As part of the policies identified by the Financial Stability Board (FSB) to increase transparency across securities financing transactions (SFTs), the EU introduced the Securities Financing Transaction Regulation (SFTR), containing three major components:
Conditions imposed on the ‘reuse’ of financial instruments provided as collateral with prior consent received to allow rehypothecation (this requirement went live in July 2016).
A requirement for managers of UCITS and alternative investment funds (AIFs) to make detailed disclosures to the investors of their SFTs and total return swaps, which need to be published in their periodical and annual prospectuses (this requirement went live in January 2017).
Finally, the regulation introduces a requirement to report all SFTs conducted to an approved trade repository (TR), which poses a significant challenge for all participants, and is the area of the regulation this article will focus on.
What are the main reporting requirements?
SFTR has a two-sided reporting requirement, with both collateral provider (borrower) and collateral taker (lender) required to report their side of the SFT to an approved TR on a trade date +1 (T+1) basis.
All new SFTs and any modifications and terminations of existing SFTs must be reported daily.
As part of the two-sided reporting obligation, a unique transaction identifier (UTI) must be included by participants in their reports to the TRs. This identifier will be used by the TRs to match separately received reports from each counterpart to an SFT.
Participants must also use legal entity identifiers (LEIs) to identify their counterparts along with many other parties involved in the SFT, such as agent lenders, central securities depository (CSD) participants or central counterparties (CCPs).
For agency loans with multiple underlying principals, both borrower and lender will need to submit each allocation to a principal as an individually reportable transaction.
SFTR reporting must also include any collateral linked to the SFTs, including the LEI of the counterparty with whom the collateral was exchanged, and the master agreement under which the transaction was agreed.
Collateral is reported on T+1 or value date +1 (S+1), dependent on the method of collateralisation used.
Collateral re-use must be reported daily at S+1 by the reporting entity and not the counterpart.
Participants also need to keep records of any SFT for a minimum of five years following its termination.
Who will be required to report?
EU-based entities, including their non-EU based branches, conducting SFTs; and EU-based branches of non-EU entities. Financial and non-financial companies including all branches are also covered.
Examples of companies that need to report include:
Investment firms and credit institutions
CCPs and CSDs
UCITS, AIFMs, insurance companies and pension funds
Corporates (NFCs)
There are a few key things to note. UCITS management companies and AIFMs must report on behalf of their funds.
Similarly, if an SFT takes place between a financial counterparty and a non-financial counterparty, then the financial counterparty is potentially obligated to perform delegated reporting on behalf of the non-financial counterparty if the non-financial counterparty meets certain criteria relating to their balance sheet.
Counterparties can also optionally choose to delegate the reporting exercise to other parties, but the associated liabilities remain with the in-scope counterparty.
Are any participants exempt?
Exemptions exist for members of the European System of Central Banks (ESCB), EU bodies that manage public debt and the Bank for International Settlements. An exemption also exists for counterparties that trade with the ESCB under SFTR, but these transactions have to be reported under the second Markets in Financial Instruments Directive (MiFID II).
While captured under MiFID II, the reporting requirement doesn’t begin until SFTR goes live.
Which SFTs are in scope?
Securities loans and borrows
Repo/reverse repo and buy-sell backs
Commodities loans and borrows
Prime brokerage margin-lending transactions
Which transaction details need to be reported?
Although full details have yet to be endorsed by the EU commission, the final regualtory technical standards were published in March 2017 and contained, among a substantial field list, the following key points:
Principal amount (quantity) and currency
Lending fee
Repo rate
Margin
Value date
Maturity date
Collateral type, quality and value
Method used to provide collateral
The details above have to be reported across four broad templates: ‘counterparty data’, ‘loan and collateral data’, ‘margin data pertaining to CCP transactions’ and ‘collateral re-use’. These four sections span a total of 153 data points, of which 96 fields (predominantly from the loan and collateral field set) are reconcilable at the repository after submission. Most of the reconciled fields have minimal or zero tolerance applied when being matched by the TRs.
When will the reporting obligation start?
Reporting obligations are currently estimated to start in Q2 2019, and will be phased in, based on the type of firm as follows:
Q2 2019: Investment firms and credit institutions
Q3 2019: CCPs and CSDs
Q4 2019: UCITS, AIFs, insurance firms and pension funds
Q1 2020: Corporates (non-financial counterparties NFCs)
Will reporting only apply to new trades?
No, the requirements will also apply retrospectively to existing transactions under certain conditions:
SFTs that were concluded before the reporting start date and on the go live date have a remaining maturity of 180 days or greater.
SFTs with an open maturity that remain outstanding 180 days after the go-live date must be reported within 190 days of the reporting start date.
What are the main reporting challenges?
The main challenges to overcome can largely be grouped into the following four separate sections: data exchange and connectivity, standardisations, reconciliation (including UTI generation) and reporting.
Data exchange and connectivity
Counterparties will need to source disparate and unstructured data both internally and from industry utilities such as triparty agents. Securities loan and repo systems tend to be fragmented with no one system having a complete view of the data, and amalgamating the data workflow will involve numerous third parties for some larger participants.
Post-trade connectivity and lifecycle monitoring play a key role in helping flag up events such as recalls, reallocations, collateral substitutions and trade terminations.
Market price and loan value information are both part of the required dataset, but will change daily for the vast majority of transactions, so it’s reasonable to assume that almost every transaction will need to be modified daily, following the initial report
Standardisation
The data that is gathered needs to adhere to a common standard to meet the high levels of matching requirements and minimal tolerances dictated by the European Securities and Markets Authority.
These standards, which cover such issues as naming conventions and decimal rounding, may seem trivial at first, but stitching together trading activity without them becomes progressively more complex.
Reconciliation
UTI generation and pre-matching before reporting is the backbone to the whole process. Once generated, UTIs also must be persisted to both trading counterparties to satisfy the dual reporting requirement.
Doing this as part of a reconciliation helps ensure that both counterparties will have the same UTI for the same transaction, preventing unnecessary breaks at the TRs post reporting.
Reporting
Although SFTR is primarily a two-sided reporting requirement in nature, there is likely to be a significant amount of one-sided reporting. For example, when an EU-based borrower finds themselves facing a non-EU beneficial owner in an agency lending trade, the borrower must still report the transaction including the LEI of the out of scope beneficial owner.
This creates a dependency on the lender providing information on each allocation, regardless of whether the beneficial owner for each allocation is in scope. This will necessitate the industry
How is the industry tackling SFTR?
There’s already been a lot of ground work put in across the industry to prepare for the regulation. Vendors are collaborating, joining forces and having open discussions with each other about how to best serve their clients.
Many vendors continue to publish informative content and run educational sessions to increase awareness and understanding of the regulation. Similarly, industry associations such as the International Securities Lending Association, the European Repo and Collateral
Council and the Alternative Investment Management Association are working with their members to tackle issues the regulation poses and have set up a number of working groups to facilitate this.
Lastly, market participants themselves are assigning a considerable resource to internal projects to ensure they meet their requirements.
All of this has been happening despite the resource constraints firms face when already tackling a rewrite of the European Market Infrastructure Regulation, which went live in November, and the go-live of MiFID II in January 2018.
Pirum would advise firms to consider the regulation in depth, specifically the reporting requirements, and begin preparing for the implementation date.
The Pirum/IHS Markit SFTR Solution offers the securities finance industry the expertise and flexibility needed to meet the challenge set by SFTR reporting regulation, providing a modular, fully-hosted SFTR reporting solution that will combine IHS Markit’s pedigree in regulatory reporting and data management with Pirum’s more than 17 years of expertise in securities finance post trade reconciliation.
We would advise firms to consider the SFTR in depth, specifically the reporting requirements, and begin preparing for the implementation date.
The Pirum/IHS Markit SFTR Solution offers the securities finance industry the expertise and flexibility needed to meet the challenge set by SFTR reporting regulation. It is a modular, fully-hosted SFTR reporting solution that will combine IHS Markit’s pedigree in regulatory reporting and data management with Pirum’s more than 17 years of expertise in securities finance post trade reconciliation.
To find out more about our SFTR project please contact us directly at:
SFTR@pirum.com or SFTR@ihsmarkit.com
