The SFTR clock is ticking – implications and solutions for those carrying out securities financing transactions

Pablo Beivide, director, global financial services management consulting firm for Axis Corporate, explains how the incoming SFTR rules will have a significant impact on the RegTech sector.

The journey to the go-live of the Securities Financing Transactions Reporting (SFTR) obligation is set to come to its conclusion by as early as the fourth quarter of 2019.  This new regulatory regime has as its principal aim an increased transparency surrounding securities financing transactions (SFTs).  These transactions see cash or securities borrowed against collateral comprising securities, commodities or cash – this includes repurchase transactions, securities lending, sell/buy-back transactions and margin lending. Transaction reporting, disclosure obligations and collateral reuse obligations will come into the scope of the SFTR which have not been included in reporting up until now.  The SFTR is therefore set to be ground-breaking and will have a significant impact on the RegTech sector.

Historically, faced with the introduction of other items of regulation, firms have been inclined to take a reactive approach to incorporating them within their operations.  This wait-and-see stance has meant that they have subsequently faced additional compliance and operational costs that could have been avoided through earlier engagement.  It is therefore crucial that businesses engaging in SFTs take the necessary steps now to ensure they are ready for the SFTR’s arrival.

The implementation of SFTR is part of the European Securities and Markets Authority’s (ESMA) aim to create a standardised regime across EMIR, MiFIR and SFTR and will include an obligation for extra-territoriality reporting for the first time.  In outlining the underlining rationale for this legislation ESMA’s chairperson Steven Maijoor stated that “bringing transparency and oversight into the multi-trillion euro market of securities financing transactions is an important step in closing a regulatory gap. It is pivotal for financial stability that the risks associated with non-bank alternative credit provision are properly addressed. The SFTR will provide transparency on the use of securities financing transactions, and will allow identifying risks associated with the collateral and its reuse.”

The SFTR will require both financial and non-financial market participants to report details of their SFTs to an approved EU trade repository. Counterparties must submit a complete set of data relating to their respective contracts within one report no later than the day following the transaction.  These details will include the relevant terms of the repo, stock or margin loan, 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.  Both counterparties must keep a record of transactions that have concluded for at least five years after their termination.  This reflects a new emphasis on an ability to measure the quality of reporting and contingent on this, the importance of having a standard data collection and management infrastructure.

The extra-territorial element to this regulation means that any firm conducting securities financing transactions in any EU jurisdiction will be bound, regardless of where any individual branch is based.  The regulation covers all EU counterparties, non-EU branches of EU-based firms and EU branches of third country businesses. 

Trading platforms, matching systems and other technology vendors operating in securities financing are looking to capitalise on the data quality they can offer but lack the essential regulatory expertise, particularly in relation to EMIR and MiFIR capabilities. Regulatory reporting platforms have this expertise and the necessary infrastructure and are keen to align themselves with industry players to demonstrate their SFTR credibility.  UnaVista, part of the London Stock Exchange Group, for example, is a European trade repository which offers clients a rules engine.  This imports data from multiple internal sources and validates them using proprietary reference data and rule logic. The rules engine then normalises, converts and formats imported information as desired and applies logic to assist clients with their compliance with multiple regulations as well as the incoming SFTR. 

Firms must now assess what guidance they require to ensure that they are fully aligned with this new regulatory regime and if necessary, engage with a partner able to advise them on how to collect, manage and present all data relating to SFTs to avoid any operational interruptions they risk facing once the SFTR is rolled out.