Regulation on transparency of securities financing transactions and of reuse (SFTR)
- Category: Financial
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) is a part of a globally coordinated effort to reduce financial stability risks arising from shadow banking activities and bring transparency to securities financing transactions (SFTs) markets.
23 September 2022
Question 13 Construction of Trade State Report
ESMA Questions and Answers on SFTR data (ESMA74-362-893) updated, amended Question 12 Currency for the Overview and Margin reports
Currency for the Overview and Margin reports (Guidelines on calculation of positions in SFTs by trade repositories)
The two main components of SFTR are:
- a transaction reporting requirement, and
- transparency obligation towards investors on the reuse of collateral.
SFTR reporting and data collection
The new rules on transparency provide for the reporting of details regarding SFTs concluded by all market participants, whether they are financial or non-financial entities, including the composition of the collateral, whether the collateral is available for reuse or has been reused, the substitution of collateral at the end of the day and the haircuts applied.
Interlinkages with EMIR reporting
Compliance with the SFTR reporting obligation is intended to require only limited updates to the systems already developed under EMIR.
The EU financial regulator also clearly indicated the intention to minimise additional operational costs for market participants by building on pre-existing infrastructures, and operational processes and formats which had been introduced with regard to reporting derivative contracts to trade repositories (see the speech of Steven Maijoor, the ESMA's Chair, at ISLA's 25th Annual Securities Finance and Collateral Management Conference on 22 June 2016 (ESMA/2016/989)).
The said ESMA's document of 22 June 2016 contains also interesting remarks on the interdependencies between reporting regimes under MIFID II/MiFIR, EMIR and SFTR and the respective timelines.
Although MIFID II and MIFIR have different objectives compared with SFTR and EMIR, the effort was put to the extent feasible on ensuring the standardisation of rules and requirements under these three reporting regimes.
This doesn't mean that all the data fields reported under SFTR, EMIR and MiFID would be exactly the same, which would put into question why three reporting regimes were envisaged in the first place.
But where the same type of information is required, it should be as standardised as possible.
ESMA expects that this would allow the relevant stakeholders to reuse components across the three pieces of legislation and to leverage on existing processes and systems.
Nevertheless, reporting parties expect to face significant one-off costs in order to comply with the new reporting requirements.
Major changes to IT and data storage systems are envisioned (Final Report, Technical standards under SFTR and certain amendments to EMIR, 31 March 2017, ESMA70-708036281-82R).
The key reasons for that are:
- The reporting fields required by the SFTR are currently spread across multiple different systems. As such additional inter-operability and connectivity will be required to match and encode (through linking algorithms) the necessary data to the relevant fields. In some cases, e.g. agency lending, only one party may have access to the full data set, at least at the scheduled reporting date.
- A mapping exercise would generally be necessary to identify how to complete data fields. The difficulty of this would vary by participant and also SFT activity (with repo seen as a better ‘fit’ than other SFTs).
It is considered that even those stakeholders with relatively more data would struggle to fill all of the required data fields.
Hence, for the majority of parties, there would likely be a need to construct complex algorithms to pull data from different systems and/or build additional interfaces, in order to bring all required data into one place (which may also involve accessing data from outside the firm). The process of extracting, cleaning and standardising data could also be costly and, as with most IT projects, the process would involve the costs of substantial testing.
An example of practical difficulties can also be tracking collateral using ISINs, especially when there are a high number of ISINs.
If there are a thousand ISINs within a collateral pool and that needs to be matched, the system may not be able to handle this much data in one field.
As regards EMIR, ESMA has explained in the Consultation paper of 23 May 2019 (Guidelines for reporting under Articles 4 and 12 SFTR, ESMA70-151-1985, p. 11) that the definition of SFTs in the SFTR does not include derivative contracts as defined in EMIR.
According to the ESMA, SFTR, however, “includes transactions that are commonly referred to as liquidity swaps and collateral swaps, provided that such arrangements do not fall under the definition of derivative contracts in EMIR”.
The process of completion of the secondary legislation on the SFTR reporting has been finalised on 22 March 2019, when the regulatory technical standards (RTS) and implementing technical standards (ITS) on SFTs reporting have been published in the EU Official Journal L 81.
- Commission Delegated Regulation (EU) 2019/356 of 13 December 2018 supplementing Regulation (EU) 2015/2365 of the European Parliament and of the Council with regard to regulatory technical standards specifying the details of securities financing transactions (SFTs) to be reported to trade repositories (RTS on SFTs reporting),
- Commission Implementing Regulation (EU) 2019/363 of 13 December 2018 laying down implementing technical standards with regard to the format and frequency of reports on the details of securities financing transactions (SFTs) to trade repositories in accordance with Regulation (EU) 2015/2365 of the European Parliament and of the Council and amending Commission Implementing Regulation (EU) No 1247/2012 with regard to the use of reporting codes in the reporting of derivative contracts (ITS on SFTs reporting).
The start dates for the implementation of the SFTR reporting are as follows:
- 11 April 2020 – Credit Institutions and Investment Firms,
- 11 July 2020 – Central Counterparties (CCPs) and Central Securities Depositories (CSDs),
- 11 October 2020 – Pension Funds and UCITS,
- 11 January 2021 – Non-Financial Counterparties.
SFTR reporting format
Pursuant to Article 1(1) of the ITS on SFTs reporting, counterparties should submit their SFT reports in a common electronic and machine-readable form and in a common XML template in accordance with the ISO 20022 methodology.
To facilitate this, ESMA is to include in the regulatory guidelines the relevant XSD component applicable to the different use cases (remark in the aforementioned Consultation paper of 23 May 2019, p. 11).
Scope of the SFTR reporting
The ESMA expressed its view (Final report, Guidelines on reporting under Articles 4 and 12 SFTR, 06 January 2020, ESMA70-151-2703, p. 11) that certain market transactions should not fall under the definition of an SFT due to their nature.
This remark covers, in particular:
a. retail client lending (except when it is against an irrevocable trust);
b. private banking and lombard loans; c. syndicated lending and other corporate lendings for commercial purposes;
d. overdraft facilities of custodians and CCP daylight lending facilities;
e. intraday credit/overdraft fails-curing;
f. T2S auto-collateralisation;
g. intermediate give-ups and take-ups;
h. transactions involving emission allowances.
The reasons for such exclusion, according to the ESMA, are:
- the focus of the Financial Stability Board on prime brokerage margin lending,
- the definitions of SFTs in Article 3(11),
- the definition of margin lending transaction in Article 3(10) SFTR, as well as
- the objectives of SFTR stated in Recital 7 of the SFTR.
ESMA believes that the said transactions should not fall under the definition of SFT and more generally to shadow banking activities, as their reporting would not contribute to the objectives of the SFTR.
Furthermore, according to the ESMA, pledge is one of the collateral arrangements foreseen in the Financial Collateral Directive, hence SFTs should be reported where pledge is used.
In the said Report ESMA also expressed the view that "commodities transactions entered into for operational and/or industrial purposes which are clearly not for financing purposes, i.e. are concluded for commercial purposes, do not contribute to the systemic risk addressed by SFTR. Therefore, these market transactions should not fall under the definition of an SFT and therefore should not be reported under SFTR".
Market transactions that do not fall under the definition of an SFT:
ESMA in its Guidelines (ESMA70-151-2838) made the preliminary remark as regards the SFTs reporting, that the counterparties are required in the first place to identify which type of SFT they have concluded - this is on account of the fact that not all the fields are applicable to all SFTs.
Entities subject to SFTR reporting
Article 4(1) of the SFTR as well as Article 1(1) ITS on SFTs reporting in the context of reporting obligation refers to “counterparties”.
ESMA In its Guidelines (ESMA70-151-2838) explained that counterparty of an SFT is “a party to an SFT that acts on a principal basis, by transacting on its own account”.
According to the ESMA, “an entity that facilitates, arranges or otherwise participates, but not on a principal basis nor on its own account, in the conclusion of an SFT, either on the loan or on the collateral side, and acts on behalf of a client, should not be defined as a counterparty but as either broker, agent lender, tri-party agent or CSD participant, as applicable”.
ESMA also observed that the entity might have several roles in an SFT.
It is also stressed by the EU regulator that an SFT is reportable when there are two counterparties to it, or where one of the parties to the SFT is an individual that is not an undertaking and the other is a counterparty as defined in SFTR.
There is no SFT with more than a pair of counterparties.
In the case of an allocation of loans between two or more collateral takers and two or more collateral providers, an SFT is defined as each collateralized loan of securities, cash or commodities, between two counterparties.
Reporting of SFTs involving energy
As regards SFTs involving energy ESMA in the Final report of 6 January 2020, Guidelines on reporting under Articles 4 and 12 SFTR (ESMA70-151-270, p. 25) observes that there is a potential overlap between SFTR and REMIT.
REMIT covers the reporting of transactions involving energy where the energy is delivered in the EU.
The scope of SFTR does not limit the place where the commodity lent or borrowed or provided as collateral is delivered, but the reporting templates neither include information on it.
According to the ESMA, it is conceivable that a transaction is a REMIT reportable transaction with T+30 reporting timeframe, but also could be an SFT reportable by T+1.
Moreover, based on input from market stakeholders (which argued for the carve-out for transactions subject to REMIT from reporting requirements under SFTR) ESMA in the above Report of 6 January 2020 made the following comments with respect to SFTs involving energy:
- ESMA does not agree that there is an exclusion of commodities from repo and buy-sell back definitions,
- ESMA recognises that overlap between REMIT and SFTR is unavoidable because of the requirements in Level I,
- ESMA understands from the feedback that the data reported in the reporting timeframe of SFTR (T+1) may seem imperfect as compared to the T+30 REMIT reporting timeframe,
- if a transaction within REMIT were also within the scope of SFTR it is likely that such transaction would be reported pursuant to a REMIT “Non-Standard Contract” template and reportable on a T+30 days basis; while the reporting of SFTs is generally on a T+1 basis,
- the reporting timeframe of SFTR is specified in Article 4(1) of SFTR and ESMA cannot modify this,
- however, it is worth reminding counterparties that they would be able to correct data.
Guidelines on reporting under Articles 4 and 12 SFTR, ESMA70-151-282, 6 January 2020, p. 12, 13, 16
Aspects related to SFTs involving commodities
The execution of the SFT should be structured in such a way that the beneficial owner neither loses its economic ownership of the commodities, nor takes on new market risk in the commodity.
Repo/reverse repo transactions involving commodities are characterised by the presence of a (repurchase) agreement. The commodities can be transferred by way of outright title transfer or pledge.
However, when adhering to the scope of SFTs involving commodities, when the sale and repurchase does not qualify as a repo, it shoud be a BSB instead.
In a commodities lending and borrowing (SLB) transaction, the collateral taker is the party that lends the commodities and the collateral giver borrows the commodities. Unlike repo/reverse repo and BSB/SBB where the commodity is deemed to be the collateral in the transaction.
When reporting SFTs involving commodities, further to the relevant master agreements, the counterparties should assess the extent to which the type of SFT involving commodities that they are reporting could fit into the fields applicable to that SFT. This should help determine whether the transaction needs to be reported as a commodities lending or borrowing transaction, or as a repo/SBB or reverse repo/BSB collateralized with commodities.
Furthermore, all SFTs as defined in Articles 3(7) to 3(10) SFTR, except margin lending, include a reference to the possible use of commodities as part of the SFT. BSB/SBB limits the use of commodities to purchases and subsequent sales between the two counterparties (without market intermediary), whereas the commodities lending and borrowing transactions and repos allow for both title transfer and pledge arrangements. Therefore, the counterparties should populate the type of collateral arrangement in Field 2.20 Method used to provide collateral, as appropriate.
SFTs involving commodities may sometimes be part of more complex structures that may include derivatives, such as futures and options. Only the parts of the overall structure that is the SFT should be reported. Derivatives used in such structures may be reportable under EMIR and/or MIFID and/or REMIT.
Regarding the meaning of equivalent commodities and substituted commodities, ESMA clarifies the following:
a. equivalent commodities are the same type of commodities with similar characteristics and/or specifications that can replace the original commodities in the return leg as contractually agreed upon.
b. substituted commodities are commodities that are pledged as collateral as substitution for the commodities that were originally pledged as collateral under the same transaction.
SFTs involving energy
A transaction (e.g. buy – sell-back of gas across zones with (alternative) financing objectives) can be a a REMIT reportable transaction with T+30 reporting timeframe and, at the same time, an SFT reportable by T+1.
Therefore, where these types of transactions are sufficiently clear for unambiguous classification as SFTs used to finance commodities they are reportable as per the relevant reporting template.
Allocation of responsibility under Article 4(3) SFTR
NFC should communicate with FC whether they qualify as small NFC or not, as well as update the FC on any potential changes in their status.
Third Country - Financial Counterparties (TC-FC)
Once the equivalence of a given TC is declared by the EC, in the case of SFT concluded between a TC-FC, with a branch in the Union, and a SME-NFC, where the TC-FC and the SME-NFC have fulfilled the reporting obligations of that third country, neither the TC-FC nor the SME-NFC should report the SFT under SFTR.
Regarding SFTs concluded between an TC-FC outside the scope of application of SFTR (i.e. not covered by Article 2(1)(a)(ii) of SFTR) and an SME NFC, such SFTs should either be reported directly by the SME NFC to a TR, or otherwise make use of the possibility for delegation included in Article 4(2).
Voluntary delegation of reporting
In cases of delegation of reporting the delegating counterparty (caught by the reporting obligation) should provide the report submitting entity with all the details of the SFT in a timely manner, and the counterparty is responsible for ensuring that those details are correct. At the same time, the report submitting entity should ensure that the reporting counterparties are informed about the data reported on their behalf, the relevant TR data processing results and relevant reporting or data quality issues if any arise.
Final report, Guidelines on reporting under Articles 4 and 12 SFTR, ESMA70-151-270, 6 January 2020, p. 12,17, 18
Furthermore, ESMA studied some of the transactions which respondents proposed were out of scope and does not agree with all the feedback. Specifically, ESMA did not agree with feedback relating to the following transactions, and has explained below that these transactions must be reported under SFTR:
a. On request borrows, that are SLB transactions that are part of prime brokerage margin lending agreements but are executed separately. They are in scope and should be reported as SLB.
b. Lombard loans to undertakings, as described in the Guidelines, are in scope and should be reported as margin lending transactions.
c. Forward sales in commodities that are transactions between two counterparties in which commodities are i) purchased by the buyer from the seller on the spot leg and ii) sold to the seller by the buyer on a specified date against a specified price on the forward leg. These are in scope and should be reported as the type of SFT that is being concluded.
d. Retail SFTs (i.e. those involving counterparties which are not undertakings) which are not governed under the consumer or mortgage directives, are in scope and should be reported as the relevant type of SFT.
e. Intraday renewable uncollateralised SLB which are in scope and should be reported as SLB. The specific aspects of reporting of (i) valuation for intraday SFTs and (ii) of uncollateralised SLB are discussed in Section 4.2.5 of the Guidelines.
f. Finally, warrants, if considered as guaranteed rights relating to title to securities, are in the scope of SFTR not as transactions to be reported, but as collateral or a loan of an SFT.
Commodities transactions entered into for operational and/or industrial purposes
Commodities transactions entered into for operational and/or industrial purposes which are clearly not for financing purposes, i.e. are concluded for commercial purposes, do not contribute to the systemic risk addressed by SFTR. Therefore, these market transactions should not fall under the definition of an SFT and therefore should not be reported under SFTR.
Transactions involving emission allowances
It is worth mentioning that emission allowances are not considered a commodity, but a financial instrument under MIFID II. Moreover, none of the SFTs definitions refers to emission allowances. Therefore, ESMA is of the view that transactions involving the use of emission allowances should not fall under the definition of SFT and therefore should not be reported under SFTR.
Reporting of intra-group transactions
An intragroup transaction is a transaction between two undertakings which are included in the same consolidation on a full basis and are subject to appropriate centralised risk evaluation, measurement and control procedures.
In the Final Report of 6 January 2020 (Guidelines on reporting under Articles 4 and 12 SFTR, ESMA70-151-2703, p. 34, 35) ESMA reminded that there are no exemptions in relation to reporting of intragroup SFTs by counterparties subject to the reporting obligation under Article 4 SFTR - therefore, when an intragroup SFT is concluded, the counterparties should report it in accordance with Article 4 SFTR.
The said Report also mentions that, due to lacking legal basis, ESMA is not taking into account the general suggestion made by two respondents in favour of an exemption from reporting for intra-group transactions similar to the provisions of EMIR Refit.
Reporting by non-financial counterparties (NFCs)
Article 33(2)(a)(iv) of SFTR provides that non-financial counterparties must comply with the SFTR reporting obligation 21 months after the SFTR enters into force (as from 11 January 2021).
Non-financial counterparties must prepare their systems so that they are ready to fully comply with the obligation on that date.
In the said Final Report of 6 January 2020 ESMA indicated that when the SFT is concluded between two NFCs, both of them need to report it to a trade repository, though they can make use of the possibility to delegate the reporting under Article 4(2) to one of them or to a third party.
Allocation of responsibility under Article 4(3) SFTR
In the Final Report of 6 January 2020 ESMA recommended that NFCs should communicate with financial counterparties (FCs) whether they qualify as small NFC or not, as well as update the FC on any potential changes in their status.
Voluntary delegation of reporting
In cases of delegation of reporting the delegating counterparty (caught by the reporting obligation) should provide the report submitting entity with all the details of the SFT in a timely manner, and the counterparty is responsible for ensuring that those details are correct.
At the same time, the report submitting entity should ensure that the reporting counterparties are informed about the data reported on their behalf, the relevant trade repository data processing results and relevant reporting or data quality issues if any arise.
In the case of cleared SFTs, each of the SFTs between the CCP, its clearing members and the clients of those, and so on, constitutes a separate SFT and should be reported with a different UTI.
Where the SFT is concluded on a trading venue and cleared on the same day, as provided in Article 2(2) of the RTS on reporting, it shall be reported after it has been cleared, i.e. the intermediate give-ups and take-ups should not be reported.
MiFID II framework for SFTRs
According to Article 2(5)(a) of the Commission Delegated Regulation (EU) 2017/590 of 28 July 2016 supplementing Regulation (EU) No 600/2014 of the European Parliament and of the Council with regard to regulatory technical standards for the reporting of transactions to competent authorities, securities financing transactions as defined in Article 3(11) of the SFTR are excluded from the definition of the "transaction" for the purposes of MiFID II reporting under Article 26 of MiFIR.
This means in practice that these two reporting frameworks do not overlap.
ESMA's Guidelines on Transaction reporting, order record keeping and clock synchronisation under MiFID II of 10 October 2016 (ESMA/2016/1452) give a practical example of two investment firms which enter into a repurchase agreement (repo) in relation to a sovereign bond, where one of the investment firms reports the transaction under the SFTR.
ESMA unequivocally decided that in this case there is no MiFID II transaction reporting obligation for either of the investment firms since this transaction has been reported under the SFTR.
SFTR rules on the reuse of financial instruments received under a collateral arrangement
Transparency obligations towards investors on the reuse of collateral are stipulated in Article 15 and Recitals 21 - 25 of the SFTR.
These provisions state that SFTR do not in any way diminish the protections afforded to title transfer collateral arrangements (TTCAs) under Directive 2002/47/EC and that any infringement of the transparency requirements of reuse does not affect national law concerning the validity or effect of a transaction.