Securities Financing Transaction Regulation (SFTR)

Background

The European Union (EU) Securities Financing Transaction Regulation (SFTR) is intended to enhance the transparency of the securities financing markets by requiring those who enter into securities financing transactions (SFTs) to report the SFT to a trade repository.

The SFTR is the product of work carried out by the Financial Stability Board (FSB) and the European Systemic Risk Board (ESRB) to curb shadow banking. They identified SFTs as the creators of bank-like risks during and after the financial crisis period, which without transparency, prevented regulators and supervisors assessing such risks.

What is an SFT?

A securities financing transaction or SFT means:

• A repurchase transaction;
• Securities or commodities lending and securities or commodities borrowing;
• A buy-sell back transaction or sell-buy back transaction;
• A margin lending transaction.

What entities are in scope?

The SFTR applies to:

• A counterparty to an SFT that is established:
  • in the EU, including all its branches irrespective of where they are located;
  • in a third country, if the SFT is concluded in the course of the operations of a branch in the EU of that counterparty;
• Management companies of undertakings for the collective investment in transferable securities (UCITS) and UCITS investment companies (in accordance with Directive 2009/65EC);
• Managers of alternative investment funds (AIFMs) authorised (in accordance with Directive 2011/61/EU);
• A counterparty engaging in reuse that is established:
  • in the EU, including all its branches irrespective of where they are located;
  • in a third country, where either:
    • the reuse is effected in the course of the operations of a branch in the EU of that counterparty or
    • the reuse concerns financial instruments provided under a collateral arrangement by a counterparty established in the EU or a branch in the EU of a counterparty established in a third country

The STFR reporting obligation

The obligation to report has been staggered depending on the categorisation of the counterparty (see Article 33 of SFTR). The reporting obligation will apply to credit institutions and investment firms 12 months after the date of entry into force of the delegated act adopted by the Commission pursuant to Article 4(9). The delegated act has now been adopted by the Commission and therefore the reporting obligation will commence in Q2 2020.

Delegation of Reporting

The SFTR does allow a counterparty, subject to the reporting obligation, to delegate such obligation to a third party.