Securities Financing Transactions Regulation (SFTR)

The SFTR seeks to increase transparency in three areas:

• Articles 4 and 12: mandatory trade reporting of SFTs to trade repositories.
• Article 15: collateral reuse risk disclosure and consent (covering both title transfer and security interest SFTs, as well as prime brokerage and derivatives).
• Articles 13 and 14: funds’ (UCITS and AIFs) use of SFTs and total return swaps prospectus disclosure and periodic reporting.

Securities Financing Transactions (SFTs) cover the following products:

• Repo and reverse repo transactions for securities, commodities and guaranteed rights.
• Lending and borrowing transactions on securities and commodities.
• Buy-sell backs and sell-buy backs of securities, commodities and guaranteed rights.
• Margin lending transactions: extension of credit in connection with the purchase, sale, carrying or trading of securities (but excluding other loans secured by collateral in the form of securities).
• Collateral swaps and liquidity swaps that do not constitute derivatives under EMIR (only listed in the SFTR recitals).

The SFT mandatory trade reporting requirement applies to a counterparty that is established in the EU and all subsequent branches of the counterparty, regardless of location, and to a third country counterparty acting through an EU branch. As SFTR has a dual-sided reporting requirement, both counterparties to the SFT must report their own side of the SFT. However, there will be single-sided reporting if one of the counterparties is not in scope of the reporting obligation, or where post Brexit divergence dictates one side being reported to ESMA and the other to the FCA where transactions are executed on a cross-border basis between the EU and UK. Counterparties include both financial (including AIFs, UCITS, IORPs, CCPs, CSDs as well as MIFID firms and credit institutions) and non- financial undertakings. Unlike EMIR however, non-EU AIFs with EU AIFMs are not in scope of the reporting obligation.

Under the SFT mandatory trade reporting, counterparty must report to a trade repository on a T or T+1 basis any new SFT, modification or termination of an SFT. Any collateral associated with an SFT must also be reported on S+1 or value date dependent on the method of collateral being used. Records of SFTs must be kept for a minimum of five years following termination. Delegation of reporting is also permitted under SFTR, either to a third party or to the SFT counterparty, however the counterparty requesting delegated reporting is still obliged to ensure reporting to the trade repository is complete, accurate and timely.

Overall, the SFTR has 155 reporting fields across 4 tables comprising counterparty, loan & collateral, collateral reuse, and margin data. Of these, 97 fields must be reconciled between reporting counterparties. As well as the initial trade report, there are also 10 trade lifecycle events which add a considerable amount of further reporting.

The Art 15 collateral reuse requirements apply to any collateral receiver established in the EU, or in a third country receiving collateral from an EU counterparty or an EU branch of a third country entity. The collateral receiver can only reuse the collateral (i.e. use in its own name, for its own account or the account of another counterparty) if the collateral provider has granted express consent and has received a risk disclosure from the receiver.

The SFTR has had enormous impact on the securities financing market in terms of the scope, timescale, the level of detail, high volumes, data complexity and the resourcing and technology required to implement it. It has led to a significant increase and reliance on third party service providers and specialised vendors to gather, manage and enrich the data, as well as other technology and service provisions, which in turn impact the securities financing markets in terms of outsourcing and resilience matters.  It is also forcing the industry to become more automated within the post-trade space and provide standardisation across the market.

The concepts and identified issues stemming from securities financing key role in the liquidity of capital markets and its interconnectedness across all financial markets, which led to the SFTR’s creation, continue to have significant regulatory and perception impacts for securities financing and its participants across the entire value chain.  There are several reviews and reports since the original 2013 FSB policy document, which will inform regulatory review of SFTs, such as the Jan 2024 EU Commission macroprudential review for credit institutions, the systemic risks relating to Non-Bank Financial Intermediaries (NBFIs) and their interconnectedness with credit institutions.

In April 2024 ESMA produced its first market report on SFTs. It helpfully noted that SFTs represent a crucial link between financial intermediaries by providing short term funding, facilitating hedging and supporting secondary market liquidity and price discovery. It also noted that whilst repo markets are mostly interbank transactions, securities lending transactions usually connect non-financial participants with banks and other intermediaries.

ISLA has been heavily involved in the implementation of SFTR on behalf of the industry and runs a Regulatory Reporting Working Group open to members. ISLA has produced an extensive ISLA SFTR Best Practice Handbook which is accessible to members and non-members.

Ahead of the expected SFTR review by the EU Commission, which may introduce new fields, change functionality, conditionality, and logic of current fields under the SFTR reporting obligation, ISLA has compiled a list of issues and challenges currently faced by the securities lending industry when reporting under SFTR. ISLA’s has assembled a definitive list of SFTR known issues and challenges under one dashboard and has already presented them to ESMA, the FCA, the EU Commission and looking to further share with all EU NCAs.  Clarification is required in order to seek amendments, relaxation, further guidance, including Level 1,2 and 3 text changes, any EMIR Re-fit appropriate tooling and concepts appropriate for SFTR review, and improved clarity from the regulators.  Ongoing work by the ISLA SFTR working group has identified several areas and trends under the SFTR Level 1 and 2 reporting standards, trade validation rules and schemas which are unworkable or impossible to complete. This includes current reconciliation challenges concerning back/historical reporting which firms are unable to resolve under the existing reporting rules.

Art 15 Risk disclosure: On 13 April 2016 ISLA together with ISDA, AFME, ICMA and the FIA jointly published an Information Statement for use by collateral receivers under the SFTR to inform market participants of the general risks and consequences that may be involved in consenting to a right of use of collateral provided under a security collateral arrangement or of concluding a title transfer collateral arrangement. Market participants can tailor the statement to suit their own specific circumstances. The consent to reuse by the collateral provider is satisfied by the use of the industry standard document such as the GMSLA, GMRA and ISDA CSA.

Where delegation of reporting is required, ISLA’s best practice advocates use of industry standard Master Regulatory Reporting Agreement (MRAA) which was developed jointly by ISLA with ISDA, AFME, ICMA and the FIA.