Securities Financing Transactions Regulation

‘Regulation (EU) 2015/2365 on transparency of securities financing transactions and of reuse’, known as the Securities Financing Transactions Regulation or SFTR is the European Union’s (EU) regulatory response to the Financial Stability Board’s (FSB) August 2013 policy framework for addressing the risks in securities lending and repos. SFTR aims to extend on the regulatory initiatives that have been introduced since the global financial crisis by closing a number of regulatory gaps in the shadow banking system. In particular, SFTR aims to introduce transparency into the market for securities financing transactions (SFTs) with the introduction of a transaction reporting regime. SFTR entered into force in January 2016.

The Securities Financing Transactions Regulation can be found here:

https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32015R2365&from=EN

The scope of application of the Article 4 transaction reporting obligation is similar to that of EMIR and MiFID2/R. Where a counterparty to an SFT is established either in the EU, including all its 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 EU of that counterparty, the transaction reporting obligation will apply.

Much of SFTR is about rule-making to establish a framework for the registration and supervision of trade repositories such that they can receive SFTR transaction reports, in the same way that EMIR does for derivative trade reporting. These particular rules are therefore generally not that relevant to counterparties that simply enter into SFTs.

Aside from trade repository rule-making, the record keeping requirements have been live since January 2016 whilst UCITS management companies and AIFMs have had to comply with the Article 13 and 14 transparency requirements (live since January 2017 and July 2017, respectively). Counterparties that reuse collateral have had to comply with the Article 15 reuse requirements (live since July 2016) but other than that, SFTR is principally all about transparency and thus the transaction reporting obligation.

SFTR reporting shares little in common with MiFID2/R reporting, the latter being concerned with monitoring for market abuse whilst ensuring that markets function in a fair and orderly manner. Other than SFTs entered into with members of the European System of Central Banks (ESCB), SFTs are out of scope of all MiFID2/R reporting.

Apart from the obvious that SFTR reporting covers SFTs whilst EMIR reporting covers derivatives, as a regulation, SFTR is very similar to EMIR in as much that both reporting regimes are used to monitor systemic risk in the financial system. Indeed, even though derivatives are fundamentally different products to SFTs, the SFTR reporting technical standards are largely based on those for EMIR and the experiences learnt thereafter and so SFTR reporting is in fact very similar to EMIR reporting.

SFTR applies to the following types of SFTs:

(a) a repurchase transaction
(b) securities or commodities lending and securities or commodities borrowing
(c) a buy-sell back transaction or sell-buy back transaction
(d) a margin lending transaction

In addition to reporting the conclusion of any new SFT, counterparties will also need to report details of any modification or termination thereof, including life-cycle events where relevant.

The transaction reporting obligation requires counterparties to SFTs to report the details of any SFT they have concluded, as well as any modification or termination thereof, to a registered trade repository no later than the following working day i.e. T+1. Where details of the collateral are not known by the reporting deadline, counterparties must report collateral no later than the working day following the value date of the collateral i.e. S+1, but will still need to report loan data on T+1.

ESMA have published regulatory and implementing technical standards clarifying how counterparties need to report SFTs, detailing a total of 155 fields spread across three different reports, covering:

(1) Counterparty data – covers the identification of all parties involved in the transaction
(2) Loan and collateral data – details the specific characteristics of the SFT itself
(3) Margin data – captures collateral (initial and variation margin) posted against centrally cleared SFTs
(4) Re-use, cash reinvestment and funding sources data – identifies the re-use of collateral, the reinvestment of cash and margin lending funding sources

The requirements for reporting SFTs are onerous and generally more complex than either of those under EMIR or MiFID2/R transaction reporting and will likely present significant challenges to in-scope counterparties.

The Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS) can be found here:

https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R0356&from=EN
https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32019R0363&from=EN

The compliance dates for SFTR reporting are phased-in, depending on counterparty classification. The reporting obligation applies from:

(1) 11-Apr-20 for financial counterparties that are investment firms and credit institutions
(2)11-Jul-20 for financial counterparties that are central counterparties and central securities depositories
(3) 11-Oct-20 for financial counterparties that are insurance/reinsurance undertakings, UCITS, AIFs and institutions for occupational retirement provision
(4) 11-Jan-21 for non-financial counterparties

Note that on 26 March 2020, ESMA issued a Public Statement aimed at mitigating the impact of COVID-19 on the EU financial markets by delaying the reporting obligations related to SFTs under SFTR and MiFIR by 3 months, whilst the backloading obligation is understood to have been removed.

“ESMA therefore expects competent authorities not to prioritise their supervisory actions towards counterparties, entities responsible for reporting and investment firms in     respect of their reporting obligations pursuant to SFTR or MIFIR, regarding SFTs concluded between 13 April 2020 and 13 July 2020, and SFTs subject to backloading under SFTR”

Note that whilst the SFTR definitions of financial counterparty and non-financial counterparty are largely similar to those under EMIR, they are not the same. Additionally, the revisions to EMIR counterparty definitions under EMIR REFIT are not understood to extend to SFTR.

The Article 4 reporting obligation also applies to certain legacy SFTs and is known as backloading. Backloading applies to SFTs that were concluded before a counterparty’s reporting go-live date and remain outstanding on that date, if:

(1) the remaining maturity of those SFTs on that date exceeds 180 days; or
(2) those SFTs have an open maturity and remain outstanding 180 days after that date

SFTs in scope of backloading need to be reported within 190 days of a counterparty’s reporting go-live date and so the latest date for a counterparty to complete backloading is:

(1) 18-Oct-20 for financial counterparties that are investment firms and credit institutions
(2) 17-Jan-21 for financial counterparties that are central counterparties and central securities depositories
(3) 19-Apr-21 for financial counterparties that are insurance/reinsurance undertakings, UCITS, AIFs and institutions for occupational retirement provision
(4) 20-Jul-21 for non-financial counterparties

Note that on 26 March 2020, ESMA issued a Public Statement aimed at mitigating the impact of COVID-19 on the EU financial markets by delaying the reporting obligations related to SFTs under SFTR and MiFIR by 3 months, whilst the backloading obligation is understood to have been removed.

“ESMA therefore expects competent authorities not to prioritise their supervisory actions towards counterparties, entities responsible for reporting and investment firms in respect of their reporting obligations pursuant to SFTR or MIFIR, regarding SFTs concluded between 13 April 2020 and 13 July 2020, and SFTs subject to backloading under SFTR”

Note that whilst the SFTR definitions of financial counterparty and non-financial counterparty are largely similar to those under EMIR, they are not the same. Additionally, the revisions to EMIR counterparty definitions under EMIR REFIT are not understood to extend to SFTR.

A LEI is a global identifier for legal entities participating in financial transactions and is used in reporting to financial regulators. The identifier is formatted as a 20-character, alpha-numeric code based on the ISO 17442 standard and provides key reference information that enables clear and unique identification of legal entities. There are a number of LEI issuers around the world that issue and maintain the identifiers and act as primary interfaces to the global directory, typically financial exchanges or financial data vendors. These are accredited by the Global Legal Entity Identifier Foundation (GLEIF) to issue LEIs.

Yes.

Where a counterparty to a SFT is in scope of the SFTR reporting obligation, all legal entities that are involved in the chain of that transaction will need to be identified in the transaction report with a valid LEI, including the other counterparty and regardless of that counterparty’s jurisdiction. Without a valid LEI from the other counterparty, the reporting counterparty will not be able to report the transaction as it will fail validation checks at the trade repository and so the reporting counterparty will be in breach of its own regulatory obligations.

Therefore, in order for counterparties to trade SFTs with Standard Chartered, Standard Chartered will require all legal entities that are eligible for a LEI to have a valid LEI at the point of trade i.e. ‘no LEI, no trade’ will apply.

Additionally, counterparties must have agreed with Standard Chartered’s ‘Consent to Report’ requirements, which allows Standard Chartered to remain compliant with certain jurisdictional blocking statutes and regulations i.e. ‘no consent, no trade’ will apply as well.

RILFO74KP1CM8P6PCT96 is the LEI for Standard Chartered UK and its branches.

549300WDT1HWUMTUW770 is the LEI for Standard Chartered AG.

A UTI is a unique trade identifier assigned to the transaction in order for counterparties and regulators to identify the SFT throughout its life. Both counterparties must therefore agree on and report with the same UTI, requiring either one counterparty to generate and share the UTI with the other counterparty, or a third party to generate and share the UTI with both counterparties.

Counterparties have the choice of bilaterally agreeing on the entity responsible for generating and sharing the UTI. When counterparties don’t agree bilaterally, Article 3(2) of the Implementing Technical Standards (ITS) – link provided above – provides a default waterfall approach to determine the entity responsible for generating the UTI, which must then be shared with the other counterparty(s) in a timely manner.

For all trades that are centrally cleared, centrally executed or centrally confirmed, Standard Chartered’s preferred approach is to follow the default waterfall approach detailed in Article 3(2)(a)-(d) of the ITS and allow the relevant CCPs, trading venues and confirmation platforms to generate and share the UTI.

For all trades that are not centrally cleared, centrally executed or centrally confirmed, Standard Chartered’s preferred approach is to agree bilaterally with counterparties that Standard Chartered is always the UTI generating counterparty regardless of trade type/direction and to share UTIs via IHSMarkit/PIRUM.

If any counterparty wishes to receive UTIs via Equilend/TRAX, Standard Chartered can also support this option.

If a counterparty wishes to follow the default waterfall approach detailed in Article 3(2)(e) of the ITS, Standard Chartered can support this approach and determine the UTI generating counterparty on a trade-by-trade basis.

If a counterparty is not directly onboarded to IHSMarkit/PIRUM for their SFTR solution, they offer 2 options to retrieve UTIs from Standard Chartered – sFTP or UTI Portal. sFTP will need to be set up bilaterally whilst UTI Portal can be accessed by users manually.

If a counterparty is not directly onboarded to Equilend/TRAX for their SFTR solution but wishes to use this vendor to retrieve UTIs, Equilend/TRAX offers a UTI Portal where users can access this manually.

Standard Chartered’s preferred vendor is IHSMarkit/PIRUM.

SFTR introduces the concept of a ‘small non-financial counterparty’ or ‘Small NFC’ (also referred to as a ‘SME NFC’ in the CP Guidelines) which on its balance sheet date does not exceed the limits of at least two of the three following criteria:

(1) balance sheet total: EUR 20 000 000;
(2) net turnover: EUR 40 000 000;
(3) average number of employees during the financial year: 250

Where a financial counterparty faces a counterparty meeting the definition of a Small NFC, the financial counterparty shall be responsible for reporting on behalf of both counterparties.

No.

Whilst the concept of the Small NFC regime introduced under SFTR is in-line with the recent EMIR REFIT changes to the EMIR trade reporting obligation such that non-financial counterparties below the clearing threshold (NFC-) will no longer have to report derivatives, the counterparty definitions are different – a Small NFC is not the same as a NFC-.

No.

Whilst the overarching objective of both the Small NFC regime under SFTR as well as the ‘small financial counterparty’ or ‘Small FC’ regime under EMIR REFIT is to remove disproportionate regulatory burdens on small counterparties, the Small FC regime makes changes to the EMIR mandatory clearing obligation and so has nothing to do with Small NFCs under SFTR.