Pursuant to Article 3(10) of the Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (SFTR) 'margin lending transaction' means 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.
"Similarly to repos, margin loans are a form of secured lending where the lender (i.e. buyer of the collateral) extends credit to a borrowing counterparty against collateral. A key difference is that margin loans are collateralised using an existing portfolio of assets (possibly including cash) held by the lender. Haircuts or margin requirements take place at portfolio level, rather than the individual security level.
[...] Typically, a financial institution will borrow money from the prime broker that conducts other transactions on its behalf (e.g. repos, derivatives, etc.). Some of the assets held by the prime brokerage firm (or collateral received from other transactions) are used as collateral to secure the margin loan.
[...] The exposure of a prime broker from margin lending is collateralised by the securities that the prime broker holds in custody for this purpose. The prime broker does not allocate the specific collateral from the collateral portfolio based on the amount of the exposure."
Discussion Paper Draft RTS and ITS under SFTR, 11 March 2016, ESMA/2016/356, p. 76
Also pursuant to Article 4(1)(35) and Article 272(3) of the Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms (CRR) margin lending transaction means transaction in which an institution 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.
Margin loans are part of the range of services that prime brokers offer to their clients (i.e. investment funds).
The loans are collateralised by a portfolio of securities, or securities held in a margin account, that prime brokers manage as part of the other services they provide, including trading in repo, derivative and cash markets (Report on securities financing transactions and leverage in the EU Report prepared under the mandate in Article 29(3) SFTR, 4 October 2016, ESMA/2016/1415, p. 12).
The amount of margin lending required is calculated on a daily basis using factors such as net exposure and counterparty risk profile.
Margin lending transaction are subject to reporting requirements as laid down in Article 4(1) of the SFTR and in the secondary legislation.
For the reporting purposes, with respect to counterparties' roles ESMA proposes to use the terms "collateral giver" and "collateral taker".
In the case of margin lending, the counterparty to which credit is extended in exchange for collateral shall be identified as the collateral giver.
The counterparty that provides the credit in exchange for collateral shall be identified as the collateral taker (Consultation Paper Draft RTS and ITS under SFTR and amendments to related EMIR RTS, 30 September 2016, ESMA/2016/1409, p. 44, 45).
In the Consultation paper of 23 May 2019 (Guidelines for reporting under Articles 4 and 12 SFTR, ESMA70-151-1985, p. 12) the ESMA, has moreover, explained that with regards to reporting margin lending transactions, the purpose of the SFTR is to capture transactions that serve the same purpose as repurchase transactions, buy-sell back transactions or securities lending transactions.
According to the ESMA, while margin lending therefore includes transactions subject to margin agreements between financial institutions and their clients where financial institutions provide prime brokerage services to their clients, it does not include other loans such as loans for corporate restructuring purposes which, despite the possibility of involving securities, do not contribute to the systemic risks addressed by SFTR.
There are no EU data available on margin lending.
Although they may have similar economic effects, margin loans are very different from other types of SFTs.
In particular, given that margin loans do not require the pledge, loan or sale of additional collateral, issues relating to the reuse of collateral are important with regards to potential procyclical effects.
The amount of margin financing made available to clients is calculated on a daily basis, alongside the clients' margin requirements.
Margin calculations are based on various factors including for example net exposures and counterparty credit risk profile.
Although there are no data on the volumes of margin lending taking place, feedback from market participants suggest that margin lending is a non-negligible part of their revenues.
Report on securities financing transactions and leverage in the EU Report prepared under the mandate in Article 29(3) SFTR, 4 October 2016, ESMA/2016/1415, p. 48
Regulation (EU) 2015/2365 of the European Parliament and of the Council of 25 November 2015 on transparency of securities financing transactions and of reuse and amending Regulation (EU) No 648/2012 (SFTR)
Regulation (EU) No 575/2013 of the European Parliament and of the Council of 26 June 2013 on prudential requirements for credit institutions and investment firms and amending Regulation (EU) No 648/2012 (CRR), Article 4(1)(35) and Article 272(3)