What is Securities Financing Transactions Regulation (SFTR)?

Securities Financing Transactions Regulation (SFTR) is a European regulation which was published in the EU official Journal on the 23^rd December 2018 and is focused on regulating securities lending and repo. Securities lending, often referred to as “stock lending” normally occurs when the borrower provides the lender with capital such as stocks, equities and bonds.

The objective of this legislation is to reduce risk in securities lending and provide transparency into collateral re-use by requiring:

1. securities financing transactions (SFTs), except those concluded with central banks, will need to be reported on central databases known as trade repositories (TRs),
2. information on the use of SFTs by investment funds to be disclosed to investors in the TRs and pre-investment documents issued by the funds,
3. transparency when collateral is reused, such as disclosure of the risks and the obligation to acquire prior consent.

SFTR is following the Financial Stability Board’s (FSB) recommendations to be in line with EMIR and MiFID II. These trade reporting requirements have been published in detail in a regulatory technical standards document.

Who has to comply with SFTR?

SFTR applies to firms in Europe but global firms will be effected as trade reporting has to include all counterparties. Any firms that offer repos, securities lending, and margin lending will need to comply with this regulation.

Key Dates

Some key dates to remember are.

• 26^th March 2020 – Covid 19 Update
• 13 December 2018 – European Commission endorses the RTS
• 22 March 2019 – Technical standards are published in the Official journal
• 11 April 2019 – Technical standards enter into force
• 12 months after the date of entry into force – reporting obligation for Credit Institution, Investment Firms, and relevant third-country entities
• 15 months after the date of entry into force – Reporting obligation for CCPs and CSDs, and relevant third-country entities
• 18 months after the date of entry into force – Insurance companies, Funds, IORP and relevant third-country entities
• 21 months after the date of entry into force – Reporting obligation for non-financial counterparties

Key Challenges

One of the main challenges for Securities Financing Transactions Regulation is in the reporting of re-use of collateral because in many cases, SFTs will have complex collateral chains where a default on one transaction could lead to a domino effect with other counterparties defaulting if the same collateral is used.

The proposal does outline requirements to SFT agreements to state what is known as “ rehypothecation rights” if rehypothecation of collateral is to take place.

With regards to Brexit, during the transition period, the ESMA and FCA have made clear that the regulation will be enforced for UK firms.

As I write this, there are also concerns around Covid-19, with many firms unable to get ready for the regulation amidst an international crisis. The FCA state:

“We support ESMA’s statement to allow firms to focus their resources on critical functions during this period, we will not prioritise supervision of these reporting requirements until at least 13 July 2020. We will not require firms to back report any securities financing transactions that are concluded between 13 April 2020 and 13 July 2020. In addition, we will not prioritise supervision relating to the reporting of SFTs for firms to which the backloading requirement specified in Article 4(1)(a) applies. Firms in scope of the first 2 application phase-in dates should continue to plan to meet their requirement to report securities financing transactions under SFTR and MiFIR from 13 July 2020. We will continue to keep this situation under review.”

SFTR and Legal Entity Identifiers (LEIs)

In order to understand each party involved in a transaction and report on it to the TRs, the Securities Financing Transactions regulation states that counterparties should use Legal Entity Identifier codes. To comply with SFTR reporting requirements, the LEI should be correctly indicated in the transaction reports irrespective of the location of the counterparties, the issuers of securities or the rest of the participants in the SFT, regardless of the LEI regulations in the countries of said participants.

The ESMA state:

“To ensure compliance with the SFTR reporting requirements, the LEI shall be correctly indicated in the transaction reports irrespective of the location of the counterparties, the issuers of securities or the rest of participants to an SFT and regardless of whether any of these entities are subject to LEI requirements in their own jurisdictions.”

The ESMA have also recognised that while 80% of relevant companies are covered for a LEI Number in the EU, only 30% of respective firms are covered abroad. This means there will also be a challenge for firms lending to non-EU counterparties.

They have allowed 12 months from the enforcement date of SFTR for which firms with reports without LEIs of third-country issuers will still be accepted.

To learn more about LEIs, read the full guide here.

If your firm needs a Legal Entity Identifier or you would like to manage multiple LEIs for clients, contact us today and receive multi-year discounts!