The Securities Financing Transaction Regulation (SFTR)1 is an EU regulation set out to increase the transparency of securities financing transactions and the reuse of collateral. The regulation covers two aspects of transparency. The first, which this article focuses on, is the reporting obligation for SFTs that have been concluded, modified, or terminated and the related collateral and reuse information under Article 4 of the regulation. The second part is a transparency requirement for investors regarding funds in their periodic reporting (Article 13 ff.) The objective of this article is to describe the impact for different market participants and suggest how to overcome the challenges.
SFTR – key requirements
The reporting requirement set out in the regulation states that the conclusion, modification, termination, and related collateral information of Repos, Reverse repos, Securities Lending and Borrowing, Sell-Buy-Back, Buy-Sell-Back, and Margin Lending (henceforth “SFT trades”) must be reported. The reporting must include a variety of data elements that the European Securities and Markets Authority (ESMA) has structured into four tables. The report must then be sent to a Trade Repository (TR) on t+1, i.e. the day following the execution, modification, or termination of the SFT, in a defined XML format (ISO 20022). This reporting format adds significant complexity to the reporting solution since it needs to accommodate more than 5000 different reporting scenarios under SFTR. The reporting is dual sided, i.e. both sides to the trade (the collateral giver and the taker) have to report the information in a consistent way and TRs have to pair the trades based on the Unique Trade Identifier (UTI) and match a defined number of fields of the two counterparties’ submissions.
For those familiar with derivatives reporting under the European Markets Infrastructure Regulation (EMIR), many of these aspects sound familiar and this is not a coincidence. ESMA took outset in EMIR with the aim to harmonize the two regulations in the future, specifically by changing some of the aspects of EMIR.
SFTR – the timeline
On March 22, 2019, the Regulatory and Implementing Technical standards (RTS and ITS) have been published2, while taking effect on April 11, 2019. Given the phased implementation period set out in the text, four groups of market participants have to start reporting as follows below
April 11, 2020: Reporting obligation for investment firms and credit institutions
July 11, 2020: Reporting obligation for CCPs and CSDs
October 11, 2020: Reporting obligation for UCITS and AIF, pension funds, and insurance companies
January 11, 2021: Non-financial counterparties
This gives the first group of reporting participants a bit over five months until the go-live.
SFTR implementation schedule
Reporting details – the four tables
Table 1 contains information on counterparty data, specifically the identification of the reporting counterparty, the other counterparty, the report submitting entity, the agent, clearing member, etc. Here, the static data maintenance of Legal Entity Identifier (LEI) codes and related party structures (e.g. for branches) need to be taken into consideration. In Table 2, the loan and collateral data must be reported. Here, a list of 99 fields is used to identify the security lent or borrowed, the collateral involved, the SFT specific information (e.g. the repo rate), and identification of the event to be reported (e.g. a new trade, a modification, or a termination). Tables 1 and 2 are combined into one line of messaging, identifying the lifecycle events of the SFT trades. Reportable events cover:
- New trades
- Modification and correction
- (Early) Termination
- Valuation and collateral update
which all pertain to a multitude of business events.