Collateral Basket for Reverse Stock Loan

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Status: Communications Review, Last Updated: 20/02/2024

Question:

For Reverse Stock Loans, how should the collateral report depict a basket of stock on a Repo construct, for example: cash delivered and many different stocks received as CLD's?

Each stock received will have different values, and value dates etc. There is one repo transaction, but many components, so how would the collateral trade associate the many lines of securities to the one row of cash that would be reported on the transactions tab?

Best Practice:

All securities taken as collateral should be reported on the COLU template message.

Field 2.01 (Unique Transaction Identifier) permits users to parse their collateral reporting to an individual SFT, therefore the UTI of the Reverse Stock Loan can be referenced here, with the corresponding field 2.74 (Value Date of the Collateral) also correctly populated.

Members should note that best practice for non-cash SFTs for securities lending SFTs is to report collateral on a net-exposure basis and to not attribute collateral to a specific loan/borrow SFT, even when on a 'bonds-borrowed' basis.

However, as reverse stock loans are a structured finance product, if single or multiple lines of stock collateral can be attributed to the loan of cash, then they should be reported as such in the collateral file when known.

Additional Insight into Best Practice reporting approach

1. Trade structures such as that outlined below present a unique problem, they are considered ‘Cash-driven’ securities loans whereby a larger Cash transaction is booked against multiple smaller Securities transactions. From a regulatory perspective these will be considered “Reverse Stock Loans”. Some features of Reverse Stock Loans are outlined below:

   • They will generally feature a relatively large cash sum
   • They will have multiple smaller securities positions
   • They are ‘cash-driven’ which means that changes in exposure are managed by changing the amount/value of outstanding securities each day

     • Note that this differs from a Borrow vs Cash or Borrow vs Cash-pool as in those cases exposure is managed by changing the outstanding Cash amount each day

   • This behaviour means the securities should be treated as collateral

1. Given that the multiple securities components and single cash component are part of the same trade structure, they must be reported under a single UTI. The problem this presents is that this cannot be done using the ‘SLEB’ reporting structure. This is however allowable using the ‘Repo’ reporting structure. Thus, a Reverse Stock Loan should be reported as below:

   • Loan side – The full cash amount should be reported on a single UTI (NEWT)
   • Collateral side – All individual securities should be reported as individual components of collateral (COLUs) under that same UTI

2. Suggested reporting is below:

   • The Cash Loan is reported as a NEWT on UTI123
   • Security 1 is reported as a COLU on UTI123
   • Security 2 is reported as a COLU on UTI123
   • Security 3 is reported as a COLU on UTI123

Why the Repo template is required over the SLEB template

It is not possible to report a reverse securities loan under SFTR using the loan and collateral data fields dedicated to securities lending by the RTS and ITS on-transaction reporting and the Validation Rules.

One obstacle to reporting reverse securities loans as securities loans arises from the fact that the SFTR reporting framework implicitly assumes, in the case of a transaction reported as a securities loan (Table 2, field 4, Type of SFT = SLEB), that any cash is identified as collateral while any security is identified as a loaned security.

The problem here is that the framework allows only one loaned security to be reported per transaction (Table 2, field 41, Security Identifier), whereas reverse securities loans typically involve multiple security issues.

It would be incorrect to try to resolve this problem by breaking up reverse securities loans into separate transactions each involving one security, which was one suggestion, as this approach would misrepresent the legal structure of the transaction and would also produce a set of apparently unrelated transactions.

Many of these could be terminated at different times, as they could be substituted, obscuring the true term of the exposure agreed by the parties. This approach would also be prohibitively complicated in view of the typical frequency and size of changes to the securities.

(SFTR-222)