Securities Financing Transactions Regulation

1. SFTR – Securities Financing Transaction Regulation
- A deep dive into Regulation and it Impact Areas
By Megha Gupta
Email : megha6788@yahoo.com

2. SFTR Overview
Contents
 SFTR Overview
 Impact Areas
- Collateral Re-use
- Investor Transparency
- Transaction Reporting
 Scope
 Reporting Requirements
 Timelines
 Other Considerations
 Appendix
The 2007-2008 global financial crisis has highlighted the need to improve transparency and monitoring not only in traditional
banking but also in bank like credit intermediation ‘Shadow Banking’ which accounts to half of regulated banking system
scale. European Systemic risk board (ESRB) and Financial Stability Board (FSB) have therefore identified the risk posed by
Securities Financing Transactions (SFT).
The Securities Financing Transaction Regulation (SFTR) came into effect on 12th Jan 2016 to help enhance the transparency around the use of
Securities Financing Transactions (SFTs) and Total Return Swaps (TRS) in the shadow banking industry.
What is an SFT?
Securities Financing
Transactions (SFTs) broadly
speaking, are any
transactions where
securities are used to
borrow cash or vice versa.
Re-purchase Transactions
• Re-purchase agreement (repo) is a form of short-term borrowing for dealers
in government securities. The dealer sells the govt. securities to investors
usually on overnight basis and buys them back the next morning. For Selling
party, it is repo and for buying party it is reverse repo.
Total Return Swaps
• Swap agreements in which one party agrees to make payments on a set rate,
either fixed or variable while the other party makes payments based on return
of an underlying asset. (includes both income and capital gains generated) `
Margin Lending
Transactions
• Transactions in which counterparty extends credit in connection with
purchase, sale, carrying or trading of securities, but not including other loans
that are secured by collateral in form of securities.
Buy-Sell back or Sell-Buy
back transactions
• A sell/buy back is the spot sale and a forward re-purchase of a security. The
Buy-sell back is the same transaction pair viewed from the perspective of other
counterparty.
Securities/Commodities
Lending / Borrowing
• Securities lending is an agreement whereby one party lends a security to
another party against a fee for limited period in exchange of other securities or
cash.
Note - Repo can differ to securities lending as repo is generally used for general collateral (against cash) whereas security lending is generally borrowing against security.
Similarly, Sell-buy back differs from repo in a way that repo is one transaction bound by legal agreement whereas buy-sell back is a pair.
Which Transaction
Types are in scope?

3. Impact Areas
Contents
 SFTR Overview
 Impact Areas
- Collateral Re-use
- Investor Transparency
- Transaction Reporting
 Scope
 Reporting Requirements
 Timelines
 Other Considerations
 Appendix
Investor transparencyCollateral re-use Transaction Reporting
Rules pertaining to transparency of
Collateral re-use are broad in their
coverage and apply to reuse of
financial collateral under all
collateral arrangements
• Obligations are applicable to
financial counterparty and non-
financial counterparty
established in EU
OR
• Third country equivalents, if :
- SFT concluded in course of
operations of EU branch
- Collateral arrangement is with EU
financial counterparty/non-
financial counterparty.
- Collateral arrangement is with EU
branch of a third country entity
Transparency and Disclosure requirements
have been introduced for managers of
*UCITS and alternative investment funds
• The transparency requirements apply to
SFTs and TRS
• There are particularly two transparency
requirements :
1. Half yearly and annual reports from
UCITS management companies, UCITS
investment companies and annual
reports in respect to AIF
2. Disclosures with respect to
pre-investment
*UCIT (Undertakings for collective investment in
transferable securities ) is a mutual fund based in
European Union
Counterparties to an SFT must report certain
details of transaction to a trade repository
within one working day of Conclusion,
modification or Termination of SFT
The Transaction reporting should ensure atleast
below types of transaction data is available to
authorities.
a. All SFTs submissions (incl submissions of
all action types for SFTs as well as their
reconciliation status) made on previous
working day
b. The latest state of outstanding trades as of
close to previous working day
c. All SFT submissions made under SFTR in
accordance with criteria defined on day of
request by authority
d. Daily report detailing the rejected SFT and
reason of rejection
e. Daily report detailing the reconciliation
status of SFTs and the reasons for lack of
reconciliation

4. Impact Areas - Collateral Re-use
Contents
 SFTR Overview
 Impact Areas
- Collateral Re-use
- Investor Transparency
- Transaction Reporting
 Scope
 Reporting Requirements
 Timelines
 Good to know facts
 Appendix
Re-use of collateral is ‘Use of Collateral’ by receiving counterparty (in its own name, account or on account of another counterparty.)
The Collateral re-use data should be available specific to counterparty as collateral is usually managed at portfolio level and not transaction
level. Re-use data can be tracked down further to individual SFTs by linking to ISIN information.
• Type of Collateral component
• Collateral component
• Value of re-used collateral
• Estimated reuse of collateral (calculated component)
• Reinvestment rate
• Re-invested cash
• Re-invested cash amount
• Reinvested Cash currency
• Availability for re-use (yes/no)
• Funding source for margin lending
• Market value of securities on loan or borrowed or
securities used as collateral
• Information pertaining clearing of SFTs
- Cleared indicates if transaction was centrally cleared or not
- CCP (in case the contract has been cleared, identifies the
CCP that has cleared the contract)
- Clearing Member
- Clearing timestamp
• Settlement data
- Place of Settlement
- CSD
- CSD participant or indirect participant
• Information elements pertaining master agreement
Data Elements for Collateral re-use
Right to
Reuse
•Collateral providers must be informed
by receivers in writing on risks and
consequences of allowing right to use
by the receiver or a transfer of title
collateral agreement , and
•Collateral Providers must agree in a
legally binding manner on the right of
use or a transfer of title collateral
agreement
Exercising
Right to
Reuse
• Reuse is undertaken in accordance
with the terms specified in the
collateral arrangement, and
•The financial instruments received
under a collateral arrangement are
transferred from the account of the
providing counterparty.
Collateral Re-use Obligations
*Re-use obligations are applicable from 13 July 2016

5. Impact Areas – Investor Transparency
Contents
 SFTR Overview
 Impact Areas
- Collateral Re-use
- Investor Transparency
- Transaction Reporting
 Scope
 Reporting Requirements
 Timelines
 Other Considerations
 Appendix
Pre- Contractual Disclosure requirements
• General description of SFTs and TRS used by the fund and the rationale for their use
• For each type of SFT/TRS – type of assets, maximum proportion of assets under management, Expected proportion of AUM
• Criteria used to select counterparties (incl legal status, country of origin and minimum credit rating)
• Acceptable collateral (i.e description of acceptable collateral with regards to asset types, issuer, maturity, liquidity, collateral
diversification and correlation policies
• Collateral Valuation (Description of valuation methodology, whether daily mark to market or daily variation margin are used)
• Risk management (description of risk linked to SFT and TRS , collateral mgmt. )
• Specification of how assets subject to SFTs and TRS and collateral received are kept safe
• Specification of any restrictions (regulatory or self imposed ) on re-use of collateral and
• Policy on sharing of return generated by SFT and TRS
Periodic Reporting (Semi- Annual and Annual)
Global Data
• Amount of securities and commodities on loan as a proportion of
total lendable assets
• Amount of assets engaged in each type of SFT and TRS expressed
as an absolute amount and as proportion of fund’s AUM
Concentration Data
• Top 10 collateral issuers across all SFTs and TRS
• Top 10 counterparties of each type of SFT and TRS
Aggregate transaction data for each type SFT/TRS
Data on reuse of collateral
Safekeeping of Collateral received by fund as part of SFTs and TRS
Number of Custodians and amount of collateral assets kept safe
by each custodian
Safekeeping of Collateral by the fund as part of SFTs and TRS.
Proportion of collateral held either in segregated accounts or in
period accounts
Data on return and cost of each type of SFT and TRS

6. Impact Areas – Transaction Reporting
Contents
 SFTR Overview
 Impact Areas
- Collateral Re-use
- Investor Transparency
- Transaction Reporting
 Scope
 Reporting Requirements
 Timelines
 Other Considerations
 Appendix
1. Details as per
official technical
standards
Min details known
: currency, asset
type used as
collateral,
collateral value,
method used to
provide collateral,
collateral reused,
repo/lending/mar
gin lending rate,
haircut, maturity,
callable date,
market segment
What Info
1. All
counterparties to
SFT must report
2. If counterparty
is non-financial
and qualifies as
SM, then financial
counterparty must
report both sides
of transaction
3. For
undertakings in
collective
investments,
ManCo of UCITS or
AIFM are
responsible
4. Reporting can
be delegated
Who
1. All Transactions
which are
concluded,
modified or
terminated must
be reported on
T+1
By when
1. Trade
repositories
recognized for
SFTR, extended
approval may
apply for trade
repositories
recognized under
EMIR
2. ESMA, if no
trade repository is
recognized
To who
1.Transactions
concluded,
modified or
terminated after
entry into force.
2. Transition
measures for SFTs
open when
regulation enters
into force
3. Transactions
with any member
of the European
System of Central
Banks do not
require reporting
What

7. Scope
Contents
 SFTR Overview
 Impact Areas
- Collateral Re-use
- Investor Transparency
- Transaction Reporting
 Scope
 Reporting Requirements
 Timelines
 Other Considerations
 Appendix
Impacted Entities
 Counterparties to SFT established in
EU (including all branches irrespective
of where they are)
 Counterparties to SFT with branch in
EU
 ManCo’s of UCITS
 AIFM
 Counterparties
engaging in reuse
established in EU
 Counterparties engaging in reuse
if the reuse concerns instruments
provided under collateral
arrangement by a counterparty
established in union or branch of a
counterparty in union established
in third country
Implementation Strategy
When
launching a
new fund,
ensure the
pre-
contractual
disclosure on
SFTs and TRS
are
mentioned
New
Funds
Review
contract so
ensure
necessary
clauses on
reuse are
reviewed
Reuse
Start
gathering
data to
ensure
correct
information
on SFT and
TRS can be
provided
Periodic
Reporting
Strategic
solution to
report all
required
fields for
different
regulations
(EMIR, MIFIR,
REMIT, SFTR)
Data
Gathering

8. Reporting Requirements
Contents
 SFTR Overview
 Impact Areas
- Collateral Re-use
- Investor Transparency
- Transaction Reporting
 Scope
 Reporting
Requirements
 Timelines
 Other Considerations
 Appendix
Event
Report outstanding margin lending
transaction end of day
Short market value
is positive
Report modifications with action
type ‘Error’ as of end of day
Modification to
collateral data
Modification to
end of day market
value of
borrowed/lent
securities
Report modifications with action
type ‘Valuation update’ as of end of
day
Modification total
margin posted/
received for all
cleared SFTs
Reporting Outcome Event Reporting Outcome
Report total amount of
margin posted or
received with action type
‘Margin update’ as of
end of day
Modification to value
of reused collateral,
reinvested cash and
funding resources
Report modifications
with action type ‘Reuse
update’ as of end of day
Details to be
reported to
trade
Repositories
1. Counterparty Data
2. Loan & Collateral Data
3. Margin Data
4. Re-use, Cash re-investment and funding
sources data
Detailed field level technical specifications can be referred at (pg 233 onwards) ESMA final report

9. Timelines
Contents
 SFTR Overview
 Impact Areas
- Collateral Re-use
- Investor Transparency
- Transaction Reporting
 Scope
 Reporting Requirements
 Timelines
 Other Considerations
 Appendix
Nov 2015 13 Jul 2016 13 Jan 2017 13 Jul 2017 Q1 2018 Q2 2018 Q3 2018 Q4 2018 2019
SFTR
adopted
by EU
council
Counterparties
to comply
with
requirements
on re-use of
collateral
Re-use Requirements Disclosure Requirements
UCITS and
AIFMs to
disclose their
use of SFT and
total return
swaps in
periodic
reports
UCITS and
AIFMs to
disclose their
use of SFTs
and total
return swaps
in pre-
contractual
documents
Reporting Requirements
Investment
funds and
credit
institutions
CSD and
central
counter-
parties
Insurance/
re-insurance
under
takings
UCITS/UCITS
managers,
AIFs/AIFMs
and
institutions
for
occupational
retirement
provision
Non-financial
counterparties
Regulation Implementation Period

10. Similarities
 Requirement of two sided reporting to an EU
trade repository following business day after
transaction
 Similar counterparty classification (financial and
non financial counterparties to follow same
classification)
 Granularity of reporting (eg : individual SFT vs
individual derivative contract)
 One report containing full data set
 Counterparties to keep transaction reports for at
least five years
 Confidentiality restriction not applicable during
transaction reconciliation
 Two way key applied to every contract (LEI + UTI)
Other Considerations
Contents
 SFTR Overview
 Impact Areas
- Collateral Re-use
- Investor Transparency
- Transaction Reporting
 Scope
 Disclosure Requirements
 Timelines
 Other Considerations
 Appendix
EMIR vs SFTR
Differences
 Different asset classes
 Extraterritoriality of SFTR regulation
 Branch obligations for reporting (EU branches of
non EU firms, EU branches of third country)
 Number fields, content and structure of data. EMIR
required 129 fields in areas of Counterparty,
collateral and common data whereas SFTR requires
153 fields across areas of margin, transaction,
collateral re-use data, counterparty data
 Difference in action types – SFTR recognizes
additional action types such as collateral update,
collateral reuse update and margin update
 Inter- TR reconciliation process differs for both. For
SFTR, it is 6:00 pm UTC, for EMIR it is 4:00 pm UTC
 Reconciliation of transaction data – Under SFTR,
terminated or matured trades that have not been
reconciled within a month of latest submission will
be automatically excluded from reconciliation.
EMIR vs SFTR

11. Appendix - References
Contents
 SFTR Overview
 Impact Areas
- Collateral Re-use
- Investor Transparency
- Transaction Reporting
 Scope
 Disclosure Requirements
 Timelines
 Other Considerations
 Appendix
 https://www.esma.europa.eu/sites/default/files/library/esma70-708036281-
82_2017_sftr_final_report_and_cba.pdf
 https://www.lseg.com/markets-products-and-services/post-trade-services/unavista/regulation/securities-financing-
transactions-regulation
 https://www.emissions-euets.com/internal-electricity-market-glossary/1171-securities-financing-transaction-sft
 https://www.lseg.com/markets-products-and-services/post-trade-services/unavista/articles/7-differences-between-
sftr-and-emir
 https://www.grantthornton.ie/globalassets/1.-member-firms/ireland/insights/factsheets/grant-thornton---sft-
regulation.pdf
 http://ec.europa.eu/transparency/regdoc/rep/1/2017/EN/COM-2017-604-F1-EN-MAIN-PART-1.PDF
 http://www.securitieslendingtimes.com/specialistfeatures/specialistfeature.php?specialist_id=237
 Deloitte - SFTR Overview Dec 2016
 https://www.elexica.com/-
/media/files/articles/2015/asset%20management/new%20eu%20regulation%20on%20securities%20financing%20tr
ansactions.pdf
 https://www.matheson.com/images/uploads/publications/The_Securities_Financing_Transactions_Regulation_and
_Investment_Funds.pdf
 http://www.elexica.com/-
/media/files/articles/2017/asset%20management/draft%20sftr%20%20update%20june%202017%20348038125.pdf