ICMA ERCC SFTR Task Force Update February 2019
The EU Securities Financing Transactions Regulation (SFTR) is designed to encourage greater transparency in repo and securities lending and borrowing markets. It will introduce an extensive reporting regime for these transactions in Europe. This SFTR update for ICMA members explains the implications for reporting of securities financing transactions, the implementation timetable and the activities of ICMA's SFTR Task Force in helping members to prepare for implementation. We will keep you updated as this work progresses.
- The ICMA ERCC SFTR Task Force
- A special alert for investment funds, fund managers and non-financial companies
- The timetable for the implementation of SFTR reporting obligations
- A guide to official SFTR documentation --- where to look for what
- Additional ESMA implementation guidance --- get ready to read & respond
- Reporting your re-use of SFT collateral
Back in 2015, ICMA’s European Repo and Collateral Council (ERCC) decided to set up a dedicated Task Force to focus on SFTR implementation. This group has gained significant traction in the course of 2018 as the industry’s focus shifted to the significant challenge posed by the SFTR reporting requirements. The Task Force provides a technical forum specifically for those organizing the reporting of repos under SFTR where issues can be identified, solutions formulated and best practices agreed. The Task Force, under the auspices of and with the support of ICMA, maintains a dialogue with ESMA, co-ordinates consensus industry responses to periodic consultations and acts as a channel for requests for clarification.
Membership of the Task Force is open to all reporting entities, financial market infrastructures and reporting systems developers. It currently includes around 400 individuals from nearly 100 member firms. The chairman is Craig Laird of Morgan Stanley.
The Task Force co-ordinates closely with the SFTR working groups at other trade associations, in particular ISLA, which is leading the work in relation to securities lending and borrowing. In fact, many members of the ERCC’s Task Force are also members of ISLA’s working groups, which reinforces the co-operation between the two associations. Task Force members also sit on other industry groups, such as those convened by trade repositories.
The Task Force meets at least once a month. Items for the agenda often originate from members’ queries. Regular items include updates on requests for clarification made to ESMA and the review of a set of recommendations (currently over 50) on aspects of SFTR reporting to be incorporated in an SFTR Annex in the ICMA Guide to Best Practice in the European Repo Market. The Task Force has also produced a set of sample repo reports (currently almost 30). While the documents are currently still internal working drafts, they will be made available on the SFTR webpage in the course of this year.
For further information on the Task Force and to join the group, please contact Alexander Westphal.
2. A special alert for investment funds, fund managers and non-financial companies --- you will have to report or assist in the reporting of any repos you do with counterparties headquartered or operating in the EEA
The SFTR imposes an obligation on virtually all entities operating within the EEA, or headquartered in the EEA but operating anywhere in the world, to report all or virtually all of their repos and reverse repos (and other SFTs). In addition, changes in collateral, modification of contracts, early terminations, corrections and cancellations must be reported, in detail, all within a day or so. This obligation also applies to investment funds, fund managers and non-financial companies (NFCs).
Investment funds, fund managers and NFCs will probably have to start reporting repos and reverse repo which they will transact from October 2020. However, their counterparties will likely request certain information prior to that date which they need to fulfil their own reporting obligations.
In addition, SFTR also requires the back-reporting of some repos and reverse repos transacted before the reporting start date but which are still outstanding on the start date (see the next section).
Investment funds, fund managers and NFCs will also have to report any “re-use” they make of the collateral received through reverse repos.
For some funds --- UCITs and Alternative Investment Funds (AIFs) --- and small EEA NFCs dealing with financial counterparties --- the reporting obligation will be compulsorily delegated to others. In the case of UCITs and AIFs, the obligation will go to their managers and, in the case of small NFCs dealing with financial counterparties, to those counterparties. But these delegated entities will still need data from those for whom they have to report. In the case of re-use reporting, this will include sensitive information6 such as total holdings and purchases of securities as well as the total receipt and re-use of securities as collateral (see section 6 below).
 “Small” NFCs are defined as those which “on their balance sheet dates do not exceed the limits of at least two of the three following criteria:
- balance sheet total of EUR 20 000 000;
- net turnover of EUR 40 000 000;
- average number of employees during the financial year of 250.
On 13 December 2018, the EU Commission finally adopted the package of seven SFTR Regulatory Technical Standards (RTS) and Implementing Technical Standards (ITS), sometimes referred to as Level 2 legislation (see section 5 below), specifying the obligation to report SFTs5 under Article 4(1) of the SFTR.
The documents were then submitted to the EU Parliament and Council for scrutiny. Both have the power to object to the RTS but not to amend it (the ITS are not subject to scrutiny). The Commission initially proposed a scrutiny period of one month but the Council wanted two months and the Parliament insisted on three.
Assuming the Parliament and Council do not object (or request an extension), the scrutiny period should end on 13 March 2019. Following this, the documents will then be published in the EU’s Official Journal and enter into force shortly after, probably during April 2019.
The entry into force of the RTS and ITS will trigger the implementation of the reporting obligations. These will be introduced in four quarterly stages starting 12 months after entry into force and ending 21 months later, so probably between April 2020 and January 2021. Different types of entity start reporting at each of the four “go-live” dates. These are set out in the timetable below, along with other implementation milestones.
Remember, if the publication in the Official Journal slips, so will all the dates.
The portfolio of regulatory documents that compromise SFTR consists of:
- The SFT Regulation itself (Regulation (EU) 2015/2365), published in November 2015.
- ESMA’s Final Report on Technical Standards under SFTR and Certain Amendments to EMIR (ESMA70-708036281-82) published in March 2017.
- RTS on reporting. The EU Commission Delegated Regulation with regard to regulatory technical standards specifying the details of securities financing transactions (SFTs) to be reported to trade repositories, published on 13 December 2018, as well as the related Annex which is a key document for reporting entities. It provides tables giving the data fields, descriptions of these fields and to which types of SFT they apply.
- ITS on reporting. The EU Commission Implementing Regulation laying down implementing technical standards with regard to the format and frequency of reports on the details of securities financing transactions (SFTs) to be reported to trade repositories, published on 13 December 2018, and related Annexes. Another key document, it provides tables prescribing the format of data fields (ie what codes be entered into each).
- RTS on trade repositories. The EU Commission Delegated Regulation with regard to regulatory technical standards on the collection, verification, aggregation, comparison and publication of data on securities financing transactions (SFTs) by trade repositories, published on 13 December 2018. Again, including the related Annexes which are key as they provide tables listing data field which will have to be matched (“reconciled”) at the trade repositories, how accurate the matching has to be (“tolerances”) and when matching will start. There is also a table of reasons for rejecting an SFT report and the list of results of matching that need to be provided by trade repositories. Finally, there is a table of aggregated data which trade repositories will have to publish (not much).
- RTS on data access. The EU Commission Delegated Regulation with regard to regulatory technical standards on access to details of securities financing transactions (SFTs) held in trade repositories, published on 13 December 2018.
- ESMA’s Validation Rules. An essential working document. It summarises the RTS and ITS Annexes in providing tables of data fields, descriptions of these fields, to which types of SFT they apply and format but also whether reporting of a field is mandatory, conditional, optional or not required, and the conditions applying to each field (eg dependency on another field). The tables cover all types of report (eg new transactions, modifications, changes in collateral, etc). These have only been consulted on informally so far and not made public by ESMA. A more developed version is expected to be published alongside the draft Reporting Guidelines later in the year.
SFTR requires the daily reporting (on settlement date plus one) of the re-use of collateral received through SFTs. There is a special collateral re-use report type for this purpose.
However, securities are often held in the same omnibus account as securities purchased in the cash market, making it impossible to say whether securities being posted as collateral have been received as collateral or have been purchased (purchased securities are labelled “own assets”). Where the source of securities cannot be distinguished, re-use on a per ISIN basis can be estimated using a formula provided by the FSB. This assumes that securities being posted as collateral are sourced pro rata from collateral received and purchased securities, eg if out of a total holding of 30 in a given security 10 have been received as collateral and 20 purchased, and then 12 of that security is posted as collateral, 4 of the posted collateral is assumed to be re-used collateral and 8 is assumed to be purchased securities.
The following table sets out what collateral is included in the FSB formula. Note that collateral received includes securities borrowed (not just the collateral in the transaction) and securities received as collateral through a pledge but only if there is a right of re-hypothecation (re-use).
|Collateral inputs to estimated re-use formula --- RTS|
|collateral received||collateral posted|
|title transfer SFTs:
||title transfer SFTs:
The rules in SFTR regarding the reporting of re-use are not fully consistent with the rules in the RTS and ITS. However, the latter follow FSB requirements and are the ones that will be followed.
Where SFTR reporting is compulsorily delegated --- to fund managers from UCITs and AIFs, and from small NFCs to their financial counterparties --- the delegating entities will have to supply their reporting entities with data on the size of their total holdings and purchases of securities as well as the total receipt and re-use of securities as collateral.