SFTR Update

Background

Regulation

SFTR is an extension and continuation of the measures to strengthen the regulation of the so-called "Shadow banking", the European Parliament published Regulation 2365/2015 (Regulation (EU) on 23 December 2015 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) 648/2012- Securities Financing Transactions Regulation, hereinafter also the SFTR Regulation).

The Securities Financing Transaction Regulation(SFTR) was first published in December, 2015 and in December of 2018 the Regulatory Technology Standard(RTS) was endorsed by the European Commission. The RTS came in to force on 11 April 2019 with the initial target date for phase 1 set to 12 months after the RTS came into force. Due to the COVID-19 crisis phase 1 has been delayed to 11 July 2020.ESMA Public Statement on COVID-19

COMMISSION DELEGATED REGULATION (EU) 2019/ 356 - of 13 December 2018 - supplementing Regulation (EU) 2015/ 2365 of the European Parliament and of the Council with regard to regulatory technical standards specifying the details of securities financing transactions (SFTs) to be reported to trade repositories

SFTR requires dual-sided reporting all counterparties executing SFTs to report their transactions to an approved Trade Repository. SFTs include, repurchase transactions, securities or commodities lending and securities or commodities borrowing, buy-sell/sell-buy back transactions, and margin lending transactions.

What is significantly different with SFTR over previous regulations is the emphasis on data quality. The SFTR reporting specification covers over 150 fields and requires strict matching on a majority the fields reported. The data quality requirement has had a significant impact on how firms implement their SFTR reporting with most firms struggling to address how to ensure that their transactions match those of their counterparty.

Resources:
REGULATION (EU) 2015/2365 OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012

COMMISSION DELEGATED REGULATION (EU) 2019/356 of 13 December 2018

ESMA statement on implementation of the LEI requirements under the SFTR reporting regime

Final report Guidelines on reporting under Articles 4 and 12 SFTR

Final Report Technical standards under SFTR and certain amendments to EMIR

Timeline

SFTR will be implemented in phases:

• Phase 1 includes EU-based investment firms and credit institutions, which is essentially all sell-side banks and dealer and all buy-side fund managers and hedge funds. The original date for phase 1 was 11 April 2020 but with the impact COVID-19 on firms to prepare an implement the regulation, phase 1 implementation date was moved to 11 July 2020

• Phase 2, starting on 11 July 2020, includes Central Clearing Counterparties (CCPs) and Central Securities Depositories (CSDs) and non-EU investment firms and credit institutions

• Phase 3, starting on 11 October 2020, adds UCITS funds and AIF funds, insurance companies and pension firms to the reports, and lastly

• Phase 4 includes Non-Financial companies (NFCs) with reporting starting on 11 January 2021

In-Scope Entities

SFTR has broad implications for EU and non-EU firms

SFTR will apply to:

• EU firms and their branches (including branches in non-EU countries) transacting SFTs

• Non-EU firms transacting SFTs through their EU entities

• UCITS management companies and Alternative Investment Fund Managers are responsible for funds with exception that non-EU AIFs are not covered

• Financial counterparties(FC) must report on behalf of their non-financial counterparties(NFCs)

• Delegated reporting is allowed but firms delegating are not giving up their responsibility to report

In-Scope Transactions

SFTR will apply to:

• Repurchase Agreements

• Buy-Sellback and Sell-Buyback

• Securities and commodity borrowing and lending

• Margin Lending

Identifiers

SFTR mandates use of standard identifiers:

• All entities to an SFT and issuers of collateral must use a legal entity identifier (LEI)

• All transactions must use a universal transaction identifier(UTI)

Inter-TR Reconciliation

SFTR mandates use of standard identifiers:

• All entities to an SFT and issuers of collateral must use a legal entity identifier (LEI)

• All transactions must use a universal transaction identifier(UTI)

Delegated Reporting

Contractual Agreement will be critical

Similar to EMIR reporting SFTR also includes a delegated reporting clause:

• EMIR reporting and now SFTR reporting allows for a counterparty to delegate reporting to another firm offering delegated reporting services which may be the broker or bank acting as their counterparty

• A firm offering delegated reporting services will need to have a delegated reporting agreement in place to limits their liability and indemnifies the reporting firm

• Many of the tier 1 international banks will be offering delegated reporting for their clients to maintain the trading relationship • While firms can delegate reporting they cannot delegate responsibility

• Firms delegating reporting must perform adequate due diligence and maintain control of the process indicating the firms will still need to monitor and reconcile the reports submitted by the delegated reporting service

• Even if a firm uses a delegated reporting service, it’s unlikely the service could produce a re-use report with the data being generated and submitted by the firm itself

Resources:
Master Regulatory Reporting Agreement(docx) will open in a new tab or window
Master Regulatory Reporting Agreement - Explanatory Notes(pdf) will open in a new tab or window