparties.

10 October 2020
The regulation comes into effect for insurance and/or reinsurance undertakings, undertakings for the collective investment in transferable securities (UCITS), alternative investment funds/alternative investment funds managers (AIFs/AIFMs) and institutions for occupational retirement provisions

11 January 2021
The regulation comes into effect for non-financial counterparties

SFTR

What does the regulation require and how can SWIFT help?

SFTR

The Securities Financing Transactions Regulation requires financial and non-financial counterparties conducting SFTs to report on the following transactions to a trade repository (TR) that is recognised by the European Securities and Markets Authority (ESMA):

  1. Repurchase (repos)
  2. Buy-sell back or sell-buy back 
  3. Borrowing/lending commodities or securities
  4. Margin lending agreements 

Finally, an SFT’s modification or its completion must also be reported. 

The TR will in turn report the SFT details to the National Competent Authority and ESMA.

SFTR prescribes the use of ISO 20022 standard messages end-to-end for SFT reporting. Each party involved in the processing chain has some of the data elements but no party has access to everything. Capturing rich data, ISO 20022 helps reporting firms collect, reconcile, clean and prepare reports. Additional tools including MyStandards and the Readiness Portal are available to assist these firms in preparation for submitting their data in ISO 20022 to the TRs and the authorities. 

What are the implications on the capital markets industry?

The Securities Financing Transactions Regulation calls for firms dealing in securities to report transparently and accurately. Time and investment by firms will need to be put in to affect systemic implementation of reporting and documentation. Although this legislation isn’t expected to change what counterparties do with respect to market practice, SFTR will require knowing both what your own firm is doing in addition to your counterparty requiring additional due diligence.  

While implementation of SFTR will come with its challenges, the regulation will curb shadow banking and offer participants in the securities market much needed clarity to assess risk with regards to the settlement of SFTs.

More information and background on the regulation can be found here.

What is a CSD and what does CSDR cover?
Securities

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