Securities Financing Transactions Regulation

(SFT Regulation, or SFTR).

A 'securities financing transaction' (SFT) is a transaction, such as a repurchase agreement, under which securities are used as collateral for a cash transaction.

The SFT Regulation is a European Union initiative to improve the understanding of the scope and depth of the markets in which securities are traded as collateral.

SFT market participants are obliged under the Regulation to report their transactions to a trade repository.

SFTR reporting – or EMIR déjà vu?

The European Commission published the Securities Financing Transactions Regulation (SFTR) back in 2016, but implementation dates were only announced in 2019. The regulation aims to increase transparency in the securities lending and repo markets, and requires firms to report their Securities Financing Transactions (SFTs) to an approved trade repository.

SFTs can be used to describe any transaction where securities are used to borrow cash, or offered as collateral for cash deposits. It does not include derivative contracts, which are already covered by European Market Infrastructure Regulation (EMIR), but does cover liquidity swaps and collateral swaps (which are outside of EMIR reporting). Implementation dates are being phased in: Q2 2020 for banks and investment firms, Q4 2020 for pension funds and Q1 2021 for non-financial counterparties (ie corporates).

Aside from corporates having to report their repo transactions, those corporates whose bonds or shares are used as collateral in the financial markets and who don’t currently have a legal entity identifier (LEI) may need to get one.

This is because a key provision of SFTR is that agent lenders were not considered as principals to the trade, meaning that the underlying client (for example, the corporate issuer) would need to be identified as the counterparty through an LEI. It is thought that currently only 30% of issuers globally have an LEI. A large percentage of collateral could be deemed ineligible to be used in any securities financing transactions, potentially reducing the volume of business, and trading with some counterparties could be stopped through lack of an LEI.

The Treasurer online, August 2019, Michelle Price, associate director, policy and technical, ACT.

See also

• Agent
• Bond
• Collateral
• Corporate
• Counterparty
• EMIR
• European Commission
• Issuer
• Legal entity identifier
• Principal
• Repurchase agreement
• Reverse repurchase agreement
• Security
• Trade repository
• UK Securities Financing Transactions Regulation (UK SFTR)

Other link

ACT briefing note: Practical steps to investing in Repos