Securities Financing Transaction Regulation (SFTR)

In June 2020, the UK announced it will not implement the reporting obligation of the EU’s SFTR for non-financial counterparties (NFCs), which is due to apply in the EU from January 2021. This is an example of the UK taking a different approach to the EU post-Brexit.

Explore our insights and what this might mean for your firm.

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.

Overview

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

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 Reporting Obligation

Details of any SFT entered into, as well as any modification or termination thereof, must be reported to a trade repository no later than the working day following the conclusion, modification or termination of the transaction.

What is caught by the reporting obligation?

The reporting obligation covers all SFTs that are:

• Concluded on or after the reporting start date 
• Were concluded before, and remain outstanding on the reporting start date and either: 
  • Have a remaining maturity exceeding 180 days after the reporting start date or 
  • Have an open maturity and remain outstanding for 180 days after the reporting start date

The Reporting Timeline

11 July 2020—CSDs and CCPs

13 July 2020—Credit institutions, investment firms and relevant third country firms are required to start reporting SFTs.

11 October 2020—Other financial counterparties

11 January 2021—Non-financial counterparties

Delegation of Reporting

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

Pershing Comment - Linda Gibson, Director of Regulatory Change – October 2020

The third phase of SFTR reporting went live on 12 October 2020. SFTR reporting obligations apply to investment funds, pensions funds and (re-)insurance undertakings that will join sell-side firms, CCPs and CSDs, who have already been providing reporting since July 2020.

In June 2020, the UK announced it will not implement the reporting obligation of the EU’s SFTR for non-financial counterparties (NFCs), which is due to apply in the EU from January 2021. This is an example of the UK taking a different approach to the EU post-Brexit and potential regulatory fragmentation. We continue to monitor further developments in this area.