Securities Financing Transactions Regulation (SFTR)

Sensitivity: Internal & Restricted
Anil Nayak
Securities Financing Transactions Regulation
(SFTR)
1

The State of SFTR
Regulation
Authority
2

Table of Contents
• Shadow Banking
• What is SFT?
• SFT Instruments
• What is SFTR?
• SFTR Timeline
• What is reported in SFTR?
• Data Flow
• ISO 20022
• Validation Excel
• Key Challenges
• Industry Impact
• Case Studies
3

Shadow banking is a term used to describe bank-like
activities (mainly lending) that take place outside the
traditional banking sector. It is now commonly referred to
internationally as non-bank financial intermediation or
market-based finance. Shadow bank lending has a
similar function to traditional bank lending. However, it is
not regulated in the same way as traditional bank
lending.
Examples of entities that engage in shadow banking are:
Bond funds
Money market funds
Finance companies
Special purpose entities.
Why not regulated ?
No Customer Deposits taken/in Risk
Shadow Banking ?
4

Bear Stearns Bailout. It was in danger of going bankrupt thanks to bad MBS and other collateralized debt obligations. The Feds were afraid, and rightly so, that the failure of
Bear Stearns would have spread to other over-leveraged investment banks. This included Merrill Lynch, Lehman Brothers, and Citigroup. In fact, that's what later happened with
Lehman's bankruptcy. By the end of 2008, Citigroup also needed a bail-out, even though it was a supposedly less-risky commercial bank.
Lehman Brothers Bankruptcy Triggered Global Recession. No government protection for Lehman's $60 billion in uncertain mortgage assets. September 15, 2008
End of Investment Banking Goldman Sachs and Morgan Stanley became regular commercial bank. They had been two of the most successful investment banks on Wall Street.
That ended an era of deregulation and high risk.
Shadow
Banking Risk
5

Shadow banking lacked transparency in the financial system.
Regulators had no Idea.
Systemic Risk ?
The significant expansion of the shadow banking sector can present systemic risks that need to be detected,
monitored and managed. The limited availability of balance sheet data of MMFs, non-MMF investment funds,
and SPVs suggest that vulnerabilities are rising due to the growing prevalence of callable equity, declining
liquidity buffers, and the growing footprint of large asset management companies. The impact of potential
adverse developments in the fund sector is also growing due to its increasing role in capital markets, and the
strengthening of both inter and intra sectoral links.
Why?
"Wobbly Bridge" after pedestrians experienced
an alarming swaying motion on its opening day.
6

Repurchase (REPO)
• Markets for Repurchase Agreements - A repurchase agreement is a
short-term agreement to sell securities to buy them back at a slightly
higher price
• Repo trade without central clearing is the simplest form of a repo trade.
In turn, in a repo trade with central clearing, a Central Clearing
Party(CCP) interposes between the two counterparties to the trade and
becomes a counterparty to a trade. Therefore, the CCP is subject to
the SFTR reporting obligation.
• Uncleared Transaction:
In a normal repo transaction, both the counter parties involved in a
trade are liable to follow SFTR guidelines
• Cleared Transaction:
In a cleared repo transaction not only, parties involved but even the
CCP becomes falls under the purview of SFTR, and hence all the three
parties must follow the guidelines of SFTR.
• Recommendation: It is not possible for reporting parties to adopt the
option of position-level reporting for CCP-cleared repos as clearing
does not meet the requirements.
• A repo not only mitigates the buyer’s credit risk. Provided the asset
being used as collateral is liquid, the buyer should be able to refinance
himself at any time during the life of a repo by selling or repoing the
assets to a third party (he would, of course, subsequently have to buy
the same or a similar asset back in order to return it to his repo
counterparty at the end of the repo). This right of use (often called re-
use) mitigates the liquidity risk that the buyer takes by lending to the
seller. Because lending through a repo exposes the buyer to lower
credit and liquidity risks, repo rates should be lower than unsecured
money market rates.
SFT
7

Sec
Lending
Securities or Commodities Lending and Securities or Commodities Borrowing
 Some SFTs documented under master securities lending agreements such as the GMSLA function like repos.
 It is not possible to report a reverse securities loan under SFTR using the loan and collateral data fields dedicated to securities lending by the RTS and ITS on transaction
reporting and the Validation Rules
 Furthermore, securities in a reverse securities loan may be substituted. It is impossible to reflect a change in loaned securities in an SFTR report using the securities lending
template. In view of the obstacles to reporting a reverse securities loan using the loan and collateral data fields intended for securities lending transactions, it was proposed that
reverse securities loans should be reported using the loan and collateral data fields intended for repos. T
 In the longer-term, it is recommended that transactions that are functionally repos but are documented as securities loans should be re-documented (“re-papered”) under the
GMRA. This recommendation has also been made by ISLA.
 Recommendation 1: When a party to a securities lending transaction wishes to report that transaction using repo data fields, it should ensure that the other party is in agreement.
SFT
8

Buy-Sell Back Transaction or Sell-Buy Back Transaction
• According to SFTR, a buy/sell-back is constituted by two
separate contracts with no overarching written legal agreement
to connect the two
• Even though SFTR defines buy/sell-backs as undocumented
pairs of separate contracts, the RTS on transaction reporting
requires them to be reported as a single trade under a legal
agreement
• The only material difference between a documented buy/sell-
back and a repurchase transaction is simply how coupon,
dividend or other income payments on collateral are handled.
• The value of any income paid on the collateral is deducted in
advance from the repurchase price that would otherwise be due
to be paid by the seller to the buyer on the repurchase date
together with additional interest to compensate the seller for the
delay between the collateral income payment date and the
repurchase date
• Recommendation: Parties transacting documented repos that do
not pay a manufactured payment in response to the payment of
a coupon, dividend or other income on collateral should report
them as buy/sell-backs along with the legal agreement, if any
SFT
9

Margin Lending (in a Prime Finance context)
Margin lending is a type of loan that allows you to borrow money to invest, by using your existing shares, managed
funds and/or cash as security. It is a type of gearing, which is borrowing money to invest
• A margin lending transaction is one where one party lends money to another so it can buy or sell securities. The
lender will lend up to a certain value of the securities. If the securities fall in value, the lender may ask
the borrower to post margin to cover the value of the margin loan.
• Usually, the borrower lets the lender hold the securities as collateral for the margin loan. The borrower may also
allow the lender to use those securities in the market to offset its funding costs of making the margin loan.
• 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.
SFT
10

To curb shadow banking, the Financial Stability Board (FSB) and the European
Systemic Risk Board (ESRB) established by Regulation (EU) No 1092/2010 of the
European Parliament and of the Council have identified the risks posed by
securities financing transactions (SFTs).
SFTs allow the build-up of leverage, pro-cyclicality and interconnectedness in the
financial markets.
Regulation
Securities Financing Transaction Regulation
The Securities Financing Transaction is an EU Regulation 2015/2365 on transparency of securities
financing transactions and of reuse (SFTR) and amending Regulation (EU) No 648/2012 which entered into
force on 12 January 2016.
The regulation responds to the need to enhance the transparency of securities financing markets and thus of
the financial system. The regulation covers any securities financing transaction (SFT) which uses securities to
borrow cash or vice versa. It does not include derivative contracts which are already covered in EMIR but
does cover liquidity swaps and collateral swaps.
11

Regulation
Securities Financing Transaction Regulation
.
Securities Financing Transactions (SFTs) can be used to describe any transaction where securities are used
to borrow cash, or vice versa. SFTs as defined in the SFTR include:
1. Repurchase agreements (Repos),
2. Securities or commodities lending activities
3. Buy-Sell back transaction or sell-buy back transaction &
4. Margin Lending (Prime Brokerage) transaction
Loans and Collaterals & Collateral Reuse
Transparency ? How ?
Reporting & Monitoring
12

SFTR Timeline and TR’s
13 April 2020 - Financial counterparties (FCs): investment firms and credit institutions
11 July 2020 - FCs: central securities depositories and central counterparties
10 October 2020 - FCs: insurance/reinsurance undertakings, UCITS, AIFs/AIFMs and
institutions for occupational retirement provisions
11 January 2021 - All non-financial counterparties
In Production
Name of the trade repository Legal Entity Identifier
Country of
residence
Types of securities financing
transactions which can be reported in
the TR Status
DTCC Derivatives Repository Plc (DDRL) 549300EF0TJDPL38U265 GB All De-registered
Krajowy Depozyt Papierów Wartosciowych S.A. 259400L3KBYEVNHEJF55 PL All Registered
Regis-TR S.A. 222100LDG5RSWCCPU755 LU All Registered
UnaVista TRADEcho B.V. (The Netherlands) 213800X8D2RDODXFIY15 NL All Registered
DTCC Data Repository (Ireland) Plc 549300TZR2LZBUW04O95 IE All Registered
13

Classification <Clssfctn> Code
Alternative Investment Fund AIFD
Central Securities Depository CSDS
Central Counterparty CCPS
Credit Institution CDTI
Insurance Undertaking INUN
Occupational Retirement Provision Institution ORPI
Investment Firm INVF
Reinsurance Undertaking REIN
UCITS Management Company UCIT
Investment Fund Classification
<InvstmtFndClssfctn>
Code
Exchange Traded Fund ETFT
Money Market Fund MMFT
Other OTHR
Real Estate Investment Trust REIT
Financial
Counterparty
14

What is reported in SFTR?
The new rules on transparency oblige the counterparties to the transaction to report details regarding securities
financing transactions (SFTs) concluded, whether they are financial or non-financial entities. The counterparty may
delegate this reporting. The reporting of the SFT should include, but is not limited to:
 the parties to the transaction
 the principal amount, and currency
 the composition of the collateral
 method used to provide collateral
 whether the collateral is available for reuse or has been reused
 the substitution of collateral at the end of the day
 the repurchase rate, lending fee or margin lending rate
 any haircuts applied
 the maturity date
 the value date
 the first callable date
 and the market segment
The Securities Financing Reporting Transaction
Report message is sent by the report submitting
entity to the trade repository (TR) to report on the
securities financing transactions or sent by the trade
repository (TR) to the competent authority (CA) or
made available by the trade repository (TR) to the
report submitting entity and the reporting
counterparty as well as the entity responsible for
reporting, if applicable.
1. auth.052.001.01 Loan & Collateral
2. auth.070.001.01 Margin
3. auth.070.001.01 Collateral Reuse
Activity & State Reports
15

16

Data
Flow
17

1 transactiontype repurchasetransaction
2 seller HSBCBankPlc LEI MP6I5ZYZBEU3UXPYFY54
3 buyer CreditSuisseSecurities(Europe)Ltd LEI DL6FFRRLF74S01HE2M14
4 transactiondate 20-Apr-20
5 executiontimestamp 10:55:30
6 executionvenue OTC
7 purchasedate 21-Apr-20
8 repurchasedate 28-Apr-20
ISIN DE0001102317
issuerLEI 529900AQBND3S6YJLY83
10 nominalvalue 10,000,000.00
11 marketvalue 10,214,263.93 cleanprice 100.741
12 purchaseprice 10,163,192.61 haircut 0.50%
13 currency EUR
14 reporate -0.610%
15 repurchaseprice 10,161,987.15
16 settlementagent/venue ClearstreamBankFrankfurt
9 collateral 1.5%BOBL15-May-2023
minimumtransactionparameterscurrentlyrequiredbycounterparties
New repurchase transaction
--- non-forward fixed-term fixed-rate --- executed OTC & settled directly at CSD
REPO
18

1 Reporting timestamp 2020-04-21T12:10:11Z M
2 Report submitting entity MP6I5ZYZBEU3UXPYFY54 M
3 Reporting counterparty MP6I5ZYZBEU3UXPYFY54 M
4 Nature of the reporting counterparty F M
5 Sector of the reporting counterparty CDTI M
6 Additional sector classification C
7 Branchof the reporting counterparty O
8 Branchof the other counterparty O
9 Counterpartyside GIVE M
10 Entityresponsible for the report MP6I5ZYZBEU3UXPYFY54 M
11 Other counterparty DL6FFRRLF74S01HE2M14 M
12 Countryof the other counterparty GB M
13 Beneficiary O
14 Tri-partyagent identifier O
15 Broker O
16 Clearing member C
17 CSD participant or indirect participant MP6I5ZYZBEU3UXPYFY54 O
18 Agent lender O
Counterparty
Data
19

1 Unique Transaction Identifier (UTI) E02MP6I5ZYZBEU3UXPYFY54DM23L45DME01234 M
2 Report tracking number C
3 Event date 2020-04-20 M
4 Type of SFT REPO M
5 Cleared FALSE M
6 Clearing timestamp C
7 CCP C
8 Trading venue XXXX M
9 Master agreement type GMRA M
10 Other master agreement type C
11 Master agreement version 2011 C
12 Execution timestamp 2020-04-20T10:55:30Z M
13 Value date (Start date) 2020-04-21 M
14 Maturity date (End date) 2020-04-28 C
15 Termination date not applicable to new transactions -
16 Minimum notice period C
17 Earliest call-back date O
18 General collateral indicator SPEC M
19 DBV indicator FALSE M
20 Method used to provide collateral TTCA M
21 Open term FALSE M
22 Termination optionality (EGRN/ETSB) NOAP M
23 Fixed rate -0.61000000% C
24 Day count convention A004 C
25 Floating rate C
26 Floating rate reference period - time period C
27 Floating rate reference period - multiplier C
28 Floating rate payment frequency - time period C
29 Floating rate payment frequency - multiplier C
30 Floating rate reset frequency - time period C
31 Floating rate reset frequency - multiplier C
32 Spread C
35 Adjusted [floating] rate O
36 [floating] Rate date C
Loan
&
Collateral
20

37 Principal amount on value date 10,163,192.61 M
38 Principal amount on maturity date 10,161,987.15 C
39 Principal amount currency EUR M
73 Collateralisation of the exposure (net exposure) TRUE M
74 Value date of the collateral not applicable to new transactions -
75 Type of collateral component SECU C
76 Cash collateral amount C
77 Cash collateral currency C
78 Identification of a security used as collateral DE0001102317 C
79 Classification of a security used as collateral DBFTFB C
83 Collateral quantity or nominal amount -10,000,000.00 C
85 Currency of collateral nominal amount EUR O
86 Price currency O
87 Price per unit 102.14263934 C
88 Collateral market value 10,214,263.93 C
89 Haircut or margin 0.5000000000 C
90 Collateral quality INVG C
91 Maturity of the security 2023-05-15 C
92 Jurisdiction of the issuer DE C
93 Issuer of collateral 529900AQBND3S6YJLY83 C
94 Collateral type GOVS C
95 Availability for collateral re-use TRUE C
96 Collateral basket identifier C
97 Portfolio code C
98 Action type NEWT M
99 Level TCTN M
21

Data Exchange ISO 20022
1. auth.052.001.01 Loan & Collateral
2. auth.070.001.01 Margin
3. auth.070.001.01 Collateral Reuse
https://www.iso20022.org/iso-20022-message-definitions?business-domain=6
ISO 20022, gives a detailed format structure of the message reporting, it gives a format on how different reports
in relation to SFTR are made.
There are 12 types of format in total for SFTR reporting, these includes all sorts of reporting that is needed in
SFTR regulations.
The structure includes four major components for each type:-
• Message definition, reflects the type of data that is needed to report a particular case
• Structure, it showcases how a particular report is to be filled'
• Constraints, a detailed information regarding supplementary data
• Message building blocks, wherein a detailed content is shown in relation to the structure given
22

Main Concern
 It is not so much the SFT as such that causes concern to regulators and supervisors, but the re-use of the
collateral received under an SFT.
 Re-use provides liquidity and enables counterparties to reduce funding costs.
 It can also create complex collateral networks between traditional banking and shadow banking, giving
rise to financial stability risks. Thus, shadow banks do not have to comply with the same stringent Basel
III capital and liquidity requirements that have been imposed on banks
 Another component of SFTR Regulation is lack of transparency on the extent to which assets provided as
collateral have been re-used and the respective risks in the case of bankruptcy can undermine confidence
in counterparties.
 That is also why, as a bank, they will need to obtain the explicit consent of counterparts before re-use of
the collateral that they provide in these SFTs.
 LEI – still every entity don’t have an LEI
23

Case
Study
Repo
Spike
2019
-
Timeline
24

Repo Spike Case
There was a significant spike in the overnight repurchase agreement (repo) rate
•The spike in rates caught many by surprise, despite warnings by the dealer community over declining bank
reserves.
•The consensus view is that a combination of low bank reserves, corporate tax payments and the settlement of the
monthly U.S. Treasury auction caused a temporary shortage of cash in the system, forcing repo rates higher.
Root causes of the repo spike
• Post-GFC regulation has made banks more risk averse
• Reserve balances were lower than normal
• Tax payments and U.S. Treasury settlements
• The repo market disruption is another example of the increasingly common market glitch
Conclusion
The system held inadequate reserves, which led to a lack of liquidity in the overnight financing markets. While the
Fed is acting to implement longer-term solutions to provide more liquidity on an as-needed basis, its estimation
process seems to have misjudged the level of reserves. This factor, combined with the actions of market
participants who have filled the void left by banks, will likely continue to affect various markets in unpredictable
ways.
25

• Axiom
• Equilend-Trax
• FIS Global
• IHS Markit-Pirum
• Broadridge
• Murex
• Calypso
• SimCorp
• RegTek Solutions
• Connectivity with TRs
Solution
Providers
26

SECURITIES
FINANCING
TRANSACTIONS
REGULATION
Q&A
27

https://www.esma.europa.eu/policy-activities/post-trading/sftr-reporting
https://www.esma.europa.eu/supervision/trade-repositories
Appendix
28

Banks
Shadow
Banking
Examples:
Merrill
GE Capital
Bear, CIT
GMAC,GME
Investment Banking
• Assets: Generally liquid
Sovereign, corporate
and structured
instruments
• Funding: Wholesale
market: short-term
confidence sensitive
Commercial
Banking
• Assets: Relatively
illiquid commercial
&
consumer credit
• Funding : Relatively
“sticky” core
deposits
29

GLEIF – Global Legal Entity Identifier Foundation
30

Taxonomy for Financial Counterparties:
 ‘CDTI’ - Credit institution authorised in accordance with Directive 2013/36/EU of the European Parliament and of the Council(1) or
Council Regulation (EU) No 1024/2013(2) or a third-country entity which would require authorisation or registration in accordance
with that legislative act
 ‘INVF’ - Investment firm authorized in accordance with Directive 2014/65/EU of the European Parliament and of the Council(3) or a
third-country entity which would require authorisation or registration in accordance with that legislative act
 ‘INUN’ - Insurance undertaking authorized in accordance with Directive 2009/138/EC of the European Parliament and of the
Council(4) (Solvency II) or a third-country entity which would require authorisation or registration in accordance with that legislative
act
 ‘AIFD’ - AIF managed by AIFMs authorized or registered in accordance with Directive 2011/61/EU of the European Parliament and
of the Council(5) or a third- country entity which would require authorisation or registration in accordance with that legislative act
 ‘ORPI’ - Institution for occupational retirement provision authorized or registered in accordance with Directive 2003/41/EC of the
European Parliament and of the Council(6) or a third-country entity which would require authorisation or registration in accordance
with that legislative act
 ‘CCPS’ - Central counterparty authorized in accordance with Regulation (EU) No 648/2012 of the European Parliament and of the
Council(7) or a third-country entity which would require authorisation or registration in accordance with that legislative act
 ‘REIN’ - Reinsurance undertaking authorized in accordance with Solvency II or a third-country entity which would require
authorisation or registration in accordance with that legislative act ‘
 CSDS’ - Central securities depository authorized in accordance with Regulation (EU) No 909/2014 of the European Parliament
and of the Council(8) or a third-country entity which would require authorisation or registration in accordance with that legislative
act
 ‘UCIT’ - UCITS and its management company, authorized in accordance with Directive 2009/65/EC of the European Parliament
and of the Council(9) or a third- country entity which would require authorisation or registration in accordance with that legislative
act 31

EMIR
Instruments
Number of fields
Supervisor
Action Type/Life –
Cycle Maintenance
Reporting Type
Report Format
Recipients
Time to Report
Regulatory Objective
Reporting To
Derivatives (OTC & ETD’s) Securities Financing Transactions All Financial Instruments
129 155 65
NFC & FC in EU FC & NFC in EU including branches not in EU, TC
CP if SFT is concluded in EU branch of that CP
EU investment firm for financial
instruments traded on a trading venue
Not Specified ISO20022 Not specified
Trade and Position Trade, Position, Collateral & Collateral reuse Transaction
Trade Repository Trade Repository NCA either directly or via ARM
Systemic Risk Monitoring Systemic Risk Monitoring Market Abuse/Market Surveillance
T+1 T+1 As real time as possible
Yes, reporting of a UTI with update to
each position
Yes, reporting of a UTI with update to each
position
No, each execution event is distinct
ESMA ESMA NCA
SFTR MIFID II
REGULATION COMPARISON
32

MRAA (MasterRepurchaseAgreement)
GMRA (GlobalMasterRepurchaseAgreement)
MSLA (MasterSecuritiesLendingAgreement)
GMSL (GlobalMasterSecuritiesLendingAgreement)
ISDA (InternationalSwapsAndDerivativesAssociation)
DERP (DeutscherRahmenvertragFurWertpapierpensionsgeschafte)
CNBR (ChinaBondRepurchaseMasterAgreement)
KRRA (KoreaFinancialInvestmentAssociationStandardRepurchaseAgreement)
CARA (InvestmentIndustryRegulatoryOrganizationOfCanadaRepurchase)
FRFB (ConventionCadreRelativeAuxOperationsDePensionsLivrees)
CHRA (SwissMasterRepurchaseAgreement)
DEMA (GermanMasterAgreement)
JPBR (JapaneseMasterAgreementOnTheTransactionWithRepurchaseAgreementOfTheBonds)
ESRA (ContratoMarcoDeCompraventaYReportoDeValores)
OSLA (OverseasSecuritiesLendingAgreement)
MEFI (MasterEquityAndFixedInterestStockLendingAgreement)
GESL (GiltEdgedStockLendingAgreement)
KRSL (KoreanSecuritiesLendingAgreement)
DERD (DeutscherRahmenvertragFurWertpapierdarlehen)
AUSL (AustralianMastersSecuritiesLendingAgreement)
JPBL (JapaneseMasterAgreementOnLendingTransactionOfBonds)
JPSL (JapaneseMasterAgreementOnTheBorrowingAndLendingTransactionsOfShareCertificates)
BIAG (BilateralAgreement)
CSDA (CSD BilateralAgreement )
OTHR (Other)
Agreements
33

Trade
Repository
34

Trade
Repository
Pre
Match
35

What is SFTR?
The Securities Financing Transactions Regulation (SFTR) is the European Union’s response to the
Financial Stability Board (FSB)'s August 2013 policy proposals on securities lending and repos and
entered into force on 12 January 2016.
It aims to reduce perceived 'shadow banking' risks in the securities financing markets by:
• Imposing conditions on the 'reuse' of financial instruments which have been provided as 'collateral';
• Requiring managers of UCITS and alternative investment funds (AIFs) to make detailed disclosures
to their investors of the use they make of securities financing transactions (SFTs) and total return
swaps;
• Requiring counterparties to report SFTs to a trade repository (TR) to provide transparency to
regulators on the use of SFTs by market participants (generally following the model for derivatives
reporting under EMIR).
36

SECURITIES
FINANCING
TRANSACTIONS
REGULATION
Thank
You
37

Securities Financing Transactions Regulation (SFTR)

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