Prime Brokerage Loans

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Status: Best Practice Finalised, Last Updated: 26/04/2021

Question:
Can ISLA confirm that they agree with AFME's view and the RTS, as follows, that reporting Prime Brokerage (PB) loans is out-of-scope for reporting?

Regarding the reporting of prime brokerage (PB) client facing securities lending transactions under the SLB reporting template. ESMA understands the Margin Lending (ML) Short Market Value (SMV) reportable field to be equal to the amount of securities lending taking place under prime brokerage agreement.

AFME industry group has also confirmed that the ML SMV is proxy for reporting of Prime Broker client.

Note: SMV is not in fact always equal to the amount of securities lending, i.e. where the PB client over borrows beyond the SMV value of the short position taken in the market.

Best Practice:
ISLA is aligned with AFME's understanding, where securities lending activity is conducted under a prime brokerage agreement (covering client's short positions), that the following reference clarifies that this should be reported as part of a margin loan under SFTR.

See Guidelines Reporting under Articles 4 and 12 SFTR 06 January 2020 ESMA70-151-2838

190. The FSB requires the collection of data on short market value, which is the amount of securities lending taking place under prime brokerage agreement in order to cover the client's short position(s). This short market value forms part of the portfolio on which the financing calculation is performed upon, and the securities loans made to a client are collateralised with the same portfolio used to collateralise margin loans extended to that same client. In order to avoid duplicated reporting, short market values should be reported together with margin loans, under the same UTI.

Firms need to satisfy themselves that in their individual circumstances the above applies, i.e. the method of execution/legal coverage is consistent with the above. What is clear is that ESMA do not want to see a duplication, so where members are reporting as SMV under the Margin Loan template, this is a very good indicator that you should not be reporting as individual SFTs under the Stock Borrow Loan template. (SFTR-232)