Regulatory Reporting – SFTR

WHEN enters into force?

Reporting start date is determined from the date of publication of the Commission Delegated Regulation (EU) 2019/356 in the Official Journal – 22 March 2019;

WHO shall report?

SFTR applies to all counterparties of a security financing transaction, irrespective whether they are financial or non-financial.

WHAT shall be reported?

  • securities or commodities lending/borrowing;
  • buy-sell back transactions;
  • repurchase transaction;
  • margin lending transaction

HOW shall be reported?

  • either report directly to a Trade Repository (TR);
  • can delegate the reporting of the details of SFTs to another party under Article 4 of SFTR.

WHEN enters into force?

Reporting start date is determined from the date of publication of the Commission Delegated Regulation (EU) 2019/356 in the Official Journal – 22 March 2019;

The stepwise SFTR implementation is as follow:

  • 11 April 2020 go-live reporting obligation for credit institutions and investment firms
  • 11 July 2020 go-live reporting obligation for CCPs and CSDs
  • 11 October 2020 go-live reporting obligation for all financial counterparties
  • 11 January 2021 go-live reporting obligation for all non-financial counterparties

Reporting obligation applies with retroactive effect to:

  • any trades with a remaining maturity of 180 days following relevant reporting start date;
  • any open trades which are outstanding 180 days following relevant reporting start date. Such trades must be reported within 190 days of the relevant reporting start date.

WHO shall report?

The security financing transactions (SFTs) allow banks and non-bank market participants to access secured funding/lending on a short term, creating low-risk investment and financing opportunities. The nature of the SFTs is similar to the usual banking activity and sometimes the securities financing is referred to as “shadow banking”. Well-functioning SFT markets are crucial for moving cash and securities between market participants.

SFTR has a broad scope – it applies to the counterparties to the SFTs which are established in the EU (including all branches irrespective of where they are located) or in a third country, if the SFT is concluded in the course of the operations of a branch in the Union of that counterparty.

Similarly to the EMIR reporting requirement, the SFTR also applies to all counterparties of a security financing transaction, irrespective whether they are financial or non-financial.

More specifically, SFTR applies to:

  • Investment Firms
  • Credit Institutions
  • Insurance Undertakings
  • Undertakings for Collective Investment in Transferable Securities (UCITS) (reporter is the Fund Manager)
  • Alternative Investment Fund (reporter is the Fund Manager)
  • Occupational Retirement Institutions
  • Central Counterparties
  • Central Securities Depositories
  • Third-country Entity
  • Other Undertakings (generally non-financial counterparty)

The reporting obligation under SFTR will not affect the validity of a transaction or the enforceability of its terms or will not give raise of compensation rights. In case of non-compliance it is in the Member States prerogatives to introduce effective, proportionate and dissuasive administrative sanctions for infringement of reporting obligation:

  • withdrawal of authorization,
  • cease and desist orders,
  • public censure,
  • ban on management functions,
  • fines- for legal persons min € 5m fine up to 10 % of annual turnover.

The Member States can also apply criminal sanctions, but in that case, they must notify ESMA within 18 months of SFTR coming into force.

WHAT should be reported?

4 types of SFT defined in Article 3 of SFTR:

  • securities or commodities lending/borrowing;
  • buy-sell back transaction or sell-buy back transaction of securities, commodities, or guaranteed rights relating to title to securities or commodities;
  • repurchase transaction;
  • margin lending transaction

 

Data elements which should be reported:

  • Counterparties to SFTs must report the details of any SFT they have concluded, as well as any modification or termination, to a trade repository. The details must be reported no later than the working day following the conclusion, modification or termination of the transaction.
  • SFT reports should be completed in accordance with ESMA’s Reporting Technical Standards and Implementing Technical Standards.

The reportable fields are 155 in total, split between the following 4 tables of data:

Table 1: Counterparty data – relates to the identification of the parties –  who execute, report, benefit from, arrange, broker and clear the transaction;

Table 2: Loan and Collateral data –relates to the characteristics and terms of the SFT itself, including the trading and clearing venues, interest calculations, security and commodity information, pricing and rebate details, haircuts and collateral quality;

Table 3: Margin data –relates to initial and variation margin, and collateral posted and received against a portfolio of transactions;

Table 4: Re-use, Cash Reinvestment and Funding Sources data – relates to collateral re-use, cash collateral reinvestment and, for margin lending transactions, funding source information.

  • All tables of data are differentiated across the four transaction types of: Repurchase; Buy-Sell back; Securities Lending; and Margin Lending transactions.
  • Some data fields are mandatory for some transaction types, and not for others, depending upon the applicability of that data element to that type of transaction.

 

Transaction reports shall include at least:

  • parties (inc. beneficiaries)
  • currency
  • principal amount
  • assets used as collateral and their type, quality and value
  • method used to provide collateral
  • whether collateral is available for reuse
  • when collateral is distinguishable from other assets, whether it has been reused
  • any substitutions of collateral
  • repurchase date
  • lending fee or margin lending rate
  • any haircut
  • maturity date
  • value date
  • first callable date
  • market segment
  • cash collateral reinvestment and securities/ commodities being lent or borrowed (depending on SFT)

 

The applicable data standards are:

  • The same UTI (Unique Transaction Identifier) must be used by both counterparties to identify each unique transaction;
  • All Securities must be identified with an ISO 6166 ISIN code and an ISO 10692 CFI code;
  • For the identification of parties and legal entities, except where a specific exception applies, an ISO 17442 Legal Entity Identifier (LEI) must be used;
  • Currency and Country identifiers, as well as date and time values, should be conform to the specified ISO standards;
  • Many other fields must be reported using only one of the permitted values enumerated by ESMA.

ESMA’s reporting guidelines and the mandatory XML message formats are expected to be finalized in Q4 2019.

HOW should be reported?

Where a financial counterparty concludes an SFT with a non-financial counterparty which does not meet certain criteria, the financial counterparty is responsible for reporting on behalf of both counterparties. A counterparty which is subject to the reporting obligation can

  • either report directly to a Trade Repository (TR) – a special regulated entity, registered by the European Securities and Markets Authorities (ESMA). The main purpose of the TRs is to make the necessary information available to the national and European supervisory authorities and thus to enable them to fulfil their respective responsibilities and mandates;
  • can delegate the reporting of the details of SFTs to another party under Article 4 of SFTR.

Why choose delegated reporting?

Delegated reporting can offer firms a simplified way of complying with the SFTR regulation through working with one of their existing partners or counterparties. Due to the complexity in the requirements to report for SFTR including the number of fields, validations and the XML schema, many firms consider delegation as a more efficient model by which to fulfil their reporting obligation.

 

ReportX has developed a reporting platform to make the onboarding process of our clients as efficient as possible, by helping them to understand the field requirements and the additional requirements embedded in the XML.
Moreover, aiming to ensure the most accurate and complete reporting, ReportX is offering a unique detailed feed-back to our clients in case of validation failures for each report.

Glossary

trade repository is a legal person that centrally collects and maintains the records of SFTs;

counterparties are financial counterparties and non-financial counterparties;

financial counterparties (FC) are investment firm, credit institution, USITS, pension fund, insurance/reinsurance firm, central counterparty (CCP), central securities depository (CSD), third country entity that would be a FC if established in EU;

non-financial counterparty (NFC) any entity that is not a FC, third country entity that would be a NFC if established in EU;

securities financing transaction (SFT) is:

  • 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;

repurchase transaction – a repo or a reverse repo is a transaction concluded between two counterparties which involves a collateralized loan in one currency;

securities or commodities lending/borrowing – a transaction by which a counterparty transfers securities or commodities subject to a commitment that the borrower will return equivalent securities or commodities on a future date or when requested to do so by the transferor, that transaction being considered as securities or commodities lending for the counterparty transferring the securities or commodities and being considered as securities or commodities borrowing for the counterparty to which they are transferred;

buy-sell back transaction or sell-buy back transaction of securities, commodities, or guaranteed rights relating to title to securities or commoditiesbuy-sell back transaction or sell-buy back transaction – a transaction by which a counterparty buys or sells securities, commodities, or guaranteed rights[1], agreeing, respectively, to sell or to buy back securities, commodities or such guaranteed rights of the same description at a specified price on a future date. Those buy- sell back transactions or sell-buy back transactions should not be governed by a repurchase agreements or by a reverse- repurchase agreements within the meaning of point;

margin lending transaction is a transaction in which a counterparty extends credit in connection with the purchase, sale, carrying or trading of securities, but not including other loans that are secured by collateral in the form of securities (loans to retail clients, Lombard loans, and other forms of private banking);

commodities means any goods of a fungible nature that are capable of being delivered, including metals and their ores and alloys, agriculture products and energy such as electricity (defined in MiFID 2)

established means:

  1. if the counterparty is a natural person, where it has its head office;
  2. if the counterparty is a legal person, where it has its registered office;
  3. if the counterparty has, under its national law, no registered office, where it has its head office;

branch is a place of business other than the head office which is part of a counterparty and which has no legal personality;

security collateral arrangement means an arrangement under which a collateral provider provides financial collateral by way of security in favour of, or to, a collateral taker, and where the full ownership of the financial collateral remains with the collateral provider when the security right is established;

collateral arrangement means a title transfer collateral arrangement and security collateral arrangement.