What is SFTR?
The Securities Financing Transactions Regulation (SFTR) is the European Union’s response to the Financial Stability Board (FSB)'s August 2013 policy proposals on securities lending and repos and entered into force on 12 January 2016.
It aims to reduce perceived 'shadow banking' risks in the securities financing markets by:
- Imposing conditions on the 'reuse' of financial instruments which have been provided as 'collateral';
- Requiring managers of UCITS and alternative investment funds (AIFs) to make detailed disclosures to their investors of the use they make of securities financing transactions (SFTs) and total return swaps;
- Requiring counterparties to report SFTs to a trade repository (TR) to provide transparency to regulators on the use of SFTs by market participants (generally following the model for derivatives reporting under EMIR).
Comparison with EMIR
Like EMIR for derivatives reporting, SFTR establishes that both parties to a trade need to report new, modified or terminated SFTs to a registered or recognized TR on a T+1 basis. It also offers the possibility for counterparties subject to the reporting obligation to delegate the reporting of these details.
Where financial counterparties entering into SFTs with non-financial counterparties that qualify as ‘small or medium sized enterprises (SMEs)’, they will be required to report on behalf of these counterparties and in case of UCITS and AIFs the managers will have to report on behalf of their funds.
In terms of third-country TRs SFTR empowers ESMA to recognize them, after the Commission determines that third-country to be equivalent, as in other relevant regulations.
It envisages reviews and stock-taking exercises after the implementation of the Regulation including the requirement for ESMA to publish a first annual report in 2019 on aggregate SFT volumes by counterparty type and transaction, based on data reported to TRs and to report on efficiency of reporting obligation, considering the appropriateness of single-sided reporting (24 months from reporting start date and every three years thereafter or earlier if material developments). SFTR also calls on the Commission to report on supervisory fees charged by ESMA to TRs 39 months from the reporting start date.
Finally, SFTR amends EMIR regarding the list of authorities to which a TR should make the necessary information available upon request.
Impact on securities financing transactions
SFTR will apply to clients who are established in the EU (including all their branches, irrespective of where they may be located). SFTR will also have a wider global impact as it may also apply to all counterparties to an SFT with a branch in the EU.
Under SFTR, participants will be required to report SFTs in an EMIR-style report to an authorized TR. Structurally, obligations under SFTR also share many similarities with EMIR:
- In addition to the reporting of the SFTs, counterparties also must report the associated collateral
- The reporting obligation is dual-sided however unlike EMIR, for trades between financial; counterparties and small non-financial counterparties, the financial counterparty is required to report for both sides. Delegated reporting is also permitted;
- Reporting counterparties must identify themselves using a Legal Entity Identifier (LEI). Unique Trade Identifiers (UTIs) are also required for all trades reported.
For repo firms, reporting matched and accurate trade data will become a key factor to ensuring regulatory compliance.
How can DTCC help?
DTCC’s Global Trade Repository (GTR) is the largest trade repository (TR) in the world supporting over 6000 customers globally. DTCC’s GTR will be entering the securities financing market as a registered TR and will enable clients to meet their reporting obligations under SFTR.
Being industry-owned, GTR provides one of the most cost-efficient methods for clients to meet their SFTR regulatory requirements.
To find out more about GTR, visit dtcc.com/GTR.
SFTR will require all parties to a repo transaction to be identified with an LEI.
The GMEI utility, owned and operated by Business Entity Data (BED) B.V., a wholly owned subsidiary of DTCC, is the largest Global LEI Foundation (GLEIF)-accredited Local Operating Unit enabling organizations with multiple legal entity subsidiaries and affiliates to register and maintain reference data for all their entities in a single location.
To find out more about the GMEI Utility, visit gmeiutility.org.
CTM and ALERT
For repo clients, the key to enhancing data quality for SFTR includes effectively matching trades before reporting:
- Ensure high transparency and consistency to post-trade processing;
- Reduce the occurrence and impact of trade settlement fails; and
- Ensure that reporting data for all counterparties to a repo transaction is correct, thereby improving regulatory compliance and risk management.
CTM supports LEIs and the provision and exchange of reporting information. This includes transactional data, Standing Settlement Instructions (SSI) data and common reference data (CRD) data enrichment.
CTM provides clients the ability to match buy/sell-back and single security bilateral repos. Workflows and matching fields cater to repo specific trade processing activities.
CTM also enables the enrichment of SSIs for repo transaction data via ALERT and the reporting information exchange for UTI and LEI data.
To find out more about CTM, visit dtcc.com/CTM and to learn more about ALERT Enrichment visit dtcc.com/ALERT.
Contact us today to learn more about how DTCC can help you prepare for SFTR.
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